DCIT, Panchkula V. M/s Haryana Minor Irrigation & Tube-well Corporation Ltd., Chandigarh

ITA 91/CHANDI/2010

• Counselvise Citation: 9121514 RSA 2010
• Duration Of Justice: 1 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-11-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 21-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JYOTI KUMARI
• Assessee Lawyers: TEJ MOHAN SINGH
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL: A BENCH: CH ANDIGARH BEFORE SHRI D K SRIVASTAVA, AM AND MS. SUSHMA CHOWL A, JM ITAS NO. 91 AND 92 /CHD/2010 ASSESSMENT YEAR: 2003-04 AND 2004-05 D.C.I.T. PANCHKULA V. M/S HARYANA MINOR IRRIGAT ION & TUBEWELL CORPORATION LTD., SCO 66-67, BANK SQUARE, SECTOR 17-B, CHANDIGARH PAN: AABFH 8314 F APPELLANT BY: SMT. JYOTI KUMARI RESPONDENT BY: SHRI TEJ MOHAN SINGH DATE OF HEARING: 22.11.2011 DATE OF PRONOUNCEMENT: 21.12.2011 ORDER D K SRIVASTAVA : BOTH THE APPEALS FILED BY THE DEPARTMENT INVOLVE COMMON ISSUES. WE THEREFORE FIND IT CONVENIENT TO DISPOSE OF BOTH OF THEM BY A CONSOLIDATED ORDER. I.T.A. NO. 91/CHD/2010: AY 2003-04 2. RETURN OF INCOME WAS FILED BY THE ASSESSEE DECLA RING TOTAL LOSS AT RS. 68,81,26,870/-. AFTER PROCESSING, THE RETURN WAS T AKEN UP FOR SCRUTINY AS A RESULT OF WHICH TOTAL LOSS WAS ASSESSED AT RS. 37,39,45,56 6/-. AGGRIEVED BY THE ADDITIONS/DISALLOWANCES MADE BY THE AO IN THE ASSES SMENT ORDER, THE ASSESSEE CARRIED THE MATTER IN APPEAL FIRSTLY BEFORE THE LD. CIT(A) AND THEREAFTER BEFORE THIS TRIBUNAL. THE TRIBUNAL BY ITS ORDER DATED 18.3.200 8 IN THE ASSESSEES APPEAL BEARING I.T.A. NO. 91 AND 1008/CHD/2007 FOR AY 2003 -04 AND 2004-05 RESTORED THE MATTER TO THE FILE OF LD. CIT(A) FOR FRESH DECI SION PURSUANT TO WHICH THE LD. CIT(A) HAS PASSED THE APPELLATE ORDER ON 3.11.2009 AGAINST WHICH THE DEPARTMENT IS NOW IN APPEAL BEFORE THIS TRIBUNAL. 3. GROUNDS NO. 1 AND 2 TAKEN BY THE DEPARTMENT READ AS UNDER:- 1 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF RETRENCHMENT COMPENSATION AND SALARY PAID BY TH E ASSESSEE AFTER THE CLOSURE OF BUSINESS? 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED LAW IN IGNORING THE JUDGMENT OF HO N'BLE SUPREME COURT REPORTED IN 65 ITR 643 (S.C) IN VIEW OF WHICH THESE PAYMENTS ARE NOT DEDUCTIBLE REVENUE EXPENDITURE AS THE BUSINESS HAD ALREADY BEEN CLOSED? 4. IN THE STATEMENT OF FACTS SUBMITTED BEFORE THE L D. CIT(A), THE ASSESSEE HAS STATED AS UNDER:- DCIT V HARYANA MINOR IRRIGATION AND TUBEWELL CORPOROATION ITAS NO . 