MUKUND ENGINEERS LTD, MUMBAI V. ITO 3(20(2), MUMBAI

ITA 846/MUM/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59921 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 24-10-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 09-02-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SATBIR SINGH
• Assessee Lawyers: VASANTIBEN PATEL
• Keywords: Depreciation; Fair market value
• Section: 143(3); 145; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, B, MUMBAI BEFORE HONBLE PRESIDENT SHRI G.E.VEERABHADRAPPA AND SHRI D.K.AGARWAL (JM) ITA NO.542/MUM/2009 (ASSESSMENT YEAR:2003-04) INCOME TAX OFFICER 3(2)(2, ROOM NO.673, 6 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020. M/S MUKUND ENGINEERS LTD., BAJAJ BHAVAN, 3 RD FLOOR, 226, NARIMAN POINT, MUMBAI-400021 PAN:AAACM4974G APPELLANT V/S RESPONDENT ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) M/S MUKUND ENGINEERS LTD., BAJAJ BHAVAN, 3 RD FLOOR, 226, NARIMAN POINT, MUMBAI-400021 PAN:AAACM4974G INCOME TAX OFFICER 3(2)(2, ROOM NO.673, 6 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, NEW MARINE LINES, MUMBAI-400020 APPELLANT V/S RESPONDENT DATE OF HEARING : 16. 2.2012 DATE OF PRONOUNCEMENT : 27.3.2012 REVENUE BY : SHRI SATBIR SINGH ASSESSEE BY : SHRI PERCY PARDIWALA AND SMT.VASANTIBEN PATEL O R D E R PER D.K.AGARWAL (JM) THESE CROSS-APPEALS BY THE REVENUE AND ASSESSEE AR E DIRECTED AGAINST THE ORDER DATED 21.11.2008 PASSED BY THE ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 2 LD.CIT(A) FOR THE ASSESSMENT YEAR 2003-04. BOTH THE SE APPEALS ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE O F CONVENIENCE. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF EXECUTING TUR NKEY CONSTRUCTION CONTRACTS AND MACHINERY FABRICATION C ONTRACTS, FILED RETURN DECLARING LOSS OF RS.4,78,43,710/- F OR THE ASSESSMENT YEAR 2003-04. HOWEVER, THE ASSESSMENT WAS COMPLETED AT AN INCOME OF RS.9,18,60,659/- INCLUDI NG THE DISALLOWANCE OF DEPRECIATION OF RS.1,25,64,412/- A ND PREMATURE CREDIT IN RESPECT OF GAIN ON DEBT ASSIGN MENT TRANSACTIONS RS.8,48,58,072/- VIDE ORDER DATED 2 8.3.2006 PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). ON APPEAL, THE LD. CIT(A) PARTLY ALLOWED THE APPEAL. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE AND ASSESSEE BOTH ARE IN APPEAL BEFORE US. ITA NO.542/MUM/2009(REVENUES APPEAL) 4. THE GROUND NO.1 AND 2 TAKEN BY THE REVENUE READ AS UNDER : ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 3 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY DISALLOWANCE OF DEPRECIATION ON EDP EQUIPME NT, APPLICATION AND SYSTEM SOFTWARE IN RUNNING MODE AN D INTELLECTUAL PROPERTY RIGHTS COMPRISING OF TECHNIC AL SKILLS. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A ) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO B E RESTORED. 