ACIT circle 16 (1), V. Turnor Internatioanal India (P) Ltd,

ITA 98/DEL/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9644 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 17-09-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 10-01-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: JATIN JINDAL
• Keywords: Business expenditure; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH `H : NEW DELHI) BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER ITA NO.98/DEL./2008 (ASSESSMENT YEAR : 2004-05) ACIT, CIRCLE 16(1), VS. M/S TURNER INTERNATIONAL INDIA P. LTD., S-2, LEVEL BLOCK-F, INTERNATIONAL TRADE TOWER, NEHRU PLACE, NEW DELHI-10 019. (PAN/GIR NO.AAACT3821H) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI KANCHAN KAUSHAL & JATIN JINDAL, CA. REVENUE BY : SHRI N.K. CHAND, SR.DR ORDER PER K.D. RANJAN: AM THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 20 04-05 ARISES OUT OF THE ORDER OF CIT(A)-XIX, NEW DELHI. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS UNDER: 1. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFI CER ON ACCOUNT OF PROVISION FOR WARRANTY AMOUNTING TO RS.10,86,000/-. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD.CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE ON ACCOUNT OF INTEREST ON BORROWED CAPITAL AMOUNTING TO RS.29,94,035/-. 3. THE FIRST ISSUE FOR CONSIDERATION RELATES TO DEL ETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROVISION FOR WARRA NTY. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE COMPANY IS ENGAGED IN THE BUSINE SS OF IMPORTS, PROMOTING, MARKETING, DISTRIBUTING AND PROVIDING SPECIAL DISTRIBUTING RIG HTS TO CABLE AND BROADCAST ENTITIES, TRADING OF SATELLITE RECEIVER AND PROCUREMENT OF AD VERTISEMENT. THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOUND T HAT THE ASSESSEE MADE A PROVISION ON ACCOUNT OF WARRANTY. THE ASSESSING OFFICER WAS OF THE VIEW THAT PROVISION FOR WARRANTY I.T.A. NO.98/DEL./2008 (A.Y. : 2004-05) 2 COULD NOT BE TREATED AS ASCERTAINED LIABILITY UNLES S IT WAS CRYSTALLIZED. HE ACCORDINGLY DISALLOWED THE AMOUNT OF RS.10,86,000/- TREATING TH E PROVISION AS UNASCERTAINED LIABILITY. 4. ON APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), IT WAS SUBMITTED THAT THE PROVISION WAS CREATED ON A SCIENTIFIC BASI S USING ACTUARIAL VALUATION FOR WHICH THE ASSESSEE OBTAINED A REQUISITE CERTIFICATE FROM THE ACTUARY. THE PROVISION FOR WARRANTY EXPENSES WAS, THEREFORE, ALLOWABLE AS A LIABILITY W HICH WAS CAPABLE OF BEING CONSTRUED IN DEFINITE TERM AND HAD ARISEN DURING THE ACCOUNTING YEAR. THEREFORE, THE AMOUNT OF PROVISION WAS ALLOWABLE AS DEDUCTION. THE COMMISSI ONER OF INCOME-TAX (APPEALS) AFTER CONSIDERING THE ARGUMENTS ADVANCED BY THE ASSESSEE HELD THAT ASSESSING OFFICER HAD NOT MADE OUT A CASE THAT ESTIMATION OF LIABILITY WAS EX CESSIVE. THE PROVISION FOR WARRANTY HAD DIRECT NEXUS TO ASSESSEES OBLIGATION ARISING F ROM WARRANTY COMMITMENTS. HE ACCORDINGLY HELD THAT THE AMOUNT OF PROVISION FOR W ARRANTY WAS ALLOWABLE AS DEDUCTION. 5. BEFORE US, LD.SR.DR SUPPORTED THE ORDER OF ASSES SING OFFICER, WHILE THE LD.AR OF THE ASSESSEE SUPPORTED THE ORDER OF THE COMMISSI ONER OF INCOME-TAX (APPEALS). HE ALSO SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003-04. 