91 AND 92/CHD/2010 2 THE HARYANA STATE MINOR IRRIGATION AND TUBEWELLS C ORPORATION LTD., IS FULLY OWNED BY HARYANA GOVERNMENT AND ITS MAIN ACTIVITIES WERE LINING OF WATERCOURSES, MAINTENANCE OF WATERCOURSES, MANUFACT URING OF PUMPS, GATES, INSTALLATION OF TUBEWELLS AND MAINTENANCE OF DIRECT IRRIGATION TUBEWELLS AND AUGMENTATION TUBEWELLS. THE ACTIVITIES OF THE CORPORATION HAVE BEEN CLOSED WITH THE APPROVAL OF THE APPROPRIATE GOVERNMENT UNDER SUB-SECTION (I) OF SEC TION 25-O OF THE INDUSTRIAL DISPUTE ACT, 1947 (14) OF 1947 W.E.F. 30 .7.2002, BUT THE OFFICE OF THE HSMITC IS STILL FUNCTIONING FOR SETTLEMENT OF D UES OF EMPLOYEES, PAYMENT OF THE OUTSTANDING LIABILITIES AND VARIOUS COURT CASES. 5. IT IS QUITE APPARENT FROM THE AFORESAID STATEMEN T OF FACTS SUBMITTED BY THE ASSESSEE BEFORE THE LD. CIT(A) THAT THE ASSESSEE CL OSED DOWN ITS BUSINESS W.E.F. 30.7.2002 WITH THE APPROVAL OF APPROPRIATE GOVERNME NT AS A RESULT OF WHICH THE RETRENCHMENT COMPENSATION WAS PAID TO THE EMPLOYEES . THE AO HAS DISALLOWED THE RETRENCHMENT COMPENSATION TO THE EMPLOYEES ON C LOSURE OF BUSINESS ON THE GROUND THAT IT WAS CAPITAL EXPENDITURE. THE LD. CI T(A) HAS HOWEVER HELD THAT RETRENCHMENT COMPENSATION WAS PART OF WAGES AND THE REFORE ALLOWED THE SAME AS REVENUE EXPENDITURE. 6. AGGRIEVED BY THE ORDER PASSED BY THE LD. CIT(A), THE DEPARTMENT IS NOW IN APPEAL BEFORE THIS TRIBUNAL. IN SUPPORT OF APPEAL, IT WAS SUBMITTED THAT THE RETRENCHMENT COMPENSATION WAS PAID ON CLOSURE OF BU SINESS AND THEREFORE IT WAS IN THE NATURE OF CAPITAL EXPENDITURE. IN THIS CONN ECTION, RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN CIT V. GEMINI CASHEW SALES CORPORATION, 65 ITR 643 (SC) AND NATHALAL ASHARAM V . CIT, 194 ITR 110 (GUJ). 7. IN REPLY, THE LD. COUNSEL FOR THE ASSESSEE RELIE D UPON THE ORDERS OF THE LD. CIT(A) AND SUBMITTED THAT THE LD. CIT(A) HAS RIGHTL Y HELD, FOLLOWING THE JUDGMENT OF THE BOMBAY HIGH COURT IN A.D. DIVEKAR V. DINESH MILLS LTD., (1955) LLJ 501 THAT THE RETRENCHMENT COMPENSATION WAS IN THE NATURE OF WAGES AND THEREFORE ALLOWABLE AS REVENUE EXPENDITURE. 8. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CON SIDERED THEIR SUBMISSIONS. THERE IS NO DISPUTE THAT THE RETRENCHMENT COMPENSAT ION WAS PAID DIRECTLY AS A RESULT OF CLOSURE OF BUSINESS. IT HAS BEEN HELD IN SERIES OF JUDGMENT, NAMELY CIT V. GEMINI CASHEW SALES CORPORATION, 65 ITR 643 (SC) ; NATHALAL ASHARAM V. CIT, 194 ITR 110 (GUJ); VENKATESA COLOUR WORKS V. CIT, 1 08 ITR 309 (MAD); INTESCO RAW SILK COMPANY V. CIT, 117 ITR 315 (ALL); CIT V. CENTRAL ART PRESS, 189 ITR 618 (MAD); P.N. GANESAN PVT. LTD. V. CIT, 196 ITR 4 55 (MAD) AND MODI ELECTRIC SUPPLY CO. V. CIT, 126 ITR 403 (P&H) THAT RETRENCHM ENT COMPENSATION PAYABLE ON CLOSURE OF BUSINESS IS IN THE NATURE OF CAPITAL EXPENDITURE AND NOT REVENUE EXPENDITURE. THE ISSUE IS THUS CLEARLY COVERED BY THE AFORESAID JUDGMENTS. IN THIS VIEW OF THE MATTER, THE IMPUGNED EXPENDITURE INCURR ED BY THE ASSESSEE AS A RESULT DCIT V HARYANA MINOR IRRIGATION AND TUBEWELL CORPOROATION ITAS NO . 