5. BRIEF FACTS OF THE ABOVE ISSUE ARE THAT THE AO O BSERVED THAT THE ASSESSEE HAS CARRIED FORWARD UNABSORBED D EPRECIATION OF RS.2,37,22,405/-. THE ASSESSMENT OF THE ASSESS EE FOR THE ASSESSMENT YEAR 2002-03 WAS COMPLETED U/S 143(3) WH EREIN THE AO HAS DISALLOWED THE CLAIM OF DEPRECIATION ON CERTAIN ITEMS. KEEPING IN TUNE WITH THE SAME AND FOR THE REASONS AS DISCUSSED IN THE ASSESSMENT ORDERS FOR THE ASSESSM ENT YEARS 2001-02 AND 2002-03, THE AO HAS DISALLOWED THE DEP RECIATION AMOUNTING TO RS. 1,25,64,412/- ON THE FOLLOWING ASS ETS: SR.NO. PARTICULARS AMOUNT OF DEPRECIATION 1 EDP EQUIPMENT (INCLUDING FURNITURE AND FIXTURE) 4,51,912 2 APPLICATION AND SYSTEMS SOFTWARE IN RUNNING MODE 48,00,000 3 INTELLECTUAL PROPERTY RIGHTS COMPRISING OF TECHNICAL SKILLS (IPR) 73,12,500 TOTAL 1,25,64,412 ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 4 6. ON APPEAL, THE LD. CIT(A) FOLLOWING THE APPELLAT E ORDER FOR THE ASSESSMENT YEAR 2001-02 DIRECTED THE AO TO GRAN T DEPRECIATION IN RESPECT OF FURNITURE AND EQUIPMEN T BEING COMPUTER AND IN RESPECT OF SOFTWARE PERTAINING TO EDP DIVISION AND CONFIRMED THE DISALLOWANCE OF DEPRECIA TION ON IPR. 7. AT THE TIME OF HEARING, BOTH THE PARTIES HAVE A GREED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSE SSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IN M /S MUKUND ENGINEERS LTD. V/S ITO AND VICE-VERSA IN ITA NOS. 1905 & 1810/MUM/2005 AND ITA NO.1081 & 1215/MUM/2006 FOR T HE ASSESSMENT YEARS 2001-02 AND 2002-03 DATED 8.10.20 10 AND IN ITO V/S M/S MUKUND ENGINEERS LTD. IN ITA NO.1524/MUM/2009 FOR THE ASSESSMENT YEAR 2004-05 DA TED 30.12.2010. THE LD. COUNSEL FOR THE ASSESSEE HAS A LSO PLACED ON RECORD THE COPY OF THE SAID ORDERS OF THE TRIBU NAL APPEARING AT PAGES 70 TO 129 OF THE ASSESSEES PAPER BOOK. 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECOR D. WE FIND THAT THE LD.CIT(A) HAS NOT ALLOWED THE DEPRECIATION ON INTELLECTUAL PROPERTY RIGHTS (IPR). IT IS VERY CLEA RLY WRITTEN IN THE LAST SENTENCE OF PARAGRAPH 3 OF HIS ORDER. THE REFORE, TO THIS EXTENT, THE GROUND RAISED BY THE REVENUE IS IN FRUCTUOUS. AS ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 5 REGARDS THE DEPRECIATION ON EDP EQUIPMENT (INCLUDIN G FURNITURE AND FIXTURE AND APPLICATION AND SYSTEMS SOFTWARE IN RUNNING MODE, WE FIND MERIT IN THE SUBMISSIONS OF THE PARTI ES THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDERS OF THE TRIBUNAL (SUPRA), WHEREIN THE TRIBUNA L VIDE PARAGRAPHS 18 AND 19 OF ORDER DATED 8.10.2010 HAS H ELD AS UNDER AS UNDER : 18. WE HAVE CONSIDERED THE RIVALS SUBMISSIONS. IN OUR VIEW THE ORDER OF THE CIT(A) ON THIS ISSUE DESERVES TO B E UPHELD. AS FAR AS THE DISALLOWANCE OF DEPRECIATION ON EDP E QUIPMENT INCLUDING FURNITURE AND FIXTURES IS CONCERNED THE M AIN OBJECTION OF THE ASSESSING OFFICER APPEARS TO BE TH AT WDV OF THESE ASSETS AS PER THE BOOKS OF MUKUND LTD. SHOULD HAVE BEEN ADOPTED AS ACTUAL COST BY THE ASSESSEE WHILE C LAIMING DEPRECIATION. ONE OF THE REASONS ASSIGNED BY THE A SSESSING OFFICER IS THAT THESE ASSETS WERE PURCHASED BY MUKU ND LTD. UNDER A LEASE AND HIRE PURCHASE