, , , IN THE INCOME TAX APPELLATE TRIBUNAL, BEN CH B, KOLKATA () BEFORE . .. . . .. . , , , , , SHRI B.R.MITTAL, JUDICIAL MEMBER. /AND . .. .!' !'!' !'. .. . , #$ SHRI C.D.RAO, ACCOUNTANT MEMBER % % % % / ITA NO1075/KOL/2009 &' ()/ ASSESSMENT YEAR : 2003-04 (+, / APPELLANT ) D.C.I.T., CIRCLE-11, KOLKATA - & - - VERSUS - . (./+,/ RESPONDENT ) M/SA.PHILIPS ELECTRONICS INDIA LTD., KOLKATA PAN: AABCP 9487 A % % % % / ITA NO.948/KOL/2009 &' ()/ ASSESSMENT YEAR : 2003-04 (+, / APPELLANT ) M/S.PHILIPS ELECTRONICS INDIA LTD., KOLKATA PAN: AABCP 9487 A - & - - VERSUS - . (./+,/ RESPONDENT ) D.C.I.T., CIRCLE-11, KOLKATA +, 0 1 #/ FOR THE APPELLANT: SHRI B.B.PANIGRAHI,CIT ./+, 0 1 #/ FOR THE RESPONDENT: SHRI BISHAN KUMAR SEAL & SHRI AMITAVA SEN #2 / ORDER ( (( ( . .. .!' !'!' !'. .. . ) )) ), , , , #$ PER SHRI C.D.RAO, AM THE ABOVE CROSS APPEALS ARE FILED BY THE REVENUE A ND THE ASSESSEE AGAINST SEPARATE ORDERS DATED 16.03.2009 OF THE CIT(A)-XI, KOLKATA PERTAINING TO A.YR. 2003-04. 2 ITA NO.1075/KOL/2009 (REVENUES APPEAL) : 2. THE FIRST TWO GROUNDS RAISED BY THE REVENUE AS W ELL AS FIRST THREE GROUNDS RAISED BY THE ASSESSEE ARE RELATING TO THE TRANSFER PRICING ADJUSTMENTS. 3. THE BRIEF FACTS OF THIS ISSUE ARE THAT WHILE DO ING THE SCRUTINY ASSESSMENT FOLLOWING ADJUSTMENTS HAVE BEEN MADE BY THE AO UNDE R THE FOLLOWING HEADS : SL.NO. ITEMS AMOUNT OF ADJUSTMENT 1. IMPORT OF MONITORS 1,56,38,800/- 2. EXPORT OF FINISHED GOODS (CE COMMERCIAL AND CE INDUSTRIAL) 88,49,308/- 3. EXPORT OF ETG 6,99,032/- 4. PAYMENT OF I.T.CHARGES 1,09,16,882/- 5. RE-IMBURSEMENT OF EXPENSES 13,01,000/- TOTAL 3,74,05,022/- 3.1. BY OBSERVING THAT THE ASSESSEE HAS MADE INTERN ATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES DURING THE YEAR AND WITH PRI OR APPROVAL FROM CIT U/S 92C THE TRANSACTIONS WERE REFERRED TO THE TRANSFER PRICING OFFICER FOR DETERMINATION OF ARMS LENGTH PRICE. THE TRANSFER PRICING OFFICER HAS FURN ISHED HIS REPORT WHICH HAS BEEN DISCUSSED WITH SHRI MONDAL, LD. AR OF THE ASSESSEE. BY VIRTUE OF SUB-SECTION (4) OF SECTION 92C THE TOTAL INCOME WILL BE COMPUTED IN RE GARD TO THE COMPUTATION OF ARMS LENGTH PRICE AND THE ADJUSTMENTS TO BE MADE THEREIN . THUS SUM WILL, HOWEVER, NOT QUALIFY FOR ANY DEDUCTION UNDER CHAPTER VIA. THE RE PORT OF THE T.P.O. IS ATTACHED TO THIS ORDER VIDE ANNEXURE-I. 3.2. AGGRIEVED BY THIS THE ASSESSEE WENT IN APPEAL BEFORE THE LD. CIT(A). 3.3. ON APPEAL THE LD. CIT(A) HAS DELETED THE ADDIT IONS ON ACCOUNT OF EXPORTS OF ETG AND PAYMENT OF IT CHARGES BY OBSERVING AS UNDER :- EXPORT OF ETG :THE ASSESSED EXPORTED FINISHED GOODS OF RS.79,88, 944/- IN ITS ETG DIVISION. THE EXPLANATION OF THE ASSESSEE AS WE LL AS THE DECISION OF THE TRANSFER PRICING OFFICER HERE IS ON THE SAME LINES AS IN RESPECT OF THE EXPORT OF GOODS OF CE DIVISION DISCUSSED EARLIER. HERE, THE C ONTRIBUTION MARGIN ON EXPORTS WAS FOUND TO 27.5% AS AGAINST OVERALL MARGI N OF 33% IN THIS UNIT. THE TRANSFER PRICING OFFICER APPLIED 33% CM TO EXPORTS, RESULTING IN ADJUSTMENT OF RS.6,99,032/-. CONSIDERING THAT THE VOLUME OF BUSIN ESS HERE IS INSIGNIFICANT COMPARED TO THE OVERALL BUSINESS OF THE ASSESSEE AN D DIFFERENTIAL CM IS ALSO NOT VERY WIDE (AS DISTINGUISHED FROM THE DIFFERENTIAL C M SEEN IN SUPPORT OF GOODS 3 FROM CE DIVISION), IT IS HELD THAT THE ADJUSTMENT S HOULD BETTER BE IGNORED. THE PURPOSE OF TRANSFER PRICING LEGISLATION IS NOT TO M AKE ADJUSTMENTS ON THE BASIS OF MATHEMATICAL FORMULA BUT TO NEUTRALIZE THE EFFEC T OF SHIFTING OF PROFITS FROM ONE JURISDICTION TO ANOTHER IN THE COURSE OF RELATE D PARTY TRANSACTIONS. IN THIS CASE, IT IS ALSO SEEN THAT THE ETG UNIT AT KOLKATA WAS CLOSED BY THE ASSESSEE AND THE ASSETS THEREOF WERE BEING WRITTEN OFF. HENCE, T HE SUBMISSION THAT THE UNSOLD STOCK WAS SOLD OVERSEAS IN A SITUATION OF DISTRESS SALE COULD BE ACCEPTED WITHOUT HAIR-SPLITTING. CONSIDERING THESE FACTS AND CIRCUMS TANCES AND ALSO THE SMALLNESS OF AMOUNT INVOLVED, THE ADDITION IS DELETED. PAYMENT OF IT CHARGES : IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT THE C OST INCURRED BY AE ON IT SERVICES IS ALLOCATED TO GROUP ENTITIES IN A UNIFORM MANNER ALL OVER THE WORLD. AS PER THE GLOBAL IT POL ICY OF THE GROUP, THE RECOVERY IS EFFECTED ON THE BASIS OF ACTUAL USER AN D IS QUANTIFIED ON THE BASIS OF COST PLUS 5% MARKUP. THE TRANSFER PRICING ANALYSIS DONE BY EMST & YOUNG FOR PHILIPS INTERNATIONAL, B.V.NETHERLANDS SHOWED THAT INTERQUARTILE RANGE OF SIMPLE AVERAGE MARK-UP ON TOTAL COSTS EARNED BY UNR ELATED ENTITIES FOR THE PERIOD 1997 TO 2001 IN THE EUROPEAN UNION, NORWAY A ND SWITZERLAND HAD A MEDIAN OF 5.1%. ACCORDING TO ANOTHER ANALYSIS, SUCH MARK-UP IN WESTERN EUROPE DURING THE PERIOD 2001 TO 2003 HAD A MEDIAN OF 6.1%. THE TRANSFER PRICING POLICY ADOPTED BY THE GENERAL SOURCING UNIT (GSU) FOR IT SERVICES OF PHILIPS INTERNATIONAL B.V.NETHERLANDS DISCUSSED VAR IOUS PARAMETERS AND LAID DOWN THAT 5% MARK-UP FROM THE ACTUAL COST WOULD BE CHARGED AS REMUNERATION FOR THE IT SERVICES RENDERED BY IT TO THE GROUP COM PANIES. IT WAS SUBMITTED THAT SUCH MARKUP, CALCULATED ON THE BASIS OF THE PROPORT IONAL COST DETERMINED ON THE BASIS OF ACTUAL USER WAS CHARGED FROM THE ASSESSEE AS WELL AS THE VARIOUS OTHER COMPANIES OF PHILIPS GROUP IN A TRANSPARENT MANNER AND BASED ON THE PUBLICLY DISCLOSED TRANSFER PRICING POLICY DISCUSSED ABOVE. ACCORDING TO THE ASSESSEE, THIS POLICY IS ALSO AVAILABLE ON THE WEBSITE OF THE PHILIPS GROUP. IN VIEW OF THESE FACTS AND CIRCUMSTANCES, IT IS HELD THAT THE PRICE PAID BY THE ASSESSEE FOR IT SERVICES UTILIZED BY IT FROM THE AE WAS NOT UNREASO NABLE. CONSEQUENTLY, THE ADDITION IS DELETED. 3.4. ON THE OTHER HAND, THE LD. CIT(A) CONFIRMED TH E ACTION ON ACCOUNT OF THREE ITEMS I.E. IMPORT OF MONITORS, EXPORT OF FINISHED G OODS AND REIMBURSEMENT EXPENSES. HOWEVER, THE ASSESSEE HAS COME IN APPEAL ONLY ON AC COUNT OF IMPORT OF MONITORS AND EXPORT OF FINISHED GOODS. IN ADDITION TO THESE TWO ITEMS THE ASSESSEE HAS TAKEN GROUND NO.3 BY STATING THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN NOT GRANTING THE BENEFIT OF +/- 5% RANGE WHILE COMP UTING THE ARMS LENGTH PRICE AND CONSEQUENT ADJUSTMENT TO TOTAL INCOME. 3.5. THE RELEVANT OBSERVATIONS OF THE LD. CIT(A) ON ACCOUNT OF IMPORT OF MONITORS AND EXPORT OF FINISHED GOODS ARE AS UNDER :- 4 2.2. IMPORT OF MONITORS : THIS ARGUMENT OF THE ASSESSEE IS LOGICALLY APPEAL ING BUT FAILS TO EXPLAIN WHY, IF ALL THESE PRODUCTS WER E SIMILAR IN NATURE AND WERE COMPLEMENTARY TO EACH OTHER, THE CM PERCENTAGE IN R ESPECT OF MONITORS IS ONLY 3.40% WHILE THAT IN RESPECT OF OTHER PRODUCTS RANGE S FORM 21.35% TO 23.56% WITHIN THE IMPORTED SEGMENT ITSELF. EVEN WITHIN THE LOCALLY MANUFACTURED SEGMENT, THE CM PERCENTAGE IN RESPECT OF CTV AND AU DIO WAS 14.95 AND 25.94 RESPECTIVELY. AS OBSERVED BY THE ASSESSING OFFICER, EVEN THOUGH MONITORS AND THE REST OF THE PRODUCTS IN THIS DIVISION ARE CLASS IFIED TOGETHER BY THE CUSTOMS AUTHORITIES, THEY CATER TO DIFFERENT AREAS OF CONSU MER NEEDS. EVEN IF THE ASSESSEES CONTENTION THAT THEY FORMED A COMMON GRO UP BE ACCEPTED, IT IS DIFFICULT TO ACCEPT THE EXCEPTIONALLY LOW CM ON MON ITORS AS COMPARED TO THE OTHER PRODUCTS WITHIN THE SAME SEGMENT. THE ASSESSE E ADOPTED THE AVERAGE CM PERCENTAGE ON IMPORTED ITEMS (19.92%) AND COMPARED IT WITH THE AVERAGE CM PERCENTAGE WITH THE LOCALLY MANUFACTURED ITEMS (19. 97%) AND CONCLUDED THAT ITS IMPORTS WERE PRICED AT ARMS LENGTH. THE TRANSFE R PRICING OFFICER CONSIDERED MONITORS SEPARATELY AND, SINCE MONITORS WERE NOT MA NUFACTURED LOCALLY BY THE ASSESSEE, HE IDENTIFIED THE CM OF UNRELATED PARTIES FOR BENCHMARKING CM ON MONITORS IN THIS CASE. IF THE PRODUCTS ARE SEPARATE LY IDENTIFIABLE AND THEIR CMS CAN SEPARATELY BE WORKED OUT, THERE IS NO REASON WH Y THE CM OF A PARTICULAR PRODUCT SHOULD NOT BE BENCHMARKED AGAINST THAT OF T HE PRODUCT IN AN UNRELATED TRANSACTION. HENCE, THE ASSESSEES METHOD OF COMPAR ING IT WITH THE GROSS CM PERCENTAGE OF ITS LOCALLY MANUFACTURED ITEMS IS NOT APPROPRIATE, PARTICULARLY CONSIDERING THE FACT THAT MONITORS DO NOT FIGURE IN LOCALLY MANUFACTURED ITEMS AND THE CM PERCENTAGE OF THE MONITORS WITHIN THE IM PORTED ITEMS IS EXCEPTIONALLY LOW COMPARED TO THE OTHER ITEMS WITHI N THE SAME SEGMENT. 2.3. IN HIS ANALYSIS OF DETERMINING THE ALP, THE TPO EXCLUDED THE GOVERNMENT COMPANIES AND LOSS MAKING COMPANIES. THI S FACT HAS BEEN CONTESTED BY THE ASSESSEE. THE TPO WAS CONSIDERING THE BROAD SPECTRUM OF COMPANIES PERFORMING DISTRIBUTION FUNCTION IN GENER AL. IN OTHER WORDS, HE WAS BENCHMARKING THE CM ON THE BASIS OF FUNCTIONAL SIMI LARITY. ACCORDING TO THE ASSESSEE IF THE TPO DESIRED TO TREAT MONITORS AS A SEPARATE ENTITY, HE SHOULD ALSO HAVE FACTORED IN PRODUCTS SIMILARITY, I.E. THE CM O F COMPANIES DISTRIBUTING IMPORTED MONITORS ONLY SHOULD HAVE BEEN CONSIDERED FOR THIS EXERCISE. THIS ARGUMENT IS WELL TAKEN. BUT THE FACT REMAINS THAT E VEN THE ASSESSEE HAS NOT FURNISHED ANY SUCH RELIABLE AND COMPARABLE DATA IN RESPECT OF CM OF IMPORTED MONITORS IN INDIA. THERE IS A PRIMA FACIE CASE FOR TRANSFER PRICING ADJUSTMENT. THE BENCHMARKING EXERCISE CARRIED OUT BY THE ASSESS EE DOES NOT APPEAR TO BE VERY ACCURATE. BUT IF ONE GOES BY ASSESSEES OWN CO NTENTION AND TAKES THE PRODUCT WITHIN THE CE DIVISION AS SIMILAR IT IS SEE N THAT CM PERCENTAGE ON OTHER PRODUCTS RANGED FROM 21.35 TO 23.56 AS NOTED ABOVE EARLIER. IN VIEW OF THESE FACTS AND CIRCUMSTANCES, IT IS HELD THAT THE C.M. O F 14.04% ADOPTED BY THE TPO CANNOT BE DISTURBED. CONSEQUENTLY, THE ADDITION MAD E BY THE ASSESSING OFFICER PURSUANT TO THE TRANSFER PRICING ADJUSTMENT IN THE COST OF IMPORTED MONITORS IS CONFIRMED. 3.3. EXPORT OF FINISHED GOODS : THE ASSESSEE HAS NOT SUBSTANTIATED, WITH RELEVANT DOCUMENTS, ITS CONTENTION THAT THE STOCK I N QUESTION WAS LYING FOR LACK 5 OF DEMAND. IT IS TRUE THAT THE AE WAS NOT A RETAIL DISTRIBUTOR NOR WAS IT THE END CONSUMER. IT WAS THE ORIGINAL MANUFACTURER/SUPPLIER . HENCE, ALL OTHER FACTS REMAINING THE SAME, THE ASSESSEE MIGHT BE REQUIRED TO SHARE A PART OF ITS PROFIT WITH THE AE AND, TO THAT EXTENT, SOME REDUCTION IN PRICE MAY BE JUSTIFIED. BUT, ON THE OTHER HAND, THERE IS ALSO A POSSIBILITY THAT THE PRICE OF THESE PRODUCTS IN THE IMPORTING COUNTRY WAS SUBSTANTIALLY HIGHER THAN THE PRICE IN INDIA AND THAT THE AE WAS IN A POSITION TO EARN ITS NORMAL PROFIT EVEN AFTER THE ASSESSEE HAD SOLD THE PRODUCTS TO IT AFTER CHARGING ITS NORMAL P ROFIT. SUCH ANALYSIS IS NOT AVAILABLE ON RECORD. IN THIS SITUATION, IT IS FELT THAT THERE IS NO JUSTIFICATION TO INTERFERE WITH THE FINDING OF THE TPO/ASSESSING OFF ICER. CONSEQUENTLY, THE ADDITION IS CONFIRMED. 4. AT THE TIME OF HEARING BEFORE US, THE LD. COUNSE L APPEARING ON BEHALF OF THE ASSESSEE HAS SUPPORTED THE ORDERS OF THE LD. CIT(A) AS FAR AS DELETION OF EXPORT OF ETG AND PAYMENT OF IT CHARGES BUT HOWEVER, THE LD. COUN SEL FOR THE ASSESSEE AFTER DISCUSSING VARIOUS CRITERIA FOR COMPUTATION OF ARM S LENGTH PRICE IN RESPECT OF TRANSACTIONS WITH ASSOCIATED ENTERPRISES, HE FINALL Y CONCLUDED THAT THE TRANSFER PRICING OFFICER HAS NOT GIVEN SUFFICIENT OPPORTUNITY TO EXP LAIN THE CASE OF THE ASSESSEE. 5. THE LD. DR APPEARING ON BEHALF OF THE REVENUE CO NTENDED THAT THE ACTION OF THE LD. CIT(A) IN DELETING OF THE TWO ITEMS I.E. IMPORT OF ETG AND PAYMENT OF IT CHARGES IS NOT BASED ON SOUND REASONING. THEREFORE HE REQUE STED TO UPHOLD THE ACTION OF THE AO ON THESE TWO ISSUES. 6. AFTER HEARING THE RIVAL SUBMISSIONS AND ON CAREF UL CONSIDERATION OF THE MATERIALS AVAILABLE ON RECORD WE HAVE OBSERVED THAT THE TRANSFER PRICING OFFICER HAS TAKEN SUFFICIENT TIME WHILE PREPARING ARMS LENGTH P RICE IN RESPECT OF THE ENTERPRISE TRANSACTION. SINCE THE MAIN CONTENTION OF THE ASSES SEE IS THAT THE TRANSFER PRICING OFFICER HAS NOT GIVEN SUFFICIENT OPPORTUNITY WE AR E OF THE CONSIDERED VIEW THAT THE MATTER MAY BE SET ASIDE TO THE FILE OF THE AO WITH THE DIRECTION TO OBTAIN FRESH REPORT FROM THE T.P.O. AND THE T.P.O. IS DIRECTED TO RECOM PUTED THE TRANSFER PRICE AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 7. REGARDING THE REVENUES APPEAL WE FIND THAT THE REASONING GIVEN BY THE LD. CIT(A) FOR DELETION IS NOT APPROPRIATE AND THE LD. CIT(A) HAS ACCEPTED THE CONTENTION 6 OF THE ASSESSEE WHICH ARE GENERAL IN NATURE AND NOT DISCUSSING THE FACTS OF THE CASE. SINCE WE HAVE ALREADY SET ASIDE THE ISSUES INVOLVED IN ASSESSEES APPEAL TO THE FILE OF THE AO FOR TAKING FRESH REPORT FROM THE T.P.O. THE ISSUE DELETED BY THE LD. CIT(A) IS ALSO BEING SET ASIDE TO THE AO WITH THE SIMILAR OBS ERVATIONS. 8. IN THE RESULT THE FIRST TWO GROUNDS OF ASSESSEE AS WELL AS REVENUES ARE ALLOWED FOR STATISTICAL PURPOSES. 9. AS REGARDING GROUND NO.3 RAISED BY THE ASSESSEE THE SPECIFIC OBSERVATIONS OF THE LD. CIT(A) ARE AS UNDER :- ANOTHER GROUND (GROUND NO.9) IS THAT, WHILE MAKING TRANSFER PRICING ADJUSTMENTS, THE TRANSFER PRICING OFFICER DID NOT G IVE THE BENEFIT OF PLUS MINUS 5% RANGE AS PROVIDED IN SECTION 92C(2)OF THE INCOME TAX ACT. ACCORDING TO THE SAID PROVISION, WHERE MORE THAN ONE PRICE IS DE TERMINED BY THE MOST APPROPRIATE METHOD, THE ALP WOULD BE ARITHMETICAL M EAN OF SUCH PRICE OR, AT THE OPTION OF THE ASSESSEE, THE PRICE WHICH MAY VAR Y FROM THE ARITHMETICAL MEAN BY AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEA N. IT IS NOT THAT, EVEN WHEN THE MOST APPROPRIATE METHOD YIELDS ONLY ONE PR ICE, THE BENEFIT OF 5% VARIATION HAS TO BE ALLOWED TO THE ASSESSEE. IN THI S CASE, ACCORDING TO THE MOST APPROPRIATE METHOD ADOPTED BY THE TRANSFER PRICING OFFICER, THE PRICE DETERMINED WAS ONE, AND NOT MORE THAN ONE IN EACH C ASE. HENCE, THERE WAS NO OCCASION TO ALLOW 5% VARIATION THEREIN. HENCE, THIS GROUND IS REJECTED. 10. AT THE TIME OF HEARING BEFORE US THE LD. COUNSE L APPEARING ON BEHALF OF THE ASSESSEE BY NARRATING THE PROVISIONS OF SECTION 92C (2) OF THE IT ACT AND BY PLACING RELIANCE ON THE FOLLOWING CASE LAWS : A) DEVELOPMENT CONSULTANTS PVT.LTD. VS DCIT, CIRCLE-11 , KOLKATA (2008) 115 TTJ 577 B) TATA TEA LIMITED VS ACIT, CIRCLE-4, KOLKATA C) SONY INDIA (P) LTD VS DCIT (2008) 114 ITD 448 (DELH I) D) SKODA AUTO INDIA PVT LTD. VS ACIT, CIRCLE-1, AURANG ABAD (ITAT,PUNE)122 TTJ 699. HE CONTENDED THAT AO SHOULD HAVE GIVEN PLUS OR MINU S 5% ADJUSTMENT AS PER SECTION 92C(2) OF THE IT ACT. 7 11. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THA T SINCE IN THIS CASE THE PROVISION OF SECTION 92C(2) OF THE IT ACT WILL NOT BE APPLICA BLE SINCE THE TPO HAS ADOPTED THE ONLY ONE METHOD I.E. MOST APPROPRIATE METHOD AND TH E PROVISION OF SECTION 92C(2) OF THE IT ACT IS APPLICABLE WHEN THERE ARE MORE THAN O NE PRICE ADOPTED BY THE TPO. IN VIEW OF THIS NO ADJUSTMENT AS REQUIRED U/S 92C(2) O F THE IT ACT IS REQUIRED. THEREFORE HE REQUESTED TO UPHELD THE ACTION OF THE LD. CIT(A) . 12. AFTER HEARING THE RIVAL SUBMISSIONS AND ON CARE FUL CONSIDERATION OF THE MATERIAL AVAILABLE ON RECORD INCLUDING THE CASE LAWS RELIED UPON BY THE ASSESSEE WE ARE OF THE CONSIDERED OPINION THAT WHEN ONLY ONE PRICE HAS BEE N DETERMINED UNDER (MOST APPROPRIATE METHOD) FOR EVALUATING ARMS LENGTH PRIC E, THE QUESTION OF APPLICABILITY OF PROVISO 2 OF SECTION 92C(2) DOES NOT ARISE. THEREFO RE ASSESSEE, WAS NOT ENTITLED TO THE CONCESSION OF PLUS OR MINUS 5% AS PRESCRIBED IN THE SAID PROVISION. 13. IN THE RESULT GROUND NO.3 OF THE ASSESSEE IS D ISMISSED. 