6. WE HAVE HEARD BOTH THE PARTIES AND HAVE PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT SIMILAR ISSUE CAME UP FOR HEARING BE FORE ITAT, DELHI BENCH H, NEW DELHI. IN I.T.A. NO.97/DEL./2008 FOR ASSESSMENT YEA R 2003-04 IN ASSESSEES OWN CASE, WHEREIN VIDE ORDER DATED 03.07.09, THE ITAT CONFIRM ED THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS) FOLLOWING THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SONY INDIA (PVT.) LTD. IN I.T.A. NOS.344,48 3,484 & 489/DEL./2006 DATED 17.04.2006. SINCE THE ISSUE IS DIRECTLY COVERED BY THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE AND THE PROVISION FOR WARRANTY HAS BEEN MA DE ON THE BASIS OF ACTUARIAL BASIS, IN OUR CONSIDERED OPINION, THE PROVISION FOR WARRANTY PAYMENT IS ALLOWABLE AS DEDUCTION. THE ISSUE IS ALSO COVERED BY THE DECISION OF HON'BL E APEX COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT, 245 ITR 428, WHEREIN IT HAS B EEN HELD THAT THE LIABILITY ARISING OUT OF WARRANTY IS ALLOWABLE DEDUCTION EVEN WHEN THE AM OUNT PAYABLE BY THE ASSESSEE IS QUANTIFIED AND DISCHARGED IN FUTURE. RESPECTFULLY FOLLOWING THE PRECEDENT, WE DO NOT FIND I.T.A. NO.98/DEL./2008 (A.Y. : 2004-05) 3 ANY INFIRMITY IN THE ORDER PASSED BY THE COMMISSION ER OF INCOME-TAX (APPEALS) DELETING THE ADDITION. 7. THE NEXT ISSUE FOR CONSIDERATION RELATES TO DELE TING THE ADDITION ON ACCOUNT OF DISALLOWANCE OF INTEREST ON BORROWED CAPITAL AMOUNT ING TO RS.29,94,035/-. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE PAID INTEREST OF RS.36,38,573/- TO ITS HOLDING COMPANY ON FOREIGN CURRENCY BORROWINGS FROM THEM. THE ASSESSING OFFICER, HOWEVER, NOTED THAT ASSESSEE COMPANY HAD NOT CHARGED ANY INT EREST FROM GROUP COMPANIES IN RESPECT OF ACCUMULATED DEBIT BALANCE AS ON 31.3.200 4 AT RS.3,29,50,208/-. THIS AMOUNT WAS INCLUDED BY THE ASSESSEE UNDER THE HEAD LOANS AND ADVANCES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS SUBMITTED BY THE ASS ESSEE THAT THE AMOUNT OF RS.3,29,50,208/- WAS THE AMOUNT RECOVERABLE FROM TE NA, CNN & TBSAP, MAINLY IN RESPECT OF APPLICABLE TAXES PAID (INCLUDING SERVICE TAX) AND MARKETING EXPENSES REIMBURSEMENT. SINCE THESE EXPENSES WERE RECOVERAB LE FROM THESE COMPANIES THE SAME WERE REFLECTED UNDER THE HEAD LOANS AND ADVANCES IN THE BALANCE SHEET. THIS AMOUNT WAS SUBSEQUENTLY RECOVERED FROM THESE COMPANIES. I T WAS ALSO SUBMITTED THAT ASSESSEE HAD OBTAINED LOANS FROM ITS HOLDING COMPANIES IN FI NANCIAL YEARS 1998-99 AND 2000-01. THE LOAN WAS OBTAINED FOR THE PURPOSE OF WORKING CA PITAL REQUIREMENTS WHICH HAVE BEEN UTILIZED FOR THE BUSINESS PURPOSES IN THE EARLIER Y EARS. NECESSARY APPROVAL FOR OBTAINING ECB LOAN AT THE RATE OF INTEREST CHARGEABLE THEREON WAS OBTAINED FROM RBI. THEREFORE, IT WAS SUBMITTED THAT THE LOAN WAS OBTAINED BY THE ASS ESSEE FOR THE PURPOSE OF BUSINESS AND WAS USED FOR MEETING THE WORKING CAPITAL REQUIREMEN TS. INTEREST PAID BY THE ASSESSEE IN RESPECT OF CAPITAL BORROWED WAS FOR THE PURPOSE OF BUSINESS AND, THEREFORE, ALLOWABLE AS BUSINESS EXPENDITURE. THIS CONTENTION OF THE ASSESS EE WAS REJECTED BY THE ASSESSING OFFICER. HE ESTIMATED THE INTEREST ON THE BASIS IN THE RATIO OF AMOUNT DUE FROM THE PARTIES TO THE AMOUNT BORROWED BY THE ASSESSEE AND DETERMIN ED THE DISALLOWANCE OF RS.29,94,035/-. 8. ON APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), IT WAS SUBMITTED THAT ASSESSEE EARNED COMMISSION INCOME ON THE BASIS OF ADVERTISING CHARGES COLLECTED FOR AND ON BEHALF OF THE GROUP COMPANIES. THE ASSESSEE HAD INCURRED EXPENSES IN THE NATURE OF MARKETING EXPENSES AND TAX PAYABLE. THE MARKETI NG EXPENSES INCURRED BY THE ASSESSEE I.T.A. NO.98/DEL./2008 (A.Y. : 2004-05) 4 FOR PROMOTING THE CHANNEL ARE DIRECTLY CONTRIBUTING IN INCREASING ADVERTISEMENT SALES COMMISSION WHICH FORMS MAJOR PORTION OF TOTAL REVEN UE OF THE ASSESSEE. IT WAS ALSO SUBMITTED THAT ASSESSEE HAD PAID TAXES LIKE SERVICE TAX AND TAX DEDUCTED AT SOURCE AND ON BEHALF OF TENA, CNN AND TVSAP THROUGH GOVERNMENT EX CHEQUER AND HAS BEEN RECOVERED SUBSEQUENTLY. 