AGREEMENT AND THE V ALUE AS PER THIS AGREEMENT SHOULD HOLD GOOD FOR ALL PURPOSE S. IN OUR VIEW THIS WAS NOT THE PROPER APPROACH. THE VALUE A DOPTED BY THE ASSESSEE IS DULY SUPPORTED BY THE REPORT OF A V ALUER, WHO HAS CERTIFIED THAT THE VALUE ADOPTED BY THE ASSESSE E IS THE MARKET VALUE OF THE ASSETS ON THE DATE OF TRANSFER. THIS VALUATION HAS NOT BEEN FOUND TO BE INCORRECT BY THE ASSESSING OFFICER. BESIDES THE ABOVE, AS FAR AS THE ASSESSEE IS CONCERNED, IT WAS JUSTIFIED IN ADOPTING THE VALUE IT PAID FOR ACQUIRING THESE ASSETS FROM MUKUND LIMITED BECAUSE THAT WAS THE ACTUAL COST WHICH IT HAD PAID FOR ACQUIRING THE SE ASSETS. THE ACTION OF THE ASSESSEE IS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 43(1) OF THE ACT. THE ASSES SING OFFICER COULD HAVE MADE OUT THE CASE BY INVOKING EXPLANATIO N-3 TO SECTION 43(1) OF THE ACT WHICH HE HAD NOT DONE. IN THESE CIRCUMSTANCES WE ARE OF THE VIEW THAT THE CIT(A) WA S RIGHT IN DIRECTING THE ASSESSING OFFICER TO ALLOW DEPRECIATI ON ON EDP EQUIPMENT INCLUDING FURNITURE AND FIXTURES AS CLAI MED BY THE ASSESSEE. 19. AS FAR AS DEPRECIATION ON APPLICATION AND SYSTE M SOFTWARE IS CONCERNED WE ARE OF THE VIEW THAT THE F ACT THAT THE ERP PACKAGE WAS LICENSED FOR USED BY MUKUND LIMITED CANNOT BE THE REASON TO HOLD THAT THE ASSESSEE IS NOT A LI CENSED USER OF THE SAID SOFTWARE ON WHICH DEPRECIATION CAN BE A LLOWED. ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 6 THE ASSESSEE BY PAYING A SUM OF RS. 5 CRORES FOR AC QUIRING THE RIGHT TO USE ERP PACKAGE HAS USED THE SAID LICENSE AND EARNED INCOME. THE SAID INCOME WAS OFFERED TO TAX BY THE ASSESSEE. BUT FOR THE LICENSE TO USE ERP SOFTWARE THE ASSESSE E WOULD NOT HAVE EARNED THIS INCOME. THE FACT THAT THESE SOF TWARE WERE USED BY MUKUND LIMITED AND BECAUSE OF CLAIM OF DEPR ECIATION OVER THE YEAR, THEIR BOOK VALUE WAS NIL AS PER TH E BOOKS OF MUKUND LIMITED, CANNOT BE THE REASON TO HOLD THAT T HE RIGHT ACQUIRED BY THE ASSESSEE TO USE THESE ERP PACKAGE H AS NO VALUE. IN OUR VIEW THE CIT(A) WAS, THEREFORE, RIGH T IN DIRECTING THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON THE VALUE OF THE APPLICATION AND SYSTEM SOFTWARE AS CLAIMED BY THE A SSESSEE. FOR THE REASONS STATED ABOVE THE GROUND NO.2 RAISED BY THE REVENUE IS DISMISSED. 9. THE ABOVE ORDER HAS BEEN FOLLOWED BY THE TRIBUNA L IN THE REVENUES APPEAL FOR THE ASSESSMENT YEAR 2004-05 (S UPRA). 10. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BR OUGHT ON RECORD BY THE REVENUE, WE RESPECTFULLY FOLLOWING TH E CONSISTENT VIEW OF THE TRIBUNAL DECLINE TO INTERFERE WITH THE ORDER PASSED BY THE LD. CIT(A) ON THIS ACCOUNT AND ACCORDINGLY, THE GROUNDS TAKEN BY THE REVENUE ARE REJECTED . ITA NO.846/MUM/2009(ASSESSEES APPEAL) 11. GROUND NOS.1 AND 2 TAKEN BY THE ASSESSEE READ A S UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFI CER IN NOT EXCLUDING FROM THE TOTAL INCOME, AN AMOUNT OF RS.8,48,58,072/- ON ACCOUNT OF PREMATURE CREDIT IN RESPECT OF GAIN EXPECTED ON DEBT ASSIGNMENT TRANSACTION. ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 7 2. THE COMMISSIONER OF INCOME-TAX (APPEALS) FURTHER ERRED IN HOLDING THAT THE GAIN ON DEBT ASSIGNMENT TRANSACTION IS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. 12. BRIEF FACTS OF THE ABOVE ISSUE ARE THAT THE A SSESSEE COMPANY BECAME A SURETY FOR A LOAN TAKEN BY ANOTHER COMPANY UNDER THE SAME MANAGEMENT, MUKUND LTD. FROM COMMERZ BANK AG. OVER A PERIOD OF TIME, MUKUND LTD. DEFAULTED IN THE PAYMENT OF LOAN TAKEN BY THEM FROM SAID BANK. THE BANK FILED A SUIT WITH DEBT RECOVERY TRIB UNAL AND ASSESSEE BEING SURETY WAS MADE A PARTY TO THIS SUIT . THE TOTAL AMOUNT OF CLAIM WAS OF RS.16.08 CRORES WHICH INCLUD ED PRINCIPAL AS WELL AS INTEREST. IN THE PROCEEDINGS B EFORE THE DEBT RECOVERY TRIBUNAL, A TRIPARTITE AGREEMENT WAS ARRIV ED AT TO SETTLE THE AMOUNT ON PAYMENT OF RS.7.60 CORES WHICH THE ASSESSEE UNDERTOOK TO PAY THE BANK ON THE CONDITION THAT THE ENTIRE AMOUNT OF OUTSTANDING LOAN AND INTEREST OF R S.16.08 CRORES WILL GET ASSIGNED TO THE ASSESSEE. IN THIS T RIPARTITE AGREEMENT, IT WAS FURTHER AGREED THAT ON ASSUMPTION OF THE LOAN TO ASSESSEE, MUKUND LTD. SHALL REPAY TO ASSESS EE OVER PERIOD OF 12 YEARS IN MONTHLY INSTALLMENTS. THE ISS UE OF INTEREST PAYABLE BY MUKUND LTD. TO ASSESSEE IS ALSO AN INTEG RAL PART OF THE AGREEMENT. IN ACCORDANCE WITH THE AGREEMENT, D EBT OF RS.16.08 CRORES WAS ASSIGNED TO ASSESSEE AND IN TUR N ASSESSEE ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 8 PAID RS.7.6 CRORES TO THE BANK. THE ENTIRE AMOUNT O F RS.16.08 CRORES WAS CREDITED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS AS INCOME. THE ASSESSING OFFICER HAS HELD THAT THE DIF FERENCE BETWEEN DEBT AMOUNT ASSIGNED BEING RS.16.08 CRORES AND THE AMOUNT OF RS.7.6 CRORES PAID BY ASSESSEE TO THE BAN K AMOUNTING TO RS. 8.48 CRORES IS INCOME OF ASSESSEE FOR THE CURRENT YEAR. 13. ON APPEAL BEFORE THE LD. CIT(A), THE LD. COUNSE L FOR THE ASSESSEE HAS FILED DETAILED WRITTEN SUBMISSIONS ON THE ISSUE. IT WAS CONTENDED THAT THE AMOUNT OF RS.8.48 CRORES WAS CREDITED BY THE ASSESSEE COMPANY TO ITS PROFIT AND LOSS ACCO UNT AS EXCEPTIONAL INCOME. IT WAS FURTHER CONTENDED THAT AUDITORS HAD QUALIFIED THE REPORT TO THE EFFECT THAT THE CRE DIT OF RS.8.48 CRORES AS INCOME WAS PREMATURE SINCE THE INCOME HAD NOT YET BECOME DUE NOR ACCRUED DURING THE YEAR UNDER CON SIDERATION. IT WAS FURTHER CONTENDED THAT THE ASSESSEE IS GOING TO RECEIVE PAYMENTS FROM MUKUND LTD. IN ACCORDANCE WITH TERMS OF AGREEMENT WHEREIN IT HAS BEEN CLEARLY SPECIFIED TH AT IT SHALL BE PAID BY MUKUND LTD. OVER A PERIOD OF 12 YEARS IN MO NTHLY INSTALLMENTS. THEREFORE, THE INCOME WHICH HAS NOT B EEN ACCRUED CANNOT BE TAXED IN THE CURRENT YEAR. IT HAS ALSO BEEN CONTENDED THAT INCOME SHALL ACCRUE IN THE YEAR IN W HICH THE ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 9 RESPECTIVE AMOUNTS ARE DUE TO ASSESSEE IN ACCORDAN CE WITH TERMS OF THE AGREEMENT. 