14. THE LAST GROUND RAISED BY THE REVENUE IN THIS A PPEAL IS RELATING TO DELETION OF MOTOR CAR EXPENSES AND PAYMENTS FOR ACQUISITION OF MOTOR CARS. 15. THE RELEVANT FACTS OF THIS ISSUE ARE THAT THE A O WHILE DOING THE SCRUTINY ASSESSMENT HAS DISALLOWED AN AMOUNT OF RS.70,00,000 /- BY OBSERVING THAT THE ASSESSEE HAS CLAIMED DEDUCTION IN COMPUTATION OF TOTAL INCOM E THE PAYMENT OF LEASE RENTAL ON CARS TAKEN ON FINANCIAL LEASE AMOUNTING TO RS.70,00 ,000/-. THE ASSESSEE HAS SUBMITTED THE COPIES OF THE LEASE AGREEMENT WITH LEASEPLAN IN DIA LTD. THE FEATURES OF THE AGREEMENT SUCH AS WARRANTIES, MANUFACTURERS WARRANT IES, VEHICLE IN TRANSIT, DELIVERY AND DISBURSEMENT, REGISTRATION OF VEHICLE, INSURANC E AND REPAIRS, LOSS AND DAMAGE THE AO IS OF THE VIEW THAT FROM THE FOREGOING CLAUSES O F THE AGREEMENTS IT IS CLEAR THAT THE VEHICLES WERE CHOSEN BY THE ASSESSEE TAKEN DELIVERY BY OR AT THE OPTION OF THE ASSESSEE, REGISTERED IN THE NAME OF THE ASSESSEE, INSURED IN THE NAME OF THE ASSESSEE AND BY THE ASSESSEE, AND ALSO REPAIRED AT THE COST OF THE ASSE SSEE. BY TAKING INTO CONSIDERATION OF THESE FACTS HE CONCLUDED THAT FOR ALL PRACTICAL PUR POSES THE ASSESSEE IS THE OWNER OF THE 8 CARS AND THE INSTALMENTS FOR PURCHASE IS PAID TO SO -CALLED LEASEPLAN INDIA LTD. ALTHOUGH THE ASSESSEE CALLED THE TERM LEASE RENTAL IT IS NOTHING BUT THE INSTALMENTS PAID FOR THE PURCHASE OF MOTOR CARS. AS THESE ARE PAID F OR THE PURCHASE OF THE CAPITAL ASSET, THE INSTALMENTS ARE NOT ALLOWED AS REVENUE EXPENDIT URE. 15.1. ON APPEAL THE LD.CIT(A) HAS DELETED THE SAME BY OBSERVING AS UNDER :- 9.4. THE ASSESSING OFFICER ANALYSED THE LEASE AGR EEMENT WITH LEASEPLAN INDIA LTD. AND CAME TO THE CONCLUSION THAT THE ASSESEE WA S THE REAL OWNER OF THE CARS AND LEASEPLAN INDIA LTD WAS JUST A FINANCIER AND TH AT THE LEASE AGREEMENT WAS IN SUBSTANCE OF FINANCING ARRANGEMENT. HAVING SAID THAT, HE HURRIEDLY DISALLOWED THE PAYMENT OF RS.70 LAKHS BY THE ASSESS EE TO LEASEPLAN INDIA LTD AS THE SAME WAS NOT REVENUE EXPENDITURE ACCORDING T O HIM. HE FAILED TO TAKE HIS OWN FINDING TO THE LOGICAL CONCLUSION BECAUSE, IF T HE ASSESSEE IS THE REAL OWNERS OF THE CARS, DEPRECIATION HAS TO BE ALLOWED TO IT. IN ADDITION, THE INTEREST COMPONENT OF PAYMENT TO LEASEPLAN INDIA LTD WOULD A LSO HAVE TO BE ALLOWED. HENCE, THE DECISION OF THE OFFICER, AS IT IS, CAN N OT BE SUSTAINED. IF THE DECISION OF THE ASSESSING OFFICER IS TAKEN TO ITS LOGICAL CO NCLUSION, THERE WILL BE ANOTHER RELATED CONSEQUENCE TO THAT. AS PER CERTIFICATE SUB MITTED BY THE ASSESSEE FROM LEASEPLAN INDIA LTD THE LATTER IS CLAIMING AND GETT ING DEPRECIATION IN RESPECT OF THE SAME VEHICLES. IT IS OBVIOUS THAT TWO PERSONS C ANNOT BE GRANTED DEPRECIATION ALLOWANCE SIMULTANEOUSLY IN RESPECT OF THE SAME ASS ET AT THE SAME TIME. HENCE, IF THE LOGIC OF THE ASSESSING OFFICER IS TAKEN FORW ARD IT WILL LEAD TO CONSEQUENCES AFFECTING THE ASSESSMENT OF LEASEPLAN INDIA LTD AS WELL. IN THE CONSIDERED OPINION OF THE UNDERSIGNED, THE FACTS ON RECORD ARE NOT SUFFICIENT TO JUSTIFY AN ADVERSE DECISION OF SUCH FAR-REACHING CO NSEQUENCES. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES, AS THEY AP PEAR FORM THE MATERIAL AVAILABLE ON RECORD, THE ADDITION IS DELETED. 15.2. AGGRIEVED BY THIS THE REVENUE IS IN APPEAL BE FORE US. 15. IN THIS CASE THE LD DR APPEARING ON BEHALF OF THE REVENUE SUBMITTED THAT THE OBSERVATIONS OF THE AO WERE CORRECT AS THE VEHICLES WERE USED WHOLLY AND EXCLUSIVELY BY THE APPELLANT AND THEREFORE THE OWNERSHIP ALSO W AS LYING WITH THE APPELLANT. THAT THE LESSOR WAS CLAIMING DEPRECIATION CANNOT BE THE ULTIMATE TEST FOR OWNERSHIP OF THE LESSOR. ON THE OTHER HAND THE CIT(A) WRONGLY HELD T HAT THE OWNERSHIP DID NOT PASS ON TO THE LESSEE AND THUS THE FINANCIAL CHARGES OR LEA SE RENT SHOULD BE ALLOWED. THIS IS WRONGLY FOUND AS THE LESSOR MIGHT HAVE SOLD THE ASS ETS TO THE LESSEE OR THE USER OF THE VEHICLE. 9 16. ON THE OTHER HAND THE LD. AR APPEARING ON BEHAL F OF THE ASSESSEE SUBMITTED THAT THE AO HAD DISALLOWED THE LEASE RENT PAID BY THE AP PELLANT ON THE GROUND THAT THE OWNERSHIP OF THE VEHICLES LIE WITH THE APPELLANT AN D EXPLAINED CERTAIN CLAUSES OF THE AGREEMENT RELATED TO WARRANTIES, MANUFACTURERS WARR ANTIES, VEHICLE IN TRANSIT, DELIVERY AND DISBURSEMENT, REGISTRATION OF VEHICLE, INSURANC E AND REPAIRS, LOSS AND DAMAGE. THE LD.AO HAS ERRED IN HOLDING THAT THE LEASE RENT PAID WAS FOR PURCHASE OF CAPITAL ASSET. THE AO HAD IGNORED THE CLAUSES/SUB CLAUSES RELATED TO OWNERSHIP OF THE VEHICLES. THE LD. AO HAD NOT EXAMINED THE CLAUSES NAMED TITLE, I DENTIFICATION, OWNERSHIP OF THE VEHICLE, SURRENDER, EVENT OF DEFAULT AND REME DIES CLAUSES. (PLEASE REFER THE ATTACHED LEASE AGREEMENT, PAGE 141 TO 146 OF THE PA PER BOOK). THE CLAUSE TITLE, IDENTIFICATION, OWNERSHIP OF THE VEHICLE DEALS WIT H THE RIGHT AND TITLE OF THE VEHICLE. (PAGE 142 OF PAPER BOOK) THIS CLAUSE CLEARLY EXPLA INS THAT THE VEHICLE UNDER THE LEASE SHALL BE THE SOLE AND EXCLUSIVE PROPERTY OF THE LES SOR AND THE LESSEE SHALL HAVE NO RIGHT THEREIN EXCEPT THE RIGHT TO USE THE SAME IN ACCORDA NCE WITH THE LEASING DOCUMENT AND THAT THE VEHICLE SHALL AT ALL TIMES REMAIN THE PROP ERTY OF THE LESSOR. THE LESSEE ALSO UNDERTAKES NOT TO SELL, ASSIGN, SUBLET AND HYPOTHEC ATE THE VEHICLE. 16.1. THE CLAUSE SURRENDER DEALS WITH DELIVERY OF THE VEHICLE TO THE LESSOR O N THE EXPIRY OR EARLIER TERMINATION OF THE LEASE. ( PAGE 144 OF PAPER BOOK) -IN PRACTICE ALL THE VEHICLES ARE RETURNED TO THE LESSOR, WHO HAS TH E DISCRETION TO SELL TO A NEW PARTY. ALSO ONCE THE VEHICLE IS RETURNED THE FORM 35 IS SI GNED AND ACCORDINGLY A NO - OBJECTION IS GIVEN BY LESSOR THAT THEY HAVE NO OBJE CTION IS DELETING THEIR NAME AND TRANSFERING THE NAME TO A NEW OWNER ALONG WITH INSU RANCE COVER. (PAGE 148 OF PAPAER BOOK).AT THE TIME OF TERMINATION OF AGREEMENT, THE LESSOR ISSUES FORM 35 CATEGORICALLY DECLARING THAT AGREEMENT OF HIRE PUR CHASE/LEASE/HYPOTHECATION ENTERED INTO BETWEEN US HAS BEEN TERMINATED. WE, THEREFORE, REQUEST THAT THE NOTE ENDORSED IN THE CERTIFICATE OF REGISTRATION VEHICLE NO. IN RES PECT OF THE SAID AGREEMENT BETWEEN US, BE CANCELLED. ( REFER PG 149 OF THE PAPER BOOK ).THE WORD TERMINATED INDICATES THAT THE LESSEE HAS DISCHARGED ALL THE OBLIGATIONS MENTI ONED IN LEASE AGREEMENT WHICH INCLUDES RETURN OF CAR BY THE APPELLANT AND PAYMENT OF ALL THE DUES. FURTHER, THE LESSOR ISSUES NOC IN FAVOUR OF RTO AGREEING FOR REMOVAL OF THEIR NAME IN THE REGISTRATION CERTIFICATE AND TRANSFER OF SAME IN THE NAME OF NEW OWNER. 10 16.2. IN THE EVENT OF DEFAULT IN RESPECT OF LEASE RENTAL BY LESSEE, THE MAIN REMEDIES LIES WITH THE LESSOR IS TO TAKE THE LEAS ED ASSET BACK FROM THE LESSEE. IT CLEARLY INDICATES THAT THE OWNERSHIP OF THE ASSET I S WITH LESSOR ONLY. ( PAGE 144 145 OF PAPER BOOK) THE ABOVE CLAUSES CLEARLY DEFINE THAT OWNERSHIP OF THE VEHICLE LIES WITH THE LESSOR ONLY AND LESSEES RIGHT IS LIMITED TO THE USE OF THE VEH ICLE. IT MAY ALSO BE NOTED THAT IN LEASING TRANSACTIONS, THE LESSOR BEING THE OWNER OF THE ASSET, ALWAYS CLAIMS THE DEPRECIATION UNDER THE INCOME TAX ACT. IN THE CASE OF APPELLANT ALSO, THE LESSOR HAD CLAIMED THE DEPRECIATION UNDER THE INCOME TAX ACT. FURTHER A CONFIRMATION FROM THE LESSOR, STATING THAT IT HAS CLAIMED THE DEPRECIATIO N IN THE RELEVANT ASSESSMENT YEAR IS ALSO ATTACHED IN PAGE 147 OF THE PAPER BOOK. THIS CONFIRMATION ESTABLISHES BEYOND DOUBT THAT THE APPELLANT IS NOT THE OWNER OF THE AS SET, AND IT IS ENTITLED FOR THE DEDUCTION OF LEASE RENTAL. FURTHER AT THE END OF TH E LEASE PERIOD, FORM 35 I.E. NO OBJECTION IN TRANSFER OF OWNERSHIP IS ALSO GIVEN BY THE LESSOR ( PAGE 148-149 OF PAPER BOOK) 16.3. IN THIS CONNECTION WAS RELIED ON THE RAJASTHA N HIGH COURT IN THE CASE OF RAJSHREE ROADWAYS VS. UNION OF INDIA, 263 ITR 206 ( 2003) AND COURT AFTER EXAMINING THE OWNERSHIP ISSUE HAS HELD THAT LESSEE WOULD BE ENTITLED TO THE DEDUCTION OF RENT PAID BY HIM AND THE BENEFIT OF THE DEPRECIA TION SHALL BE AVAILABLE TO THE OWNER OF THE ASSET. 16.4. UNDER THE INCOME TAX ACT, AN APPELLANT IS ELI GIBLE TO CLAIM DEPRECIATION ON ANY ASSET U/S 32 ONLY IF SUCH ASSETS IS OWNED BY HIM AN D IS USED FOR THE PURPOSE OF HIS BUSINESS. THE CBDTS VIEWS ON THE TREATMENT OF FINA NCE LEASE FOR THE PURPOSE OF DETERMINING OWNERSHIP AND THEREBY DEPRECIATION ALLO WANCE IS HOWEVER NOT ALIGNED TO THE ACCOUNTANTS PERSPECTIVE OF A FINANCE LEASE. TH E PRINCIPLES GOVERNING ELIGIBILITY OF LESSOR TO CLAIM TAX DEPRECATION UNDER THE LEASE ARR ANGEMENT IS ENUNCIATED BY ADMINISTRATIVE GUIDELINES ISSUED BY THE CBDT IN CIR CULARS 9/1943 AND 2/2001. THE CIRCULARS DO NOT DISTINGUISH BETWEEN THE TWO KINDS OF LEASE ARRANGEMENT AND PROVIDES 11 THAT IN A LEASE OTHER THAN A HIRE PURCHASE, THE LES SOR IS ELIGIBLE TO CLAIM DEPRECIATION PROVIDED THE TEST OF OWNERSHIP AND USE OF ASSET ARE SATISFIED. THE PRINCIPLES LAID DOWN IN CIRCULAR NO. 9 DATED 23-03-1943 PROVIDES THAT WH ERE THE TERMS OF AGREEMENTS PROVIDES THAT EQUIPMENT SHALL EVENTUALLY BECOME THE PROPERTY OF THE HIRER OR CONFER ON THE HIRER AN OPTION TO PURCHASE THE EQUIPMENT, THE TRANSACTION SHOULD BE REGARDED AS ONE OF HIRE-PURCHASE AND THE LESSEE WILL BE ENTITLE D TO DEPRECIATION IN THAT CASE. CIRCULAR 2/2001 DATED 09-02-2001 HAS CLARIFIED THAT AS-19 WHICH REQUIRES CAPITALIZATION OF THE ASSET BY THE LESSEES IN FINAN CIAL LEASE TRANSACTION, BY ITSELF, WILL HAVE NO IMPLICATION ON THE ALLOWANCE OF DEPRECIATIO N ON ASSETS UNDER THE PROVISIONS OF THE INCOME-TAX ACT. THE OWNERSHIP OF THE ASSET IS R EQUIRED TO BE DETERMINED BY THE TERMS OF CONTRACT BETWEEN THE LESSOR AND THE LESSEE . THE A/R SUBMITTED THAT IN THE INSTANT CASE IT IS THE LESSOR WHO HAD REMAINED THE OWNER AND EVEN AT THE END THE VEHICLES ARE RETURNED TO HIM BY THE APPELLANT COMPA NY. 16.5. ON THE BASIS OF ABOVE, THE A/R SUBMITTED BEFO RE THE BENCH THAT THE CIT(A) HAS RIGHTLY DIRECTED THE AO IN DELETING THE DISALLOWANC E AND ALLOWING THE LEASE RENTAL OF RS. 7,000,000/- AND THE SAME MAY BE UPHELD. HE FURT HER POINTED OUT THAT THIS IS THE ONLY YEAR IN WHICH SUCH ISSUE AROSE AS IN THE SUBSE QUENT YEARS AS LATE AS AY 2006-07 & AY 2007-08 THE ISSUE WAS CONSISTENTLY ALLOWED BY THE AO. 17. AFTER HEARING THE RIVAL SUBMISSIONS AND ON PER USAL OF THE PAGE NUMBERS OF THE PAPER BOOK REFERRED BY ASSESSEE AS WELL AS AO WE AR E OF THE VIEW THAT THE ACTION OF THE ASSESSING OFFICER IS QUITE JUSTIFIABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE WHEN COMPARED TO THAT OF LD. CIT(A). THEREFORE, WE SET A SIDE THE ORDERS OF LD.CIT(A) ON THIS ISSUE AND RESTORE THAT OF AO. 18. IN THE RESULT GROUND NO.3 OF THE REVENUES APP EAL IS ALLOWED. 