91 AND 92/CHD/2010 3 OF CLOSURE OF ITS BUSINESS IS HELD TO BE IN THE NAT URE OF CAPITAL EXPENDITURE AND THEREFORE LIABLE TO BE DISALLOWED U/S 37 OF THE INC OME-TAX ACT, 1961. RESULTANTLY, THE ORDER OF LD. CIT(A) IN THIS BEHALF IS REVERSED AND THAT OF THE AO RESTORED. 9. AS REGARDS PAYMENT OF SALARY TO THE EMPLOYEES AF TER CLOSURE OF BUSINESS, IT CANNOT BE SAID THAT THE PAYMENT OF SALARY AFTER CLO SURE OF BUSINESS IS NOT IN THE NATURE OF REVENUE EXPENDITURE SO LONG AS THE ASSESS EE-CORPORATION FUNCTIONS FOR SETTLEMENT OF DUES OF ITS EMPLOYEES, DISCHARGE OF L IABILITIES AND OTHER MISCELLANEOUS EXPENDITURE. IN THIS VIEW OF THE MATT ER, THE ORDER OF LD. CIT(A) ALLOWING PAYMENT OF SALARY IS IN ORDER AND THEREFOR E IT IS CONFIRMED. 10. GROUNDS NO. 1 AND 2 ARE PARTLY ALLOWED IN TERMS OF THE AFORESAID DIRECTIONS. 11. GROUND NO. 3 TAKEN BY THE DEPARTMENT READS AS U NDER: 3 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ALSO ERRED IN DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF INTEREST PAID BY THE ASSESSEE TO THE NA TIONALIZED BANKS ON COMPROMISE SETTLEMENTS AS THE INTEREST PAID PERTAIN ED TO THE PERIOD EARLIER THAN THE YEAR UNDER CONSIDERATION ? 12 THE LD. CIT(A) HA ALLOWED THE CLAIM OF THE ASSES SEE WITH THE FOLLOWING OBSERVATIONS:- 8 THE THIRD GROUND OF APPEAL IS REGARDING INTEREST PAID TO BANKS AFTER 30.6.2002. THE LD. COUNSEL HAS ARGUED THAT THE INT EREST PAID TO THE NATIONALIZED BANKS ON ACCOUNT OF COMPROMISED SETTLE MENT SCHEME RELATES TO THE PERIOD OF OPERATION OF THE APPELLANT AND THE SAME IS ALLOWABLE EXPENDITURE. I FIND FORCE IN THE ARGUMENTS OF THE COUNSEL THAT SINCE THE INTEREST PAID RELATES TO THE PERIOD OF OPERATION OF THE ASSESSEE THE SAME IS AN ALLOWABLE EXPENDITURE. THE DISALLOWANCE MADE BY THE AO IS ORDERED TO BE DELETED AND THIS GROUND OF APPEAL IS ALLOWED. 13. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THEIR SUBMISSIONS. BOTH THE PARTIES AGREE THAT THE INTEREST PAID TO TH E NATIONALIZED BANKS WAS ON ACCOUNT OF SETTLEMENT BETWEEN THE PARTIES. BOTH TH E PARTIES ALSO AGREE THAT THE INTEREST LIABLE TO BE PAID AS A RESULT OF COMPROMIS E SETTLEMENT RELATES TO THE PERIOD DURING WHICH THE BUSINESS OF THE ASSESSEE WA S IN OPERATION. IN THIS VIEW OF THE MATTER, THE PAYMENT OF INTEREST TO NATIONALIZED BANKS CANNOT BE HELD AS CAPITAL EXPENDITURE. IN OUR VIEW, THE LD. CIT(A) H AS RIGHTLY HELD THE IMPUGNED EXPENDITURE TO BE IN THE NATURE OF REVENUE EXPENDIT URE. HIS ORDER IN THIS BEHALF IS CONFIRMED. GROUND NO. 3 TAKEN BY THE DEPARTMENT IS DISMISSED. 14. GROUNDS NO. 4 AND 5 TAKEN BY THE DEPARTMENT ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 15. APPEAL FILED BY THE DEPARTMENT IS PARTLY ALLOWE D. DCIT V HARYANA MINOR IRRIGATION AND TUBEWELL CORPOROATION ITAS NO . 91 AND 92/CHD/2010 4 I.T.A. NO. 92/CHD/2010: AY 2004-05 16. GROUND NO. 1 AND 2 TAKEN BY THE DEPARTMENT READ AS UNDER: 1 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(A) IS RIGHT IN HOLDING THAT THE EXPENDITURES ON ACCOUNT OF SALARY, RETRENCHMENT COMPENSATION AND INTEREST ARE ALLOWABL E BUSINESS EXPENDITURES OF THE ASSESSEE WHEN THE BUSINESS OF T HE ASSESSEE STOOD COMPLETELY CLOSED DOWN IN THE YEAR PRECEDING THE YE AR UNDER CONSIDERATION? 2 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(A) IS RIGHTLY IN ALLOWING THE EXPENDITURES CLAI MED BY THE ASSESSEE BY HOLDING THESE AS BUSINESS EXPENDITURES WHEN THE INC OMES AGAINST WHICH THESE EXPENDITURES HAD BEEN CLAIMED WERE INCOME FR OM HOUSE RENT AND INTEREST INCOME FROM FDRS? 17. THE LD. CIT(A) HAS ALLOWED THE CLAIM OF THE ASS ESSEE WITH THE FOLLOWING OBSERVATIONS:- 7 I HAVE CAREFULLY CONSIDERED OBSERVATIONS OF THE AO IN THE ASSESSMENT ORDER AND ALSO THE ARGUMENTS OF THE LD. COUNSEL FOR THE APPELLANT AND THE CASE LAWS RELIED UPON BY HIM. THE AO DISALLOWED T HE EXPENDITURE CLAIMED BY THE APPELLANT ON THE GROUND THAT THE BUSINESS OF THE APPELLANT STANDS CLOSED ON 30.7.2002 AND THE EXPENDITURE IS NOT INCI DENTAL TO THE RUNNING OF THE BUSINESS OF THE ASSESSEE. THE LD. COUNSEL FOR THE APPELLANT ON THE OTHER HANDS HAS ARGUED THAT THE EXPENDITURE HAS BEE N INCURRED FOR PAYMENT OF INTEREST ON LOAN UTILIZED FOR PAYMENT OF RETRENCHMENT COMPENSATION AND ALSO SALARY PAID TO THE CORE STAFF RETAINED FOR COMPLETION OF POST CLOSURE FORMALITIES INCLUDING PREPARATION O F BALANCE SHEET ETC WHICH IS VERY MUCH WITHIN THE AMBIT OF BUSINESS RELATED A CTIVITY OF THE COMPANY EVEN AFTER THE CLOSURE OF ITS OPERATION. THE LD. C OUNSEL HAS RELIED ON THE TWO CASE LAWS MENTIONED ABOVE. I FIND FORCE IN THE ARGUMENT OF THE LD. COUNSEL THAT THE INTEREST EXPENDITURE AND THE SALAR Y PAID TO THE CORE STAFF IS AN ALLOWABLE EXPENDITURE SINCE THE SAME FALLS WITHI N THE AMBIT OF BUSINESS RELATED ACTIVITY. THE RETRENCHMENT COMPENSATION WA S BUSINESS EXPENDITURE FOR PAYMENT OF WHICH THE APPELLANT RAISED LOAN FROM THE STATE GOVERNMENT ON WHICH INTEREST HAS BEEN PAID. THE INTEREST EXPE NDITURE IS THEREFORE AN ALLOWABLE EXPENDITURE. SIMILARLY, THE SALARY PAID TO THE CORE STAFF FOR POST CLOSURE FORMALITIES IS ALSO BUSINESS RELATED ACTIVI TY AND THIS EXPENDITURE IS ALLOWABLE. THE AO IS NOT JUSTIFIED IN DISALLOWING THE EXPENDITURE CLAIMED BY THE APPELLANT. THE DISALLOWANCE OF THE BUSINESS EX PENDITURE ON ACCOUNT OF INTEREST AND SALARY TO CORE STAFF MADE BY THE AO IS ORDERS TO BE DELETED. THIS GROUND OF APPEAL IS ALLOWED. 18. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THEIR SUBMISSIONS. PERUSAL OF ASSESSMENT ORDER SHOWS THAT THE ASSESSEE HAD CLAIMED LOSS OF RS. 8,33,88,253/-. PERUSAL OF ASSESSMENT ORDER FURTHER SHOWS THAT THE ASSESSEE HAD DECLARED INCOME OF RS. 3,23,13,262/- ON ACCOUNT OF INTEREST AND RENT FROM HOUSE PROPERTY. IT IS SEEN FROM THE ASSESSMENT ORDER THA T THE AO HAD DISALLOWED THE ENTIRE BUSINESS EXPENSES ON THE GROUND THAT THE ASS ESSEE HAD CLOSED DOWN ITS BUSINESS W.E.F. 30.7.2002. THE ASSESSEE CHALLENGED THE DISALLOWANCES/ADDITIONS MADE BY THE AO BEFORE THE LD. CIT(A). PERUSAL OF T HE ORDER PASSED BY THE LD. CIT(A) SHOWS THAT HE HAS ALLOWED THE APPEAL FILED B Y THE ASSESSEE. HOWEVER PARA DCIT V HARYANA MINOR IRRIGATION AND TUBEWELL CORPOROATION ITAS NO . 91 AND 92/CHD/2010 5 7 OF THE ORDER PASSED BY THE LD. CIT(A) SHOWS THAT HE HAS ALLOWED RETRENCHMENT COMPENSATION, INTEREST AND SALARY. THERE IS NO DIS CUSSION IN THE ORDER OF LD. CIT(A) ON THE ISSUE OF ALLOWABILITY OF EXPENSES OTH ER THAN RETRENCHMENT COMPENSATION, INTEREST AND SALARY. IN THE PRESENT APPEAL THE CASE OF THE DEPARTMENT IS THAT THE LD. CIT(A) SHOULD NOT HAVE A LLOWED BUSINESS EXPENDITURE AGAINST RENTAL INCOME AND INCOME FROM OTHER SOURCES I.E. INTEREST INCOME FROM FDRS. THE LD. CIT(A) HAS NOT DEALT WITH THE ISSUE OF ALLOWABILITY OF EXPENDITURE OTHER THAN RETRENCHMENT COMPENSATION, SALARY AND IN TEREST IN HIS APPELLATE ORDER. IN THIS VIEW OF THE MATTER, THE ORDER OF LD. CIT(A) IS VACATED AND THE MATTER IS RESTORED TO HIS FILE FOR FRESH DECISION IN CONFORMI TY WITH LAW ON EACH GROUND OF APPEAL TAKEN BEFORE HIM AFTER GIVING REASONABLE OPP ORTUNITY OF HEARING TO BOTH THE PARTIES. 19. GROUNDS NO. 3 AND 4 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 20. APPEAL FILED BY THE REVENUE IS TREATED AS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 21.12.2011 SD/- SD/- (SUSHMA CHOWLA) (D K SRIVASTAVA) JUDICIAL MEMBEER ACCOUNTANT MBMER CHANDIGARH: THE 21.12.2011 SURESH COPY TO: 1. THE APPELLANT, D.C.I.T. PANCHKULA 2. THE RESPONDENT, M/S HARYANA MINOR IRRIGATION AND TUBEWELL CORPORATION 3. THE CIT(A), PANCHKULA 4. THE LD. CIT, PANCHKULA 5. THE D.R, INCOME-TAX DEPARTMENT, CHANDIGARH ASSISTANT REGISTRAR, ITAT, CHANDIGARH TRUE COPY ASSISTANT REGISTRAR, ITAT, CHANDIGARH