14. THE LD. CIT(A) WHILE HOLDING THAT THE ENTIRE AC TIVITY WILL HAVE TO BE CONSIDERED AS AN ACTIVITY UNDER THE HEA D INCOME FROM OTHER SOURCES FURTHER HELD THAT SINCE THE APP ELLANT HAS BEEN ASSIGNED DEBT OF RS.16.08 CRORES AGAINST THE OUTRIGHT PAYMENT OF RS.7.60 CRORES TO THE BANK, THEREFORE, THE DIFFERENCE OF RS.8.48 CRORES IS A BENEFIT TO THE APPELLANT WHICH HAS ARISEN DURING THE YEAR UNDER CONSIDERAT ION AND HENCE THE SAME IS TAXABLE UNDER THE HEAD INCOME F ROM OTHER SOURCES. 15. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE WHILE REITERATING THE SAME SUBMISSIONS AS SUBMITTED BEFORE THE AO AND THE LD.CIT(A) FURTHER SUBMITS THAT THE AMOUN T OF RS.8.48 CRORES WAS CREDITED BY THE ASSESSEE COMPAN Y TO ITS PROFIT AND LOSS ACCOUNT AS EXCEPTIONAL INCOME. H E FURTHER SUBMITS THAT AUDITORS HAD QUALIFIED THE REPORT TO T HE EFFECT THAT THE CREDIT OF RS.8.48 CRORES AS INCOME WAS PREMATUR E SINCE THE INCOME HAD NOT YET BECOME DUE. HE FURTHER SUBMIT S THAT THE ASSESSEE SHALL RECEIVE PAYMENTS FROM MUKUND LTD. IN ACCORDANCE WITH TERMS OF AGREEMENT IN WHICH IT IS C LEARLY SPECIFIED THAT THE AMOUNT SHALL BE PAID BY MUKUND LTD. OVER A ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 10 PERIOD OF 12 YEARS IN MONTHLY INSTALLMENTS AND IN S UPPORT THE REFERENCE WAS MADE TO THE POINT NO.4.6 OF THE DIRE CTORS REPORT AND POINT NO.6 OF THE REPORT OF THE AUDITOR S TO THE MEMBERS OF THE ANNUAL REPORT OF THE ASSESSEE CO MPANY FOR THE FINANCIAL YEAR 2002-03 RELEVANT TO THE ASSESS MENT YEAR 2003-04 APPEARING AT PAGES 40 AND 47 OF THE ASSESS EES PAPER BOOK. THE REFERENCE WAS ALSO MADE TO THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT WITH RELEVANT SCHEDULES AT PAGES 50,51,52,55 AND 61 OF THE ASSESSEES PAPER BOOK. HE FURTHER SUBMITS THAT IN VIEW OF THE DECREE OF ADMISSION DAT ED 5.4.2002 AND COPY OF DEED OF ASSIGNMENT DATED 20.1.2003 AP PEARING AT PAGES 1 TO 25 OF THE ASSESSEES PAPER BOOK, THE DEBTS OF RS.16.08 CRORES OF MUKUND LTD. FROM COMMERZ BANK AG BY PAYMENT IS RS.7.6 CRORES. THE COMMERZ BANK AG, THER EAFTER, HAS ASSIGNED THE DEBT OF MUKUND LTD. TO THE ASSESS EE COMPANY. THE DIFFERENCE BETWEEN THE AMOUNT PAID B Y THE COMPANY AND THE AMOUNT OF THE DEBT ASSIGNED BY THE COMMERZ BANK AG AS PER CONSENT TERMS SIGNED BETWEE N THE COMMERZ BANK AG, MUKUND LTD. AND THE ASSESSEE-COMPA NY, HAS BEEN CONSIDERED IN THE BOOKS OF ACCOUNT AS AN EXCEPTIONAL INCOME, HOWEVER WHILE FILING THE RETURN OF INCOME, THE ASSESSEE HAS REDUCED THE AMOUNT OF RS.8.48 CRORES FROM ITS TOTAL INCOME OF THE ASSESSEE VIDE STATEMENT OF COMP UTATION OF ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 11 INCOME APPEARING AT PAGES 26 AND 27 OF THE ASSESSEE S PAPER BOOK. HE FURTHER SUBMITS THAT EVEN OTHERWISE, THE Q UESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIPLE OF LAW AND NOT IN ACCORDANCE WITH THE ACCOUNTING PRACTICE AS HELD BY THE HONBLE APEX COURT IN . TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. V/S CIT (1997) 227 ITR 17 2 (S C). HE FURTHER SUBMITS THAT ACCORDING TO THE ACCOUNTING STANDARD A4 AND 6 NOTI FIED U/S 145(2) DATED 25.1.1996 THE DIFFERENCE AMOUNT OF RS .8.48 CORERS CANNOT ADDED TO THE INCOME OF THE ASSESSEE. THE RELIANCE WAS ALSO PLACED ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN SULZER INDIA LTD. V/S JT. CIT( 2010 ) 42 SOT 457 ( MUM .) ( SB ), WHEREIN IT HAS BEEN HELD THAT THE PAYMENT OF NET PRESENT VALUE OF FUTURE LIABILITY COULD NOT BE REGARDED AS REMISSION OR CESSATION OF LIABILITY SO AS TO ATTRACT PROVISIONS OF SECTION 41(1)(A) OF THE ACT. HE FU RTHER SUBMIT THAT THE LD. CIT(A) HAS ASSESSED THE INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER, SUCH INCOME CA NNOT BE TAXED EVEN UNDER THE HEAD INCOME FROM OTHER SOURCE S AS THERE IS NO SUCH PROVISIONS TO TAX THE DIFFERENCE OF RS.8 .48 CRORES TO THE INCOME OF THE ASSESSEE. HE FURTHER SUBMITS T HAT EVEN THE CLAUSE (VIIA) OF SUB-SECTION (2) OF SECTION 56 OF THE ACT HAS BEEN INSERTED BY THE FINANCE ACT 2010 WITH EFF ECT FROM 1.6.2010 WHEREIN IT HAS BEEN PROVIDED THAT AFTER 1.6.2010 ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 12 WHERE THE COMPANY RECEIVES ANY PROPERTY BEING SHAR ES OF A COMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC AR E SUBSTANTIALLY INTERESTED (I) WITHOUT CONSIDERATION THE AGGREGATED FAIR MARKET VALUE OF WHICH EXCEEDS RS.5 0,000/-, WHOLE OF THE AGGREGATE FAIR MARKET VALUE OF SUCH PR OPERTY, (II) FOR A CONSIDERATION WHICH IS LESS THAN FAIR MARKET VALUE OF THE PROPERTY BY AN AMOUNT EXCEEDING RS.50,000/-, THE AG GREGATE FAIR MARKET VALUE OF SUCH PROPERTY AS EXCEEDS SUC H CONSIDERATION SHALL BE ADDED TO THE INCOME OF THE ASSESSEE, THEREFORE, THE LD. CIT(A) HAS ERRED IN ADDING THE INCOME OF RS.8.48 CRORES UNDER THE HEAD INCOME FROM OTHER S OURCES WITHOUT ANY SUCH PROVISIONS OF LAW. THE LD. COUNSE L FOR THE ASSESSEE AT THIS STAGE ALSO REFERS TO THE DEFINITI ON OF INCOME AND THE PROVISIONS OF SECTION 17(2) OF THE ACT FO R THE PROPOSITION THAT SUCH INCOME IS NOT ASSESSABLE UN DER THE ACT. HE FURTHER SUBMITS THAT THE ASSESSEE HAS SHOWN THE GAIN ON ASSIGNMENT OF DEBTS ON PROPORTIONATE BASIS FROM THE ASSESSMENT YEAR 2007-08 ONWARDS AND THERE IS NO AP PEAL ON THIS ISSUE BY THE ASSESSEE AGAINST THE ADDITION OF THE SAID INCOME FOR THE ASSESSMENT YEAR 2007-08 ONWARDS. HE , THEREFORE, SUBMITS THAT THE AMOUNT OF RS.8.48 CRORES CREDITED BY THE ASSESSEE COMPANY TO ITS PROFIT AND LOSS AC COUNT AS EXCEPTIONAL INCOME IS NOT ASSESSABLE UNDER THE ACT IN THE ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 13 YEAR UNDER CONSIDERATION AS THE INCOME HAS NOT BE EN ACCRUED TO THE ASSESSEE. HE, THEREFORE, SUBMITS THAT THE A DDITION MADE BY THE AO AND SUSTAINED BY THE LD. CIT(A) BE DELET ED. 16. ON THE OTHER HAND, THE LD. DR WHILE RELYING O N THE ORDER OF HE AO AND THE LD. CIT(A) FURTHER SUBMITS THAT T HE ASSESSEE COMPANY AND M/S MUKUND LTD ARE SISTER CONCERNS, THE DIRECTORS ARE