19. AS REGARDING GROUND NO.4 TAKEN BY THE ASSESSEE IS IN RESPECT OF DISALLOWANCE OF PROVISION FOR REPLACEMENT GUARANTEE. THE RELEVANT F ACTS ARE THAT WHILE DOING THE SCRUTINY ASSESSMENT THE AO HAS DISALLOWED THE PROVI SION OF REPLACEMENT OF GUARANTEE 12 CHARGES AMOUNTING TO RS.10,24,78,000/- BY OBSERVING THAT AS THIS IS MERE PROVISION IT IS NOT ALLOWED AS DEDUCTION. HOWEVER, THE AO HAS AL LOWED THE ACTUAL PAYMENT IN THIS YEAR AMOUNTING TO RS.10,14,41,000/-. 19.1. ON APPEAL THE LD. CIT(A) HAS CONFIRMED THE AC TION OF THE AO BY OBSERVING AS UNDER :- 10.11 CONSIDERING THE FACTS AND CIRCUMSTANCES O F THE CASE DISCUSSED ABOVE IT IS HELD THAT WARRANTY OBLIGATIONS WHICH WOULD ARISE IN FUTURE IS NOT AN EXPENDITURE AND AMOUNT SET ASIDE FOR MEETING SUCH FUTURE OBLIGATION CANNOT BE ALLOWED AS A DEDUCTION IN THE CURRENT YEAR. THIS DE CISION IS BASED ON THE DECISION OF THE HON.SUPREME COURT IN THE CASE OF I NDIAN MOLASSES COMPANY (37 ITR 78ITR 475) REFERRED TO ABOVE AND WITH DUE R EGARD TO THE OTHER VIEW SECTIONED BY OTHER DECISIONS OF COURTS/TRIBUNALS. I T MAY BE REITERATED THAT THE FACTS OF THIS CASE ARE PECULIAR IN SO FAR AS THE AS SESSEE HAS ACCEPTED DEDUCTION ON THE BASIS OF ACTUAL EXPENDITURE IN THE PAST AND, IN ONE OF SUCH INSTANCES (AY 1997-98), THE ACTUAL EXPENDITURE WAS MORE THAN THE PROVISION MADE IN THAT YEAR, AS A RESULT OF WHICH IT GOT HIGHER DEDUCTION THAN WAS CLAIMED BY IT IN THE RETURN OF INCOME. HENCE, THIS DECISION IS BASED MOR E ON THE FACTS OF THE CASE; THE LEGAL ASPECT IS ADJUNCT TO THE FACTUAL ONE. WIT H THESE OBSERVATIONS, THE ADDITION IS CONFIRMED. 19.2. AGGRIEVED BY THIS THE ASSESSEE IS IN APPEAL B EFORE US. 20. AT THE TIME OF HEARING BEFORE US THE LD. COUNSE L APPEARING ON BEHALF OF ASSESSEE BY PLACING RELIANCE ON THE PAPER BOOK WHEREIN ASSES SEE HAS GIVEN A CHART CONTAINING THE OPENING BALANCE, AMOUNT CHARGED IN THE P/L ACC OUNT BY CREATING THE PROVISION AND ACTUAL PAYMENTS MADE DURING THE ASSESSMENT YEAR S AND THE CLOSING BALANCE SINCE ASSESSMENT YEARS 1995-96 TO 2004-05, BASED ON THE C ONTENTS ON THE ACTUAL EXPENDITURE INCURRED AND THE PROVISION CREATED HE SUBSTANTIATED THAT THE PROVISIONS ARE SCIENTIFICALLY COMPUTED TO COVER AGAINST THE COST O F FREE REPLACEMENT DURING THE WARRANTY PERIOD. THEREFORE, HE FINALLY CONTENDED TH AT AFTER THE DECISION OF HONBLE APEX COURT IN THE CASE OR ROTORK CONTROLS (INDIA) P VT. LIMITED VS CIT 180 TAXMAN 422 (SC) WHEREIN IT IS HELD THAT PROVISION FOR WARR ANTY IS ALLOWABLE DEDUCTION PROVIDED IT IS ASCERTAINED ON A SCIENTIFIC BASIS AN D WITH REASONABLE ACCURACY. THEREFORE HE REQUESTED TO ALLOW THE CLAIM OF ASSESSEE. 13 21. ON THE OTHER HAND, THE LD. DR APPEARING ON BEH ALF OF THE REVENUE CONTENDED THAT IN THIS CASE ASSESSEE HAS NOT PROVED HOW THE P ROVISION HAS BEEN CALCULATED AND WHETHER THIS IS SCIENTIFICALLY PROVED OR NOT. HOWEV ER, AO HAS ALREADY ALLOWED THE ACTUAL AMOUNT OF EXPENDITURE INCURRED AGAINST THE W ARRANTY. THEREFORE, NO PROVISION IS TO BE ALLOWED. 22. AFTER HEARING THE RIVAL SUBMISSIONS AND ON CAR EFUL PERUSAL OF MATERIALS AVAILABLE ON RECORD, KEEPING IN VIEW OF THE STATEME NT FILED BY ASSESSEE AND ON CAREFUL PERUSAL OF THE PROVISIONS CREATED AS WELL AS THE EX PENDITURE INCURRED ON ACCOUNT OF WARRANTY, WE ARE OF THE VIEW THAT THE PROVISIONS AR E BASED ON THE PREVIOUS YEARS DATA AND BASED ON THE SALES AND AO HIMSELF HAS ALLOWED T HE PROVISIONS MADE BY ASSESSEE IN ASSESSEMENT YEAR 2004-05 WHILE DOING THE ASSESSM ENT U/S 143 ITSELF WE ARE OF THE VIEW THAT ASSESSEE IS ENTITLED TO DEDUCTION OF PROV ISIONS IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S (INDIA) PVT. LTD. VS CIT (SUPRA). WE DIRECT AO TO ALLOW THE PROVISION ON ACC OUNT OF REPLACEMENT OF GUARANTEE FOR ASSESSMENT YEAR INVOLVED IN THIS APPEAL. 23. IN THE RESULT GROUND NO.4 OF ASSESSEES APPEAL IS ALLOWED. 24. AS REGARDING THE LAST GROUND RAISED BY THE ASSE SSEE WHICH RELATES TO THE DISALLOWANCE OF ADVANCES WRITTEN OFF. 25. THE BRIEF FACTS OF THIS ISSUE ARE THAT WHILE DO ING THE SCRUTINY ASSESSMENT, THE AO HAS DISALLOWED AN AMOUNT OF RS.6,30,00,000/- BY OBSERVING AS UNDER :- 14. THE ASSESSEE CLAIMED BAD DEBTS WRITTEN OFF AM OUNTING TO RS.6,30,00,000/- . THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF THE ASSESSMENT YEARS IN WHICH THE AMOUNT WAS INCLUDED IN SALES. AS PER PROVISIONS OF SECTION 36(2) IN THE CASE OF AN ASSESSEE WHICH DOES NOT RUN A BANKING OR MONEY LENDING BUSINESS, THE AMOUNT CLAIMED TO BE THE BAD DEBT, MUST HAVE BE EN CREDITED INTO SALES. THE ASSESSEE COULD NOT FURNISH THE DETAILS OF UNITS TO WHICH THE DEBTS RELATE. MOREOVER, THE ASSESSEE SELLS THE FINISHED PRODUCTS TO THE DISTRIBUTORS/DEALERS WHO HAS NO SCOPE FOR NOT MAKING THE PAYMENTS AND RU N AWAY WITHOUT MAKING THE PAYMENT. HENCE IT IS NOT PROVED THAT THE RECEIV ABLES ACTUALLY BECAME BAD. AS THE MOST VITAL INFORMATION HAS NOT BEEN FILED, T HE AMOUNTS CLAIMED TO HAVE 14 BEEN WRITTEN OFF FAILED TO QUALIFY TO BE WRITTEN OF F. AS SUCH THE AMOUNTS WERE NOT ALLOWED TO BE WRITTEN OFF. 25.1. ON APPEAL THE LD. CIT(A) HAS CONFIRMED THE DI SALLOWANCE TO THE EXTENT OF RS.52,67,000/- AND DELETED THE BALANCE BY OBSERVING AS UNDER :- 11.3. NO DOUBT, TRADE DEBTS ARE ALSO A BALANCE SH EET ITEM. BUT, THERE IS A SPECIFIC PROVISION, VIZ.