9. THE COMMISSIONER OF INCOME-TAX (APPEALS) AFTER C ONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE OBSERVED THAT THE ISSUE WAS CO VERED BY THE DECISION OF HON'BLE APEX COURT IN THE CASE OF SA BUILDERS VS. CIT, 288 ITR 01. THE ASSESSEE HAD SPENT CERTAIN AMOUNT ON BEHALF OF GROUP COMPANIES TEMPORA RILY AND THE SAME WERE RECOVERED SUBSEQUENTLY. IN THE BOOKS OF ACCOUNT, THE OUTSTAN DING AMOUNT AGAINST THE GROUP COMPANIES WERE SHOWN UNDER THE HEAD LOANS AND ADVA NCES. JUST BECAUSE OF THIS NOMENCLATURE, IT CANNOT BE SAID THAT THE BORROWED F UNDS WERE DIVERTED TO THE SISTER CONCERN WITHOUT CHARGING OF INTEREST. HE FURTHER N OTED THAT AN ANALYSIS OF ITEM OF EXPENDITURE INCURRED ON BEHALF OF GROUP COMPANIES R EVEALED THAT THOSE WERE THE EXPENSES ARISING OUT OF CONTRACTUAL OBLIGATION TAKEN UP BY T HE ASSESSEE FOR WHICH ASSESSEE WAS COMPENSATED. THE FACT REMAINED THAT THESE EXPENSES WERE TEMPORARILY INCURRED BY THE ASSESSEE OUT OF COMMERCIAL EXPEDIENCY. THE ASSESS ING OFFICER HAD NOT BROUGHT ON RECORDS ANY FACT TO SHOW THAT LOAN MONEY WAS UTILIZ ED BY THE RECIPIENT FOR NON-BUSINESS PURPOSES. HE ACCORDINGLY HELD THAT PROPORTIONATE E XPENSES OUT OF INTEREST PAID COULD NOT BE DISALLOWED U/S 36(1)(III) OF THE ACT. 10. BEFORE US, LD.SR.DR SUBMITTED THAT ASSESSEE WAS NOT REQUIRED TO INCUR THE EXPENDITURE ON BEHALF OF GROUP COMPANIES. THE SAME IS NOT COMING OUT OF THE CONTRACT ENTERED INTO BETWEEN THE ASSESSEE AND THE GROUP CON CERN. THEREFORE, THE PAYMENT MADE BY THE ASSESSEE ON BEHALF OF GROUP COMPANIES WAS NO T UNDER CONTRACTUAL OBLIGATION. IT WAS ALSO SUBMITTED THAT THE PRINCIPLE OF RES JUDICA TA WILL NOT APPLY IN CASE OF INCOME-TAX PROCEEDINGS. ON THE OTHER HAND LD.AR OF THE ASSESS EE THAT SUPPORTED THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THE OTHER HAND, 11. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. FROM THE FACTS STATED ABOVE, IT IS CLEAR THAT THE A SSESSEE HAD BORROWED AN AMOUNT OF RS.4,00,43,616/- UNDER ECB. THE ASSESSEE HAS OBTAI NED RBI APPROVAL FOR THE SAME. THE I.T.A. NO.98/DEL./2008 (A.Y. : 2004-05) 5 ASSESSEE IS RECEIVING COMMISSION FROM THE GROUP COM PANIES ON BEHALF OF WHOM THE EXPENDITURE WAS INCURRED. THEREFORE, THE EXPENDITU RE INCURRED BY THE ASSESSEE HAS TO BE TREATED TO HAVE BEEN INCURRED AS A COMMERCIAL EXPED IENCY AS HELD BY HON'BLE APEX COURT IN THE CASE OF SA BUILDERS (SUPRA). IT IS ALSO A F ACT THAT ASSESSING OFFICER HAD NOT BROUGHT ON RECORD ANY MATERIAL TO SHOW THAT THE LOAN OBTAIN ED BY THE ASSESSEE UNDER ECB WAS DIVERTED TO GROUP COMPANIES. IN THE ABSENCE OF SUC H NEXUS, IT CANNOT BE SAID THAT AMOUNT BORROWED FOR THE PURPOSE OF BUSINESS WAS DIVERTED F OR NON-BUSINESS PURPOSES. IN THE ABSENCE OF ANY SUCH MATERIAL ON RECORD, IN OUR CONS IDERED OPINION, COMMISSIONER OF INCOME-TAX (APPEALS) WAS JUSTIFIED IN DELETING THE ADDITION ON THE GROUND THAT THERE WAS NO NEXUS BETWEEN THE MONEY BORROWED AND EXPENSES IN CURRED BY THE ASSESSEE. SECONDLY, THE AMOUNT WAS SPENT BY THE ASSESSEE ON BEHALF OF T HE GROUP COMPANIES FOR OBTAINING THE COMMISSION FROM THEM AND HENCE, THE SAME WAS INCURR ED AS COMMERCIAL EXPEDIENCY. ACCORDINGLY, IN OUR CONSIDERED OPINION, THE COMMISS IONER OF INCOME-TAX (APPEALS) WAS JUSTIFIED IN DELETING THE ADDITION. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 13. ORDER PRONOUNCED IN OPEN COURT ON 25/09/2009. [ RAJPAL YADAV ] [ K. D. RAN JAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : SEPT. 25, 2009. *SKB* COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS)-XIX, NEW DELHI. 5. DIT(DR), ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT.