THE COMMISSIONER OF INCOME TAX V. M/S UNITED BREWERIES (HOLDINGS) LTD.,

ITA/800/2008

AI Insights

The case involves appeals by the Commissioner of Income-Tax and the Assistant Commissioner of Income-Tax against M/s United Breweries (Holdings) Ltd., concerning the assessment year 1998-99. The primary issues revolved around the deductibility of certain expenditures and the allowance of depreciation. The revenue challenged the Appellate Tribunal's decision which had allowed the deductions and depreciation claimed by the assessee. The High Court examined whether the Appellate Authorities were correct in their interpretations and applications of the relevant provisions of the Income Tax Act, particularly focusing on the timing and nature of the expenditures and the usage of the Faridabad unit.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 728933 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 28-10-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: D L N RAO
• Assessee Lawyers: K V ARAVIND
• Keywords: Assessment Year 1998-99; Depreciation; Income tax appeal; Revenue expenditure; Guarantee Obligation
• Section: 32; 37; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 28TH DAY OF OCTOBER, 2014 PRESENT: THE HON'BLE Mr.JUSTICE N.KUMAR AND THE HON'BLE Mr.JUSTICE B.MANOHAR INCOME TAX APPEAL NO.800 OF 2008 C/W INCOME TAX APPEAL NO.801 OF 2008 ITA.NO.800/2008 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE, C.R.BUILDING, QUEENS ROAD, BANGALORE. 2. THE ASST. COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE-2(3), C.R.BUILDING, QUEENS ROAD, BANGALORE. ... APPELLANTS (BY SRI.K.V.ARAVIND, ADV.,) AND: M/S UNITED BREWERIES (HOLDINGS) LTD., FORMERLY KNOWN AS UNITED BREWERIES LTD., NO.1/1, VITTAL MALLYA ROAD, BANGALORE. 2 ... RESPONDENT (BY SRI.D.L.N.RAO, SR. ADV., FOR SMT S.R.ANURADHA, ADV.,) THIS APPEAL IS FILED U/S 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 28-3-2008 PASSED IN ITA NO.416/BNG/2002, FOR THE ASSESSMENT YEAR 1998-1999, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.416/BNG/2002 DATED 28.3.2008, AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY. ITA.NO.801/2008 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE, C.R.BUILDING, QUEENS ROAD, BANGALORE. 2. THE ASST. COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE-2(3), C.R.BUILDING, QUEENS ROAD, BANGALORE. ... APPELLANTS (BY SRI.K.V.ARAVIND, ADV.,) 3 AND: M/S UNITED BREWERIES (HOLDINGS) LTD., FORMERLY KNOWN AS UNITED BREWERIES LTD., NO.1/1, VITTAL MALLYA ROAD, BANGALORE. ... RESPONDENT (BY SRI.D.L.N.RAO, SR. ADV., FOR SMT S.R.ANURADHA, ADV.,) THIS APPEAL IS FILED U/S 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 28-3-2008 PASSED IN ITA NO.980/BNG/2002, FOR THE ASSESSMENT YEAR 1998-1999, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.980/BNG/2002 DATED 28.3.2008, AND CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY. THESE APPEALS COMING ON FOR HEARING THIS DAY, N.KUMAR, J., DELIVERED THE FOLLOWING: J U D G M E N T The revenue has preferred these appeals against the order passed by the Tribunal. 4 2. As both these appeals are arising in the case of same assessee, against a common order, they are taken up together for consideration and disposed of by this common order. 3. The appeal was admitted to consider the following three substantial questions of law. 1) Whether the Appellate Authorities were correct in allowing deduction despite the agreement entered into with M/s. Karnataka Breweries and Distilleries Ltd., to utilize facilities and improve production capacity was effective from 01.04.1998 relevant to assessment year 1999-2000 and not applicable to the current assessment year 1998-99? 2) Whether the Appellate Authorities were correct in holding that the guarantee obligation was an allowable deduction despite the same having not occurred during the current assessment year and the same was a contingent liability? 3) Whether the Appellate Authorities were correct in holding that the Faridabad unit 5 had not been put to use during the current assessment year and therefore no depreciation was allowable on the same? 4. The assessee is carrying on the business in the manufacture and sale of beer. In respect of the Assessment Year 1998-99, the assessee filed the return of income on 30.11.1998. Assessee claimed Rs.3.00 crores paid to Karnataka Breweries and Distilleries Ltd., as a revenue expenditure. A guarantee obligation of Rs.37.23 lakhs was claimed as deduction. Depreciation made on the assets in Faridabad Unit in Rs.38.96 lakhs was also claimed. The Assessing Authority held that the agreement entered into between the assessee and the Karnataka Breweries and Distilleries Ltd., is for the period commencing from 01.04.1998 and therefore, the assessee would not have claimed revenue expenditure for the assessment year 1998- 99 and therefore, disallowed the said claim. Similarly, the Assessing Authority held that the guarantee obligation has not occurred during the current assessment year and the same was a contingent liability and moreover, there was no 6 close business connection between the assessee and the companies to which it has stood as guarantor. Lastly, it was held that Faridabad unit was not put to use during the current assessment year and therefore, no depreciation was allowable on the same. The assessee preferred an appeal in the Income Tax Appellate Authority. Following the judgment of the Tribunal in the assessee’s case for the assessment year 1997-98, the Appellate Authority held that the depreciation on the Faridabad unit assets is liable to be deducted. 5. Insofar as the guarantor obligation is concerned, again relied on the judgment of the Tribunal in the assessee’s case that in the year 1995- 96 deductions were granted under Section 37 of the Income Tax Act. Insofar as the amount of Rs.3.00 crores claimed as revenue expenditure is concerned, it was held that the assessee is entitled to the deductions of the said amount for the assessment year 1998-99 though the agreement came into force on 01.04.1998 7 and granted relief to the assessee. Aggrieved by the said order the revenue preferred an appeal to the Tribunal. 6. The Tribunal held that upfront facility charges are in the nature of revenue expenditure and therefore, revenue expenditure incurred in that year is to be taken into consideration and the agreement with Karnataka Breweries and Distilleries Ltd., is for utilization of the facilities which is similar to hiring of space for the purpose of the business and therefore, it has upheld the order of the Appellate Authority. Similarly the guarantee obligation comprising of guarantee bonus taken by M/s.UNITED Communications Ltd., and Tamilnadu Alkaline Batteries Ltd., from Vysya Leasing Ltd., to the extent of Rs.37,23,900/- was held to be an allowable deduction. Similarly, the depreciation in respect of Faridabad Unit property was also allowed. Aggrieved by these orders the revenue is in appeal. 8 7. Learned counsel appearing for the revenue assailing the impugned order contended that the payment of Rs.3.00 crores is made prior to 01.03.1998 which was made in connection with an agreement which has to come into effect on 01.04.1998 and therefore, the said amount would not have been taken into consideration as the revenue expenditure for the assessment year 1998-99 and therefore, he submits that the orders passed by the Appellate Authorities requires to be set-aside. 8. Insofar as the corporate guarantee obligation is concerned, there was no need or necessity for the assessee to stand as a guarantor in those companies. Therefore, Section 37 of the Income Tax Act is not attracted and the Appellate Authority wrongly allowed the deduction. 9. Insofar as the depreciation in respect of Faridabad Unit is concerned, it was contended that it 9 was allowable for depreciation in terms of Section 32 of the Act which says that not only the assessee should own the property but he should use it for the previous year, then only he will be entitled to the depreciation. In this case, admittedly in the previous year the property was not used and therefore, he is not entitled to the depreciation. 10. We do not see any merits in these contentions. 11. The amount of Rs.3.00 crores is made prior to 01.03.1998. It is reflected in the accounts of the assessee for the year 1998-99. Correspondingly, the Karnataka Breweries and Distilleries Ltd., have shown the said payment in their books of accounts for the assessment year 1998-99. Assessee is following the mercantile system of account. The said amount is in the nature of revenue expenditure and therefore, the said amount is taken into consideration for the 10 assessment year 1998-99. Merely because the agreement in pursuance of which the said amount is paid comes into account on 03.09.1998, three years thereafter, there is no obligation to show the said amount for the assessment year 1999-2000 as held by the Assessing Authority. Therefore, both the Appellate Authorities were justified in upholding the claim of the assessee by setting – aside the order of the assessing authority. Therefore, the said substantial question of law is answered in favour of the assessee and against the revenue. 12. Insofar as guarantee obligation is concerned, it is not in dispute that the assessee is the promoter of M/s. UNITED Communications Ltd., and Tamilnadu Alkaline Batteries Ltd. The assessee has stood as a guarantor and hence, obliged to make payment. Accordingly, a sum of Rs.37,23,900/- was debited by the assessee to the P & L Account as guarantee 11 obligation is involved which has lent money to the aforesaid two companies. Merely because the assessee made no efforts to recover the said amount and that the business carried out by the said companies were not as of the assessee, is not a ground to deny the benefit under Section 37 as rightly held by both the Appellate Authorities. Infact, earlier he has also lent such benefit which has been accepted by the revenue. Therefore, the second substantial question of law is also answered in favour of the assessee and against the revenue. 13. Insofar as the claim and depreciation in respect of Faridabad Unit is concerned, the order passed by the Assessing Authority itself clearly indicates that consequent to the prohibition policy introduced by the Haryana Government during the financial year 1996-97 relevant assessment year 1997-98, the operation of the Faridabad Unit of the assessee company were suspended. It follows that the 12 assessee was running its unit in Faridabad till it was suspended. It is not in dispute that the assessee owns the said unit and the disptue is regarding ‘use’. Infact Madras High Court and Delhi High Court have interpreted the meaning of the word ‘user’ as ‘only if the machinery and plant is kept ready for the use, the requirement of the user contemplated under Section 32 of the Act is satisfied’. 14. In that view of the matter as plant and machinery in Faridabad Unit was in use and the user was suspended because of the prohibition policy, both the conditions of user and ownership was satisfied. Rightly the benefit was extended. The said order is strictly in accordance with law. Therefore, third substantial question of law is answered in favour of the assessee and against the revenue. 13 For the aforesaid reasons, we do not see any merit in these appeals. Accordingly, both the appeals are dismissed. Sd/- JUDGE Sd/- JUDGE GH "