(SEC.36(1)(VII)R.W.S. 36(2) OF I.T.ACT, FOR ALLOWING DEDUCTION WHEN THE SAME ARE WRITTEN OFF. IN SUCH A SITUATION, IT AHS TO BE EXAMINED WHETHER THE DEDUCTION CAN BE ALLOWED UNDER ANY OTHER SECTION. THE ASSESSEE HAS CLAIMED DEDUCTION U/S 28. BUT THAT SEC TION DEALS WITH THE ITEMS OF INCOME FALLING UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IT DOES NOT DEAL WITH DEDUCTIONS. THE SECTION UNDER WH ICH SUCH A DEDUCTION COULD BE CONSIDERED IS SECTION 37 OF THE INCOME-TAX ACT, ACCORDING TO WHICH, ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF THE BUSINESS IS ALLOWABLE AS A DEDUCTION. BUT THE SECTI ON APPLIES ONLY TO EXPENDITURE NOT BEING IN THE NATURE OF CAPITAL EXP ENDITURE. AS MENTIONED ABOVE, TRADE ADVANCES CANNOT BE CALLED REVENUE EXP ENDITURE AND, HENCE, ALLOWANCE OF THE SAME IS SPECIFICALLY EXCLUDED FROM THE PURVIEW OF SECTION 37 OF THE INCOME-TAX ACT ALSO. AS MENTIONED BY THE HON BLE SUPREME COURT IN THE CASE OF BADRIDAS DAGA REFERRED TO ABOVE, A LOSS WHI CH ARISES DIRECTLY FROM THE CARRYING ON THE BUSINESS AND IS INCIDENTAL TO IT SH OULD BE ALLOWED AS DEDUCTION PROVIDED THAT THERE IS NO PROVISION AGAINST IT, EX PRESSED OR IMPLIED, IN THE ACT. AS MENTIONED ABOVE, THE SECTION UNDER WHICH T HE DEDUCTION COULD BE CONSIDERED CONTAINS AN EXPRESS PROVISION PROHIBITIN G DEDUCTION OF CAPITAL EXPENDITURE. HENCE, IT IS HELD THAT THE DEDUCTION I N RESPECT OF THE AMOUNT OF RS.52,67,000/- REPRESENTING ADVANCES WRITTEN OFF, C ANNOT BE ALLOWED AS A DEDUCTION. CONSEQUENTLY THE ADDITION IS REDUCED TO RS.52,67,000/-. 25.2. FURTHER AGGRIEVED BY THIS THE ASSESSEE IS IN APPEAL BEFORE US. 26. AT THE TIME OF HEARING AGAINST THE ABOVE ALLEGA TIONS THE LD. AR APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE COMPANY I S MAINLY ENGAGED IN THE MANUFACTURE AND SALE OF DURABLE CONSUMER ELECTRONIC S GOODS LIKE TELEVISION SETS, AUDIO SETS, DOMESTIC APPLIANCES ETC. EACH SUCH PRODUCT IS DIVIDED IN VARIOUS DIVISIONS (9 IN NUMBER) NAMELY CE, LIGHT, DAP, PROJECTS, CSI, MSO, ETG, WHPD AND S&I. ALTHOUGH THE APPELLANT IS ONE AND ONLY PHILLIPS IND IA LIMITED, THE OPERATIONS AND ACHIEVEMENT OF EACH AND EVERY DIVISIONS CAN BE CAPT URED SEPARATELY WHICH HELPS THE COMPANY TO KEEP A STRONG MIS. THUS DIVISION WISE SA LES AND EXPENSES ARE CAPTURED. IN THE CURRENT YEAR THE MANAGEMENT OF THE DIVISION DAP , PROJECTS & S&I DECIDED TO 15 WRITE-OFF AN AGGREGATE SUM OF RS. 52.67 LAKHS GIVEN TO VARIOUS PARTIES FOR SUPPLY OF MATERIALS AND SERVICES IN THE GENERAL COURSE OF BUS INESS. HOWEVER IT WAS FOUND THAT SOME OF THE BALANCE LYING AS ADVANCES GIVEN TO FEW PARTIES / SUPPLIERS GIVEN DURING THE COURSE OF THE BUSINESS FOR PURCHASE OF RAW MATERIAL S, CHARGES AND OTHER BUSINESS EXPENDITURE, WHICH THE APPELLANT WOULD PURCHASE/ OB TAIN FROM VARIOUS PARTIES WERE STILL OUTSTANDING AND RECOVERABLE. THESE BALANCES W ERE WRITTEN OFF AFTER DUE NEGOTIATION WITH THE PARTIES AND ONLY WHEN THE PART IES DENIED SETTLING THE OUTSTANDING BALANCES. THESE ARE MERELY TRADE ADVANCES AND THE W RITE OF THE SAME TANTAMOUNT TO TRADING LOSS. THE D ETAILS WERE SUBMITTED IN PAGES 190 191 OF THE PAP ER BOOK. THE SAID ADVANCES HAVING BEEN GIVEN BY THE APPELLANT TO VARIOUS SUPPLIERS / PROCESSORS IN THE NORMAL COURSE OF ITS BUSINESS FOR ACQUIRING VAR IOUS RAW MATERIALS AND OTHER SERVICES, THE WRITE OFF OF THE SAME AS IRRECOVERABL E, IS ALLOWABLE AS A NORMAL TRADING LOSS WHILE COMPUTING THE INCOME CHARGEABLE UNDER TH E HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, NOTWITHSTANDING THE FACT T HAT THERE IS NO SPECIFIC PROVISION FOR THE ALLOWABILITY OF THE SAME, CONTAINED IN CHAPTER IV-D OF THE ACT, DEALING WITH THE COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD PR OFITS AND GAINS OF BUSINESS OR PROFESSION. IN THIS CONNECTION RELIANCE WAS PLACE D IN THE HONBLE SUPREME COURT IN THE CASE OF CIT VS MYSORE SUGAR COMPANY LIMITED 4 6 ITR 649 (SC) AND THAT DELIVERED BY THE HONBLE MADRAS HIGH COURT IN THE C ASE OF DEVI FILMS PRIVATE LIMITED VS CIT 75 ITR 301, 304 (MAD). IT HAS BEEN HELD IN BOTH THE SAID DECISIONS THAT THAT EVEN THOUGH THE CLAIM FOR DEDUCTION OF AN AMOUNT OF ADVANCE WRITTEN OFF, WHERE SUCH ADVANCE HAD GIVEN BY AN APPELLANT IN THE NORMAL COURSE AND FOR THE PURPOSE OF ITS BUSINESS, OTHER THAN ON CAPITAL ACCO UNT , DID NOT SQUARELY FALL UNDER SECTION 10(2)(XI) OF THE INDIAN INCOME TAX ACT, 192 2 [CORRESPONDING TO SECTION 36(1)(VII) OF THE ACT OF 1961] OR FOR THAT MATTER ANY OF THE ENUMERATED CLASSES O F ALLOWANCES, THE SAID AMOUNT WOULD NONETHELESS BE AL LOWED AS DEDUCTION WHILE COMPUTING THE BUSINESS PROFITS. 