COMMON, THEREFORE, THE ARRANGEMENT MADE BY THE ASSESSEE WAY OF DECREE OF ADMISSION AND DEED OF ASS IGNMENT IS AN ARRANGEMENT NOT TO PAY ANY TAX ON THE SAID AMOU NT WHICH IS OTHERWISE TAXABLE, THEREFORE, THE ORDER PASSED BY THE AO AND CONFIRMED BY THE CIT(A) ON THIS ACCOUNT BE UPH ELD. 17. IN THE REJOINDER, THE LD. COUNSEL FOR THE ASSE SSEE SUBMITS THAT THERE IS NO DISPUTE THAT M/S MUKUND LTD. IS A SISTER CONCERN OF THE ASSESSEE BUT THE FACT IS THA T THE ASSESSEE AS PER SURETY U/S 145 OF THE CIVIL PROCED URE CODE, 1908 AND DEED OF ASSIGNMENT HAS MADE PAYMENT OF RS.7,60,00,000/- TO THE COMMERZ BANK AG AND DEBITED THE OUTSTANDING DEBT OF RS.16.08 CRORES IN THE ACCOUNT OF M/S MUKUND LTD, PAYABLE BY MUKUND LTD. IN 144 INSTALL MENTS FROM APRIL 2006 TO MARCH 2018, THEREFORE, THE DIFFERENC E OF RS.8.48 CRORES DID NOT ACCRUE TO THE ASSESSEE IN THE YEAR UNDER ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 14 CONSIDERATION AND HENCE IT CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE. 18. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECOR D. WE FIND THAT THE FACTS ARE NOT IN DISPUTE. 19. SECTION 14 OF THE INCOME TAX ACT, 1961 AS IT S TOOD AT THE RELEVANT TIME SIMILARLY PROVIDED THAT 'ALL INCOME S HALL FOR THE PURPOSES OF CHARGE OF INCOME-TAX AND COMPUTATION OF TOTAL INCOME BE CLASSIFIED UNDER SIX HEADS OF INCOME,' NA MELY : (A) SALARIES; (B) INTEREST ON SECURITIES; (C) INCOME FROM HOUSE PROPERTY; (D) PROFITS AND GAINS OF BUSINESS OR PROFESSION; (E) CAPITAL GAINS; (F) INCOME FROM OTHER SOURCES UNLESS OTHERWISE, PRO VIDED IN THE ACT. 20. SECTION 56 PROVIDES FOR THE CHARGEABILITY OF IN COME OF EVERY KIND WHICH HAS NOT TO BE EXCLUDED FROM THE TO TAL INCOME UNDER THE ACT, ONLY IF IT IS NOT CHARGEABLE TO INCO ME-TAX UNDER ANY OF THE HEADS SPECIFIED IN SECTION 14 ITEMS A TO E. ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 15 THEREFORE, IF THE INCOME IS INCLUDED UNDER ANY ONE OF THE HEADS, IT CANNOT BE BROUGHT TO TAX UNDER THE RESIDU ARY PROVISIONS OF SECTION 56. 21. IN AIRPORTS AUTHORITY OF INDIA V/S CIT (2012) 340 ITR 407 (DEL) (FB) IT HAS BEEN OBSERVED (PAGE 419): THE QUESTION IS AS TO WHETHER THERE IS A REAL INCOME WHICH HAS ACCRUED TO THE ASSESSEE. THIS REAL INC OME THEORY IS ACCEPTED BY THE APEX COURT IN STATE BA NK OF TRAVANCORE V/S CIT (1986)158 ITR 102 (SC). AS PER THIS JUDGMENT, THE CONCEPT OF REAL INCOME IS APPLICABLE IN JUDGING WHETHER THERE HAS BEEN INCOME OR NOT. IF IN COME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOK-KEEPING, AN ENTRY IS MADE ABOUT A HYPOTHETI CAL INCOME WHICH DOES NOT MATERIALIZED. THIS PRINCIPLE IS APPLICABLE WHETHER THE ACCOUNTS ARE MAINTAINED ON T HE CASH SYSTEM OR UNDER MERCANTILE SYSTEM. IF THE ACCO UNTS ARE MAINTAINED UNDER THE MERCANTILE SYSTEM, WHAT HA S TO BE SEEN WHETHER INCOME CAN BE SAID TO HAVE BEEN REA LLY ACCRUED TO THE ASSESSEE-COMPANY. (SEE GODHARA ELECTRICITY CO. LTD. V. CIT [1997] 225 ITR 746 (SC) . 