ECHJAY FORGINGS P. LTD, MUMBAI V. ITO 10(3)(1), MUMBAI

ITA 922/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48934 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 10-05-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 11-02-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ASHIMA GUPTA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, E BENCH, MUMBAI. BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI V.DURGA RAO, JUDICIAL MEMBER I.T.A NO.922/ MUM/2009 ASSESSMENT YEAR: 2004-05 ECHJAY FORGINGS P. LTD. .. APPELLANT 603, RAHEJA CHAMBERS, 213, BACKBAY RECLAMATION, NARIMAN POINT,MUMBAI-21. PA NO.AAACE 1902 A VS INCOME TAX OFFICER 10(3)(1 ) .. RESPONDEN T AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. APPEARANCES: M. SUBRAMANIAN, FOR THE APPELLANT ASHIMA GUPTA, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. THIS APPEAL IS DIRECTED AGAINST CIT(A)S ORDER D ATED 26 TH NOVEMBER, 2008 FOR THE ASSESSMENT YEAR 2004-05. 2. GROUND NOS.1 AND 2 ARE NOT PRESSED AND ARE DISMI SSED AS SUCH. 3. IN GROUND NO.3, THE ASSESSEE IS AGGRIEVED THAT T HE CIT(A) ERRED IN SUSTAINING DISALLOWANCE OF ` .1,07,83,402 ON ACCOUNT OF CONTINGENT LIABILITY. I.T.A NO.922/ MUM/2009 ECHJAY FORGINGS P. LTD 2 4. THE RELEVANT MATERIAL FACTS ARE LIKE THIS. THE A SSESEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF STEEL FORGINGS AND AUT OMOBILE PARTS. THE ASSESSEE WAS SUPPLYING RAILWAY TYRES TO INDIAN RAILWAYS AND THE RAW MATERIAL FOR PRODUCING THESE RAILWAY TYRES WAS PURCHASED FROM ISPAT PROFIL ES LIMITED. DURING THE FINANCIAL YEAR 1997-98, THE ASSESSEE RECEIVED COMPLAINTS ABOU T QUALITY OF RAILWAY TYRES. IN THE OPINION OF ASSESSEE, THE DEFECTS POINTED OUT IN RAILWAY TYRES WERE ON ACCOUNT OF DEFECTIVE RAW MATERIAL SUPPLIED BY ISPECT PROFILES LIMITED. IT WAS IN THIS BACKDROP THAT THE ASSESSEE DECIDED NOT TO PAY OUTSTANDING BI LLS PAYABLE TO ISPAT PROFILES LIMITED, AND UNILATERALLY WRITE BACK THESE DUES TO THE CREDIT OF HIS PROFITS AND LOSS ACCOUNT. IN EFFECT THUS THE AMOUNT PAYABLE TO ISP AT PROFILES LIMITED WAS ADJUSTED AS DAMAGES CLAIMED ON ACCOUNT OF POOR QUALITY OF RAW M ATERIAL SUPPLIED, AND OFFERED TO TAX. THIS CLAIM FOR DAMAGES, HOWEVER, WAS REPUDIAT ED BY ISPAT PROFILES LIMITED. NOT ONLY THAT ISPAT PROFILES LIMITED REFUSED TO TAKE IN TO ACCOUNT THE DEBIT NOTE ISSUED BY THE ASSESSEE, ISPAT PROFILES LIMITED EVEN FILED A S UIT FOR RECOVERY OF ITS DUES. ON 9 TH JANUARY, 2004, ISPAT PROFILES LIMITED SERVED A WIND ING UP NOTICE ON THE ASSESSEE. REALISING THAT ISPAT PROFILES LIMITED WILL NOT GIVE UP ITS CLAIM AND THAT UNILATERAL WRITE OFF BY THE ASSESSEE WAS PERHAPS PREMATURE, TH E ASSESSEE WROTE BACK THE AMOUNT WHICH WAS EARLIER OFFERED TO TAX. IN EFFECT THUS LIABILITY OF ` .1,07,83,402 WAS BROUGHT BACK TO ACCOUNTS- A LIABILITY FOR PAYMENT O F OUTSTANDING DUES TO ISPAT PROFILES LIMITED. THE ASSESSING OFFICER DISALLOWED THE SAME. HE WAS OF THE VIEW THAT IT WAS A CONTINGENT LIABILITY. THE ASSESSING O FFICER