26.1. THE AR FURTHER SUBMITTED THAT IT IS NOT THE C ASE OF THE APPELLANT THAT THE SUMS WRITTEN OFF AMOUNTING TO RS.52.67 LAKHS ARE TO BE ALLOWED AS DEDUCTIONS UNDER SECTION 36(1)(VII) READ WITH SECTION 36(2) OF THE ACT. UNDI SPUTEDLY, ONE OF THE CONDITIONS 16 PRECEDENT FOR THE ALLOWABILITY OF DEDUCTION UNDER S ECTION 36(1)(VII) OF THE ACT, READ WITH SECTION 36(2) OF THE ACT, WITH RESPECT TO BAD DEBT WRITTEN OFF, IS THAT THE DEBT IN QUESTION MUST HAVE BEEN PREVIOUSLY ASSESSED TO TAX OR THE SAME MUST HAVE BEEN ADVANCED BY AN APPELLANT IN THE COURSE OF ITS USUAL MONEY LENDING BUSINESS. THE AFORESAID CONDITIONS ARE ADMITTEDLY NOT SATISFIED I N THE INSTANT CASE OF THE APPELLANT. THERE IS NO DISPUTE REGARDING THE FACT THAT THE SAI D ADVANCES GIVEN BY THE APPELLANT TO VARIOUS SUPPLIERS FOR THE PURCHASE OF RAW MATERIALS , AND SERVICES, WAS INCIDENTAL TO THE BUSINESS OF THE APPELLANT AND THEREFORE THE WRITE O FF SUCH ADVANCES IS PER SE ALLOWABLE AS A NORMAL TRADING LOSS WHILE COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION IN TH E HANDS OF THE APPELLANT . 26.2. IN THIS CONNECTION ATTENTION WAS ALSO INVITED TO THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS ABDULLA BHAI ABDULKADAR REPORTED IN 41 ITR 545, WHEREIN IT WAS HELD THAT IN ORDER A LOSS MIGHT BE DEDUCTIBLE IT MUST BE A LOSS IN THE BUSINESS OF THE APPELLANT AND NOT A PAYMENT RELATING TO THE BUSINESS OF SOMEBODY ELSE WHICH UNDER THE PROVISION OF THE ACT WAS DEEMED TO BE AND BECOME THE LIABILITY OF THE APPELLANT. LOSS WAS ALLOWABLE IF IT SPRANG DIRECTLY FROM AND WAS INCIDENTAL TO THE BUSINESS OF THE APPELLANT . THEREFORE A DEBT WAS ALLOWABLE ONLY WHEN IT WAS A DEBT AND AROSE OUT OF AND AS AN INCID ENT OF TRADE. 26.3. THE AR STATED THAT THE RATIO OF THE SAID DECI SIONS OF THE HONBLE SUPREME COURT IS SQUARELY APPLICABLE IN THE INSTANT CASE OF APPEL LANT. THE IMPUGNED ADVANCE GIVEN BY APPELLANT IN FAVOUR OF VARIOUS PARTIES WAS FOR T HE PAYMENT OF RAW MATERIALS AND OTHER BUSINESS EXPENDITURE, WHICH THE APPELLANT WOU LD PURCHASE/ OBTAIN FROM VARIOUS PARTIES. THE ADVANCES GIVEN IN NORMAL COURSE OF BUS INESS BY THE APPELLANT WAS NOT IN THE NATURE OF AN INVESTMENT. AS THE HONBLE SUPREM E COURT HAD HELD IN THE DECISION REFERRED TO ABOVE, IT DID NOT MATTER AS TO WHETHER OR NOT, THE ITEM FOR WHICH THE ADVANCE WAS GIVEN WAS ALREADY IN EXISTENCE, HAVING BEEN MANUFACTURED, AT THE TIME OF GIVING THE ADVANCE. THE SAID TRADE ADVANCE, BEING NOT IN THE NATURE OF AN INVESTMENT MADE FOR SMOOTH OPERATION OF THE BUSINESS, IS TO BE ALLOWED AS DEDUCTION IF WRITTEN OFF IN THE BOOKS OF ACCOUNT AS IRRECOVERABLE. INCIDENTA LLY THE HONBLE KOLKATA TRIBUNAL 17 WHILE DECIDING THE SIMILAR ISSUE IN THE CASE OF ITC LIMITED IN THE ASSESSMENT YEAR 1991-92 HAD CONSIDERED THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT DISCUSSED ABOVE, AND THEREAFTER ALLOWED THE CLAIM F OR SUCH WRITE-OFF OF ADVANCE. [ITA NO 157/KOL/96 DCIT VS. ITC LTD DATED 30 TH APRIL 2001]. SINCE SUCH ADVANCES ARE GIVEN IN THE COURSE OF THE BUSINESS, IT IS INCIDENT AL TO THE BUSINESS AND ITS WRITE OFF MAY BE ALLOWED AS A TRADING LOSS. 26.4. FURTHER AS PER THE A/R THE FINDINGS OF THE CI T(A) IS ABSOLUTELY BASELESS THAT SUCH AN AMOUNT IS CAPITAL IN NATURE. HE SUBMITTED T HAT THE CIT(A) HAS MERELY MADE A PRESUMPTION THAT AN ADVANCE WITH RESPECT TO NORMAL BUSINESS IS IN THE NATURE OF CAPITAL. IN VIEW OF THE ABOVE SUBMISSIONS HE REQUES TED THE BENCH TO DELETE THE DISALLOWANCE. 27. THE LD.DR ON BEHALF OF THE REVENUE OBJECTED TO THE SUBMISSIONS AND HELD THAT THE EXPENSES WERE NEVER OFFERED TO TAX EARLIER AND HENCE CANNOT BE ALLOWED. HOWEVER IF SUCH ADVANCES ARE PROPERLY MADE AGAINST REVENUE ITEMS IT CANNOT BE TERMED AS CAPITAL RECEIPTS. THE LD DR SUBMITTED THAT HE RELIE D ON THE DECISION OF THE CIT(A) WHO HAD CATEGORICALLY HELD THAT IT WAS NOT FOR TRAD E. THE APPELLANT COULD NOT ALSO SUBMIT ANY DOCUMENTS WHICH COULD PROVE THAT SUCH AD VANCES WERE FROM TRANSACTION OF TRADING ITEMS AND THE SAME CAN ONLY BE RESTORED TO THE FILE OF THE AO IF SUCH DOCUMENTS ARE SUBMITTED. OTHERWISE, THE ADDITIONS C ONFIRMED BY THE CIT(A) MAY BE UPHELD. 28. AFTER HEARING THE RIVAL SUBMISSIONS AND KEEPIN G IN VIEW OF THE ARGUMENTS MADE BY THE LD. COUNSEL ON BEHALF OF ASSESSEE, WE ARE OF THE VIEW THAT THESE SUBMISSIONS REQUIRE FRESH VERIFICATION. THEREFORE, IN THE INTER EST OF JUSTICE WE CONSIDER IT FIT TO RESTORE THIS ISSUE TO THE FILE OF AO FOR FRESH VERI FICATION AND DECIDE THE SAME AS PER LAW AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEAR D TO ASSESSEE. THE ASSESSEE IS ALSO AT LIBERTY TO FILE THE ADDITIONAL EVIDENCES IN SUPP ORT OF HIS SUBMISSIONS. 29. IN THE RESULT GROUND NO.5 OF THE ASSESSEES AP PEAL IS ALLOWED FOR STATISTICAL PURPOSES. 18 30. IN THE RESULT THE APPEALS OF REVENUE AS WELL AS ASSESSEE ARE ALLOWED IN PART FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 11.10.2011. SD/- SD/- . .. . . .. . , , , , B.R.MITTAL, JUDICIAL MEMBER . .. .!' !'!' !'. .. . , ,, , #$ , C.D.RAO, ACCOUNTANT MEMBER. ( (( ('$ '$ '$ '$) )) ) DATE: 11.10.2011. ORDER PRONOUNCED BY SD/- SD/- (JM) (AM) (NVK) (CDR) #2 0 .3 4#3(5- COPY OF THE ORDER FORWARDED TO: 1. M/S. PHILIPS ELECTRONICS INDIA LTD., 7, JUSTICE CHA NDRA MADHAB ROAD, KOLKATA-700020. 2 THE D.C.I.T., CIRCLE-11, KOLKATA. 3. THE CIT, 4. THE CIT(A)-XI, KOLKATA 5. DR, KOLKATA BENCHES, KOLKATA /3 ./ TRUE COPY, #2&:/ BY ORDER, DEPUTY /ASST. REGISTRAR , ITAT, KOLKATA BENCHES R.G.(.P.S.) 19