22. IT IS ALSO SETTLED LAW THAT WHEN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CER TAIN DEDUCTIONS FROM THAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIP LES OF LAW AND NOT IN ACCORDANCE WITH ACCOUNTANCY PRACTICE. (SEE TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. V/S C IT (1997) 227 ITR 172 (SC). ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 16 23. ACCORDING TO SAMPATH IYENGARS LAW OF INCOME TAX, 2011 EDITION AT PAGE 1312 OF VOL 1, THE CONCEPT O F ACCRUAL OF INCOME IS DISCUSSED AS UNDER : THE TIME OF ACCRUAL OR ARISAL IS OF SIGNIFICANCE I N TAXATION, SINCE, IN ORDER TO BE CHARGEABLE, THE INCOME SHOULD HAVE ACCRUED OR ARISEN TO THE ASSESSEE DURING THE ACCOU NTING YEAR, I.E., THE PREVIOUS YEAR. IN ORDER THAT INCOME MA Y BE SAID TO HAVE ACCRUED AT A PARTICULAR POINT OF TIME, IT MUST HAVE RIPENED INTO A DEBT AT THAT MOMENT, THAT IS TO SAY THE ASSESSEE SHOULD HAVE ACQUIRED A RIGHT TO RECEIVE PAYMENT AT THAT MOMENT, THOUGH THE RECEIPT ITSELF MAY TAKE PLACE LA TER. THERE MUST BE A DEBT OWED TO THE ASSESSEE BY SOMEBODY AT THAT MOMENT OR AS IS OTHERWISE EXPRESSED, DEBITUM IN PR AESENTI, SOLVENDUM IN FUTURO. UNTIL, THERE IS CREATED IN FA VOUR OF THE ASSESSEE A DEBT DUE BY SOMEBODY, IT CANNOT BE SAID THAT ANY INCOME HAS ACCRUED TO HIM. (SEE SASSOON & CO. LTD.(ED) V/S CIT (1954)26 ITR 27, 52 (SC). 24. APPLYING THE ABOVE PROVISION OF LAW AND THE RAT IO OF THE ABOVE DECISIONS TO THE FACTS OF THE PRESENT CASE, WE OBSERVE THAT THE ACCRUAL OF THE INCOME DEPENDS UPON THE CO NTINUANCE OF THE AGREEMENT AND THE PERFORMANCE OF THE RESPECT IVE OBLIGATION BY BOTH THE PARTIES. IN THE CASE BEFOR E US, IN FACT, THERE IS NO MATERIAL ON RECORD TO SHOW THAT THE SA ID INCOME HAS ACCRUED TO THE ASSESSEE. AS PER THE CONSENT TER MS DATED 5.4.2002 AND COPY OF DEED OF ASSIGNMENT DATED 20.1. 2003, BETWEEN COMMERZ BANK AG AND MUKUND LTD, THE PRINC IPAL AMOUNT IS TO BE RECEIVED BY THE ASSESSEE COMPANY FR OM MUKUND LTD. IN 144 MONTHLY INSTALLMENTS PAYABLE FRO M APRIL 2006 TO MARCH 2018, THEREFORE, DURING THE YEAR I.E . THE ASSESSMENT YEAR 2003-04 THE INCOME DOES NOT ACCRUE/ ARISE TO ITA NO.542/MUM/2009 ITA NO.846/MUM/2009 (ASSESSMENT YEAR:2003-04) 17 THE ASSESSEE. IN THIS VIEW OF THE MATTER AND KEEPI NG IN VIEW THAT THE ASSESSEE HAS SHOWN PROPORTIONATE INCOME F ROM THE ASSESSMENT YEAR 2007-08 AND ONWARDS, ACCEPTED BY THE REVENUE, WE ARE OF THE VIEW THAT THE ADDITION OF RS.8,48,58,072/- MADE BY THE AO AND SUSTAINED BY THE LD. CIT(A) IS NOT SUSTAINABLE IN LAW AND ACCORDINGLY TH E SAME IS DELETED. THE GROUNDS TAKEN BY THE ASSESSEE ARE, TH EREFORE, ALLOWED. 25. IN THE RESULT, THE REVENUES APPEAL STANDS DISM ISSED AND ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27TH MARCH ,2012. SD SD (G.E.VEERABHADRAPPA) (D.K.AGARWAL ) PRESIDENT JUDICIAL MEMBER MUMBAI, DATED 27TH MARCH,2012. SRL: COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH 6. GUARD FILE. BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUM BAI