FURTHER NOTED THAT THE LIABILITY TO ISPAT PROFILES LIMITED WAS FINALLY SETTLED FOR ` .65,00,000 VIDE MEMORANDUM OF UNDERSTANDING DATED 1 ST SEPTEMBER, 2004, AND THAT THE ACTUAL LIABILITY CAN AT BEST BE CLAIMED IN THE RELEVANT ASSESSMENT YEAR I.E. 2005-0 6. HE WAS OF THE VIEW THAT THE LIABILITY WAS ASCERTAINED AND CRYSTALLIZED ONLY ON 1.9.2004 I.E. PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2005-06. ACCORDINGLY, CLAIM OF DEDUCTION FOR ` .1,07,83,402 WAS DISALLOWED. AGGRIEVED, ASSESSEE CARRIED THE MAT TER IN APPEAL BEFORE THE CIT (A) BUT WITHOUT ANY SUCCESS. WHILE CONFIRMING THE ACTIO N OF THE AO, CIT(A) OBSERVED AS FOLLOWS: I HAVE CONSIDERED THE FACTS IN THE INSTANT CASE. T HE ORIGINAL LIABILITY TO PAY M/S. ISPAT PROFILES LTD., ACCRUED DURING THE F. Y. 1998-99 AND THE I.T.A NO.922/ MUM/2009 ECHJAY FORGINGS P. LTD 3 SAME WAS ACCORDINGLY ALLOWED UNDER SECTION 37(1). SUBSEQUENTLY, IN THE A.Y. 2001-02, THE APPELLANT SUO-MOTO WROTE BACK THE LIABILITY AND OFFERED THE SAME FOR TAXATION U/S.41(1). THE APPELL ANT HAS NOW RECLAIMED THE SAME AMOUNT IN THE A.Y. 2004-05 BY RE VERSING THE ENTRIES MADE IN THE FY 2000-2001. IN MY OPINION IF THE AO WAS TO ALLOW THIS, IT WOULD AMOUNT TO A DOUBLE DEDUCTION U /S.37(1) AS THIS AMOUNT HAS ALREADY BEEN ALLOWED IN THE A.Y. 1999-20 00. IT IS ONLY BY VIRTUE OF A LEGAL FICTION, CREATED BY SECTION 41(1) ,THAT THIS AMOUNT WAS BROUGHT TO TAX IN THE A.Y. 2001-02. THERE IS NO LE GAL FICTION, OF A SIMILAR NATURE, IN THE STATUTE WHEREBY A REVERSAL O F AN AMOUNT WRITTEN BACK TO THE P&L ACCOUNT CAN BE CLAIMED AS A DEDUCTI ON. THEREFORE, THERE IS NO QUESTION OF ALLOWING THE SAME U/S.37(1) /28, ONCE AGAIN. EVEN OTHERWISE, I FIND THAT THE AO HAS RIGHTLY HELD THAT, DURING THE F.Y. 2003-04, THE LIABILITY TO PAY M/S. ISPAT PROFILES L IMITED HAD NOT ACCRUED. IT WAS ONLY IN THE FY 2004-05 THAT A SETT LEMENT WAS REACHED BY VIRTUE OF WHICH AN AMOUNT OF ` .65 LAKHS WAS PAID TO M/S. ISPAT PROFILE LTD. A SIMPLY LEGAL NOTICE U/S.433/434 OF THE COMPANIES ACT COULD NOT CREATE A LIABILITY TO PAY THE DISPUTED AM OUNT. THEREFORE, BY REVERSING THE ENTRY OF ` .1,07,83,402 ALL THE ASSESSEE DID WAS TO CREATE A CONTINGENT LIABILITY WHICH HAS RIGHTLY BEEN DISAL LOWED BY THE AO. THIS GROUND OF APPEAL IS THEREFORE, DISMISSED. 5. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL B EFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE FACTUAL MATRIX OF THE CASE AS A LSO THE APPLICABLE LEGAL POSITION. 7. WE FIND THAT IN THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS MERELY REVERSED A UNILATERAL WRITE BACK OF DUES PAYABLE TO VENDOR. AS A MATTER OF FACT, AS LATER DEVELOPMENTS SHOWED, THE VERY DECISION OF WRITING O FF AMOUNT PAYABLE TO ISPAT PROFILES LIMITED WAS PREMATURE AND BASED ON TOO OPT IMISTIC AN APPRAISAL OF VENDORS WILLINGNESS OF FOREGO THE CLAIM. ALL THAT THE ASSE SSEE HAS DONE IN THE PRESENT YEAR TO REVERSE THE ACTION OF WRITE OFF. THERE IS NO DISPU TE, AS EVIDENT FROM THE LEGAL PROCEEDINGS INITIATED BY THE VENDOR AND AS EVIDENT FROM THE FACT THAT ULTIMATELY ASSESSEE HAD TO PAY OFF THIS LIABILITY- THOUGH AT A LESSER AMOUNT, THAT THE LIABILITY TO PAY TO ISPAT PROFILES LIMITED DID EXIST IN THE RELE VANT PREVIOUS YEAR, EVEN AS IT DID NOT REFLECT IN THE ASSESSEES ACCOUNT. UNDER THES E CIRCUMSTANCES, DISALLOWING THE LIABILITY DEBITED TO PROFIT AND LOSS ACCOUNT, ON TH E GROUND THAT IT IS A CONTINGENT I.T.A NO.922/ MUM/2009 ECHJAY FORGINGS P. LTD 4 LIABILITY, WAS CLEARLY ERRONEOUS. THE PROFITS OF T HE ASSESSEE ARE TO BE COMPUTED ON THE BASIS OF NORMAL ACCOUNTANCY PRACTICES, AND IT I S ONLY ELEMENTARY THAT ALL KNOWN LIABILITIES ARE TO BE PROVIDED FOR WHILE COMPUTING BUSINESS PROFITS. THERE WAS THUS NO INFIRMITY IN ASSESSEES CLAIM FOR DEDUCTION OF L IABILITY OF ` 1,07,83,402 PAYABLE TO ISPAT PROFILES LIMITED. THE STAND OF THE AUTHORITI ES BELOW THAT LIABILITY ACCRUED AS A RESULT OF MEMORANDUM OF UNDERSTANDING DATED 1 ST SEPTEMBER, 2004 IS WHOLLY INCORRECT, INASMUCH AS LIABILITY CAME INTO EXISTENC E AS A RESULT OF PURCHASE OF RAW MATERIALS FROM ISPAT PROFILES LIMITED, AND THE MOU ONLY RESULTED IN PART REMISSION OF THE SAME TO THE EXTENT CLAIM WAS FORGONE BY THE VENDOR. THE SAME HAS BEEN OFFERED TO TAX IN THE RELEVANT ASSESSMENT YEAR AND ASSESSING OFFICER HAS ACCEPTED THE SAME. AS OBSERVED BY HONBLE SUPREME COURT, IN THE CASE OF CHAINRUP SAMPATRAM VS CIT, 24 ITR 481, WHILE ANTICIPATED LOSS IS THU S TAKEN INTO ACCOUNT, ANTICIPATED PROFITSIS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROFIT BEFORE ITS ACTUAL REALIZATION. THE UNDERLYING PRINCIPLE IS THE THEORY OF CONSERVATION IN ACCOUNTING WHICH HAS THE SANCTION OF HONBLE COURTS ABOVE. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARI NG IN MIND THE ENTIRETY OF THE CASE, WE DEEM IT FIT AND PROPER TO DIRECT THE ASSESSING O FFICER TO DELETE THE IMPUGNED DISALLOWANCE OF ` . 1,07,83,402 THE ASSESSEE GETS RELIEF ACCORDINGL Y. 8. GROUND NO. 3 IS THUS ALLOWED. 9. GROUND NO.4 WAS NOT PRESSED BY THE ASSESSEE AND IS DISMISSED AS SUCH. 10. IN GROUND NOS.5,6 AND 7, THE ASSESSEE HAS CHALL ENGED LEVY OF INTEREST U/S.234A, B & C. HOWEVER, HAVING NOTED THAT THE CI T (A) HAS DISMISSED THE GRIEVANCES AS CONSEQUENTIAL AND WITHOUT DEALING WIT H THE MATTER ON MERITS, WE DEEM IT FIT AND PROPER TO REMIT THE MATTER TO THE F ILE OF THE CIT(A) FOR FRESH ADJUDICATION, BY WAY OF A SPEAKING ORDER AND AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSESSEE, IN ACCORDANCE WITH LAW. TO THIS EX TENT, GROUND NOS.5,6 & 7 ARE ALLOWED FOR STATISTICAL PURPOSES. I.T.A NO.922/ MUM/2009 ECHJAY FORGINGS P. LTD 5 11. IN THE RESULT, APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON 31 ST MAY 2011. SD/- (V. DURGA RAO) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 31 ST MAY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),X, MUMBAI 4. COMMISSIONER OF INCOME TAX,MC-X , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH E, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI