ITO, Ward - 6(1), Kolkata, Kolkata V. M/s. Duncan Brothers & Company Ltd., Kolkata

ITA 983/KOL/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2455 (ITAT-KOLKATA)
• Duration Of Justice: 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-07-2010
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2010
• Court: TRIBUNAL
• Department Lawyers: PIYUSH KR KOLHE
• Assessee Lawyers: D S DAMLE

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : KOLKATA ( (( ( ) )) ) . .. . . . . . , , , , !' !' !' !', ,, , #$ #$ #$ #$ . . . . . . . . %& %& %& %&, , , , ' !' ' !' ' !' ' !' [BEFORE HONBLE SRI D. K. TYAGI, JM & HONBLE SRI K. K. GUPTA, AM] $( $( $( $( / ITA NO. 983 /KOL/2010 )* +, )* +, )* +, )* +,/ // / ASSESSMENT YEAR : 2006-07 INCOME-TAX OFFICER, WD-6(1), KOLKATA. -VS- M/S. D UNCAN BROTHERS & COMPANY LTD. (PA NO. AAACD 8674 L) (./ / APPELLANT ) (0.// RESPONDENT ) #$ #$ #$ #$ /AND C.O. NO.74/KOL/2010 IN $( $( $( $( / ITA NO. 983 /KOL/2010 )* +, )* +, )* +, )* +,/ // / ASSESSMENT YEAR : 2006-07 M/S. DUNCAN BROTHERS & COMPANY LTD. -VS- INCOME-TA X OFFICER, WD-6(1), KOLKATA (CROSS OBJECTOR) (RESPONDENT) FOR THE DEPARTMENT: / SRI PIYUSH KR. KOLHE FOR THE ASSESSEE : / SHRI D. S. DAMLE !1 / ORDER PER D. K. TYAGI, JM ( . . . . . . . . , , , , !' ) THE APPEAL PREFERRED BY THE REVENUE AND THE CROSS O BJECTION PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE LD . CIT(A), KOLKATA DATED 15.02.2010 FOR THE ASSESSMENT YEAR 2006-07. BOTH THE APPEAL AND T HE CROSS OBJECTION HAVE BEEN HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLID ATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE TAKE UP ITA NO. 983/K/2010 FILED BY THE REVENUE. THE REVENUE HAS TAKEN THE FOLLOWING SOLE GROUND : THAT LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FAC TS, IN DELETING THE ADDITION OF RS.11,23,500/-, BEING INTEREST ACCRUED ON LOAN GIVEN TO ANOTHER COM PANY, WITHOUT CONSIDERING THAT THE ASSESSEE DID NOT DISCLOSE SUCH AMOUNT OF INTEREST INCOME ON ACCRUAL BASIS EVEN THOUGH IT MAINTAINS ITS ACCOUNTS IN MERCANTILE SYSTEM. BRIEFLY STATED FACTS OF THE CASE AS OBSERVED BY THE AO ARE THAT THE ASSESSEE HAD ADVANCED LOAN TO ITS SUBSIDIARY COMPANY ON WHICH IT DID NOT RECOGNIZE ANY INTEREST FOR THE PREVIOUS YEAR. HE FURTHER OBSERVED THAT THE ASSESS EE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE, THE ASSESSEE WAS REQUIRE D TO ACCOUNT ACCOUNT FOR THE ACCRUED INTEREST IN ITS P & L ACCOUNT. HE FINALLY HELD THA T INTEREST OF RS.11,23,500/- ON LOANS GIVEN TO M/S. ARINDAM INVESTMENTS PVT. LTD. BECAME DUE ON ACCRUAL BASIS AND THEREFORE THE SAID INTEREST WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. IN APPEAL, THE LD. CIT(A) 2 DIRECTED THE AO TO DELETED THE SAID ADDITION. BEIN G AGGRIEVED WITH THE SAID ORDER, NOW THE REVENUE IS IN APPEAL BEFORE US. 3. AT THE TIME OF HEARING BEFORE US THE LD. DR REL IED ON THE ORDER OF THE AO AND SUBMITTED THAT THE INTEREST OF RS.11,23,500/- ON LO ANS GIVEN TO M/S. ARINDAM INVESTMENTS PVT. LTD. BECAME DUE TO THE ASSESSEE O N ACCRUAL BASIS AND THERE IS NO DISPUTE IN IT. SINCE THE ASSESSEE COMPANY IS FOLL OWING MERCANTILE SYSTEM OF ACCOUNTING IT HAD TO ACCOUNT FOR THE ACCRUED INTEREST WHICH IT DID NOT DO FOR WHICH INCOME HAS BEEN UNDERSTATED AND AS SUCH THE AO HAD RIGHTLY ADDED TH E SAID SUM OF RS.11,23,500/- TO THE TOTAL INCOME OF THE ASSESSEE. 4. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE WHILE REITERATING HIS SAME SUBMISSIONS AS SUBMITTED BEFORE THE LOWER AUTHORITI ES FURTHER SUBMITTED THAT THE ASSESSEE HAD GIVEN LOAN TO ITS SUBSIDIARY COMPANY M/S. ARIND AM INVESTMENTS PVT. LTD. SEVERAL YEARS BACK AND THERE HAS BEEN NO MOVEMENT EITHER IN THE PRINCIPAL AMOUNT DUE OR THE ACCUMULATED INTEREST THEREON . THE SAID SUBSIDIARY COMPANY HAS BEEN INCURRING HUGE LOSSES AND AS AT 31.3.2002 THE DEBIT BALANCE IN THE P & L ACCOUNT STOOD AT RS.2,07,58,926/- AS AGAINST THE SHARE CAPITAL OF RS .66,66,500/-. IN VIEW OF THE HUGE ACCUMULATED LOSSES SUFFERED BY M/S. ARINDAM INVESTM ENTS PVT. LTD. THE ASSESSEE WAS UNCERTAIN AS TO REALISABILITY OF THE PRINCIPAL SUM EVEN AND IT THEREFORE, STOPPED CHARGING INTEREST FROM FY 2001-02 AS REQUIRED BY ACCOUNTING STANDARD 9 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. HE ALSO CONTENDE D THAT THE ACCOUNTING STANDARD STIPULATES THAT INTEREST ON LOANS SHOULD ONLY BE R ECOGNIZED WHEN NO SIGNIFICANT UNCERTAINTY AS TO MEASURABILITY OR COLLECTABILITY E XISTS. THE ACCOUNTING STANDARD PROVIDES THAT WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLE CTION WITH REASONABLE CERTAINTY IS LACKING REVENUE CANNOT BE RECOGNIZED HE ALSO CONT ENDED THAT THE ACCUMULATED LOSSES OF M/S. ARINDAM INVESTMENTS PVT. LTD. WERE RS.2,07, 65,656/- WHICH WERE ALMOST THREE TIMES OF THE SHARE CAPITAL OF THE SAID COMPANY. TH EREFORE, THERE WAS SIGNIFICANT UNCERTAINTY AS TO THE COLLECTIBILITY OF THE SAID L OAN AND THE ACCUMULATED INTEREST THEREON. IN FACT IN NOTE 3 IN THE NOTES TO THE ACCOUNTS IN S CHEDULE 11 TO THE AUDITED ACCOUNTS THE SAID FACT HAS ALSO BEEN CLEARLY STATED AND IT READS IN ACCORDANCE WITH ACCOUNTING STANDARD 9 ON REVENUE RECOGNITION ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, INTEREST ON CERTAIN LOANS AND DEPOSITS PAID TO VARIOUS PARTIES HAVE NOT BEEN ACCOUNTED FOR DUE TO SIGNIFICANT UNCERTAIN TIES AS TO ITS COLLECTABILITY. IT WAS IN THESE CIRCUMSTANCES THE ASSESSEE COULD NOT AND DID NOT CHARGE INTEREST ON THE LOAN GIVEN TO THE SUBSIDIARY. AS SUCH THE ASSESSEE HAS TILL DA TE NOT BEEN ABLE TO REALIZE ANY PART OF 3 THE OUTSTANDING DUES FROM M/S. ARINDAM INVESTMENTS PVT. LTD. HE, THEREFORE, SUBMITTED THAT THE ADDITION OF INTEREST OF RS.11,23 ,000/- MADE BY THE AO WAS WRONG AND SHOULD BE DELETED. HE ALSO CONTENDED THAT THE AO H AS TOTALLY MISUNDERSTOOD THE EXPLANATIONS OF THE ASSESEE MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE ASSESEE NO DOUBT WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. UNDER MERCANTILE SYSTEM OF ACCOUNTING IT WAS ONLY THE REAL INCOME WH ICH WAS LIABLE TO TAX. WHETHER THE INCOME REALLY ACCRUED NEEDED TO BE JUDGED IN THE LI GHT OF REALITY OF THE SITUATION. HE ALSO RELIED ON THE DECISION OF HONBLE SUPREME COUR T IN THE CASE OF GODHRA ELECTRICITY CO. LTD. VS. CIT REPORTED IN 225 ITR 746. HE LASTLY HEAVILY RELIED ON THE ORDER OF THE LD. CIT(A) .AND URGED BEFORE THE BENCH TO CONFIRM T HE SAME. 5. AFTER HEARING BOTH THE PARTIES, PERUSING THE MA TERIAL AVAILABLE ON RECORD AND THE CASE LAW CITED BY THE LD. COUNSEL FOR THE ASSESSEE, WE FIND THAT THE ASSESSEE COMPANY GAVE LOAN TO ITS SUBSIDIARY COMPANY SEVERAL YEARS B ACK AND THE SAID SUBSIDIARY HAS BEEN INCURRING HUGE LOSSES. THE ASSESSEE WAS UNCERTAIN AS TO THE REALISABILITY OF THE PRINCIPAL SUM EVEN AND IT STOPPED CHARGING INTEREST FROM FY 2 001-02 FOLLOWING THE ACCOUNTING STANDARD 9 ISSUED BY THE INSTITUTE OF CHARTERED ACC OUTANTS OF INDIA. WE ALSO FIND THAT THE HONBLE SUPREME COURT IN THE CASE OF GODHRA ELE CTRICITY CO. LTD. CITED SUPRA HAS HELD AS UNDER : THE TRIBUNAL HAD RIGHTLY HELD THAT THE CLAIM AT TH E INCREASED RATES AS MADE BY THE ASSESEE COMPANY ON THE BASIS OF WHICH NECESSARY ENTRIES WER E MADE REPRESENTED ONLY HYPOTHETICAL INCOME AND THE AMOUNT IN QUESTION BROUGHT TO TAX BY THE INCOME TAX OFFICER DID NOT REPRESENT INCOME WHICH HAD REALLY ACCRUED TO THE ASSESSEE COM PANY DURING THE RELEVANT PREVIOUS YEAR. IN THE AFORESAID JUDGMENT THE HONBLE SUPREME COURT REITERATED THE FOLLOWING OBSERVATIONS MADE BY IT EARLIER IN THE CASE OF CIT V. SHOORJI VALLABHDAS & CO. 46 ITR 144. INCOME TAX IS A LEVY ON INCOME. NO DOUBT, THE INCO ME TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED, VI Z, THE ACCRUAL OF THE INCOME OR ITS RECEIPT BUT THE SUBSTANCE OF THE MATTER IS INCOME. IF INCOME DOES N OT RESULT AT ALL, THERE CANNOT HE A TAX EVEN THOUGH IN BOOK KEEPING, AN ENTRY IS MADE ABOUT A HY POTHETICAL INCOME, WHICH DOES NOT MATERIALIZE THE SUPREME COURT ALSO REFERRED TO THE RATIO LAID D OWN IN ITS EARLIER .DECISION IN THE CASE OF PUNE ELECTRIC SUPPLY COMPANY LTD. V. CI T [57 ITR 521] WHEREIN THE APEX COURT HAD HELD AS FOLLOWS: INCOME TAX IS THE TAX ON THE REAL INCOME I.E. PROF ITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE I. T. ACT. THE COURT ALSO REFERRED TO ITS ANOTHER JUDGEMENT I N THE CASE OF CIT V. BIRLA GWALIOR PVT. LTD. [ 39 ITR 266 ] AND MORVI I NDUSTRIES LTD. [ 82 ITR 835 ] . IN 4 BOTH THE CASES THE ADDITIONS WERE SOUGHT TO BE JUST IFIED ON THE GROUND THAT THE ACCOUNTS WERE MAINTAINED ON THE MERCANTILE SYSTEM. IN 89 ITR 266 (AT PAGE 273) THE HONBLE SUPREME COURT MADE THE FOLLOWING OBSERVATIONS: HENCE IT IS CLEAR THAT THIS COURT IN MORVI INDUSTR IES CASE DID EMPHASIS THE, FACT THAT THE REAL QUESTION FOR DECISION WAS WHETHER THE INCOME HAD RE ALLY ACCRUED OR NOT. IT IS NOT HYPOTHETICAL ACCRUAL OF INCOME THAT HAS GOT. TO BE TAKEN INTO CO NSIDERATION BUT THE REAL ACCRUAL OF INCOME. IN VIEW OF THIS, WE DO NOT FIND ANY INFIRMITY IN TH E ORDER OF THE LD. CIT(A) AND THE SAME IS HEREBY UPHELD. THE GROUND OF APPEAL OF THE REVE NUE IS, THEREFORE, DISMISSED. 6. IN THE CROSS OBJECTION THE ASSESSEE HAS RAISED T HE FOLLOWING GROUNDS : 1.THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN DISALLOWING THE SUM OF RS.2,27,277/- BEING REIMBURSEMENT MADE ON ACCOUNT OF CONTRIBUTION S TO PROVIDENT AND OTHER FUNDS TO M/S. DUNCAN SERVICES LTD. FOR SUPPORT STAFF SECONDED BY THEM ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. 2. FOR THAT THE CIT(A) SHOULD HAVE SEEN THAT ALL CO STS ASSOCIATED WITH THE SECONDED STAFF WERE BORNE BY THE RESPONDENT AND THE REIMBURSEMENT MADE FOR CONTRIBUTION TO PROVIDENT AND OTHER FUNDS WAS ALSO ALLOWABLE AS AN ADMISSIBLE DEDUCTION HAVING BEEN WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS ON THE FACTS A ND IN THE CIRCUMSTANCES OF THE CASE. 7. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSES SEE OBJECTED TO THE DISALLOWANCE OF A SUM OF RS.2,27,277/- MADE BY THE AO AND CONFIR MED BY THE LD. CIT(A) BEING REIMBURSEMENT MADE TO M/S. DUNCAN SERVICES LTD. ON ACCOUNT OF CONTRIBUTIONS MADE TO P.F AND OTHER FUNDS FOR THE STAFF SECONDED BY M/S. DUNCAN SERVICES LTD. TO THE ASSESSEE. IN THE ASSESSMENT ORDER, THE AO STATED THAT IN THE P & L ACCOUNT, THE ASSESEE DEBITED A SUM OF RS.5.05 LACS UNDER THE HEAD CONTRIBUTION TO PROVIDENT AND OTHER FUNDS. HOWEVER, AS PER THE TAX AUDIT REPORT THE CONTRIBUTI ON TO PROVIDENT AND OTHER FUNDS WAS SHOWN AT RS.2,27,950/-. THE ASSESSEE FURNISHED ITS EXPLANATION BEFORE THE AO. HE, HOWEVER, HELD THAT THE STAFF MEMBERS BELONGED TO M/ S. DUNCAN SERVICES LTD. AND THE ASSESSEE HAD NO OBLIGATION TO CONTRIBUTE THE PROVI DENT FUND AND OTHER FUND IN RESPECT OF THOSE EMPLOYEES. THE AO, THEREFORE, DISALLOWED THE SAID SUM OF RS.2,77,277/- AND ADDED THE SAME TO THE ASSESSEES TOTAL INCOME. IN APPEAL, THE LD. CIT(A) DISMISSED THE ASSESSEES GROUND OF APPEAL BY OBSERVING AS UNDER : I HAVE GONE THROUGH THE SUBMISSIONS OF THE APPELLA NT AND ALSO THE ORDER OF THE AO. ADMITTEDLY, THE STAFF SECONDED BY M/S. DUNCAN SERVICES LTD. WER E NOT EMPLOYEES OF THE APPELLANT AND WERE EMPLOYEES OF M/S. DUNCAN SERVICES LTD. THERE IS NO AGREEMENT WITH M/S. DUNCAN SERVICES LTD. REGARDING THE REIMBURSEMENT MADE TO DUNCAN SERVICES LTD. THE ASSESSEE COMPANY HAD NO OBLIGATION TO CONTRIBUTE TO PROVIDENT FUND IN RESP ECT OF THOSE EMPLOYEES. THERE WAS NO EMPLOYEE-EMPLOYER RELATIONSHIP WITH THESE EMPLOYEES FOR THE APPELLANT. THE AO HAS CORRECTLY DISALLOWED THE CONTRIBUTION TO THE PROVIDENT FUND. THIS GROUND OF APPEAL IS DISMISSED. AGGRIEVED BY THE SAID ORDER, NOW THE ASSESSEE HAS F ILED THIS CROSS OBJECTION BEFORE THE TRIBUNAL. 5 8. AT THE TIME OF HEARING BEFORE US, THE LD. COUNSE L FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF DCIT VS. M/S. SANTIPARA TEA CO. LTD. IN ITA NO. 1259, 1260, 1231 & 1634/ KO L OF 2008 FOR AYS 2002-03 TO 2005-06 RESPECTIVELY DATED 22.1.2010 WHEREIN ON SIM ILAR FACTS, THE ASSESSEES CONTENTION WAS ACCEPTED AND ALSO PLACED RELIANCE O N A CERTIFICATE GIVEN BY M/S. DUNCAN SERVICES LTD. DATED 4.1.2010 THAT THE MONEY WAS DEP OSITED BY IT WITH THE PROVIDENT FUND TRUST. 9. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDE RS OF THE LOWER AUTHORITIES AND URGED BEFORE THE BENCH TO CONFIRM THE SAME. 10. AFTER HEARING THE RIVAL SUBMISSIONS, PERUSING T HE MATERIALS AVAILABLE ON RECORD AND THE DECISION OF THE COORDINATE BENCH CITED SUPR A, WE FIND FORCE IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE FACTS OF THIS CASE ARE SIMILAR TO THE FACTS OF THE CASE OF ITAT CITED SUPRA. HOWEVER, THE FACT THAT T HE AMOUNT WAS DEPOSITED BY DUNCAN SERVICES LTD. WITH THE PROVIDENT FUND TRUST OR NOT REQUIRES VERIFICATION. THEREFORE, THE MATTER IS RESTORED BACK TO THE FILE OF THE AO AND I F THE CERTIFICATE GIVEN BY DUNCAN SERVICES LTD. IS FOUND CORRECT NO DISALLOWANCE IS CALLED FOR. THE GROUND OF THE CROSS OBJECTION OF THE ASSESSEE IS, THEREFORE, ALLOWED FO R STATISTICAL PURPOSES. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED AND THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. . ORDER IS PRONOUNCED IN THE OPEN COURT ON 16.7.10 SD/- SD/- . . . . . . . . %& %& %& %&, , , , ' !' . . . . . . . . , , , , !' (K. K. GUPTA) (D. K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER ( (( (' ' ' ') )) ) DATED : 16 TH JULY, 2010 23 )45 )6 JD.(SR.P.S.) !1 7 0))8 98+:- COPY OF THE ORDER FORWARDED TO: 1. ./ /APPELLANT - ITO, WARD-6(1), KOLKATA 2 0./ / M/S. DUNCAN BROTHERS & COMPANY LTD., DUNCAN HOUSE , 31, N. S. ROAD, KOLKATA-1. . 3. )1/ THE CIT, KOLKATA 4. )1 ()/ THE CIT(A), KOLKATA 5. A) 0) / DR, KOLKATA BENCHES, KOLKATA 8 0)/ TRUE COPY , !1B/ BY ORDER , C $5 / DEPUTY REGISTRAR .