TMI Blog2007 (8) TMI 379X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a sum of Rs. 13 crore from its parent company M/s. Lurgi A.G., which was credited to profit loss account by way of a capital grant. However, in the computation, this amount was reduced from the income, and a note was also appended to the return stating, inter alia, that in the relevant previous year, the assessee received Rs. 13 crore from Lurgi A.G. for recoupment of its losses. The same is a capital grant not chargeable to tax under the Act, in view of the decisions of Hon'ble Delhi High Court in the case of Handicrafts Handloom Exports Corpn. ofIndiav. CIT [1983] 140 ITR 532; Hon'ble Bombay High Court in the case of CIT v. Indian Textile Engineers Lid. [1983] 141 ITR 69 and Hon'ble Calcutta High Court in the case of CIT v. Stewarts Lloyds of India Ltd. [1987] 165 ITR 416. In the course of assessment, the assessee was required to elaborate further on this issue with respect to the nature of the transaction. It was elaborated that Lurgi A.G.,Frankfurtwas holding 99.7 per cent share in the assessee-company, which gave a grant of Rs. 13 crore to the assessee-company for recoupment of losses. The assessee-company was executing turn-key project for Haldia Petrochemicals Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of the decision of Hon'ble Delhi High Court in the case of Handicrafts Handloom Exports Corpn. ofIndia. In that case, theHon'ble Courtfound that the payment was in the nature of gift or voluntary payment; it was motivated by personal relationship; and it did not stem from any business consideration. Therefore, it was held that the receipt was non-trading in nature. Coming to the facts of this case, it was pointed out that the impugned amount was not a gift. As a matter of fact no gift deed was drawn. The onus to prove the gift was on the assessee, as held by Hon'ble Delhi High Court in the case of K.L. Agarwal v. CIT [1991] 190 ITR 303. The payment was also not voluntary in nature for the reason that there was a protracted correspondence and meetings between the two parties. Various suggestions were made by both the parties and the assessee insisted on payment in some form or the other. The assessee even threatened to stop its business operations inIndia. Thus, Lurgi A.G. was coerced into furnishing guarantees for credit facilities and repatriated the aforesaid money. The payment stemmed out of business consideration for the reason that the Lurgi A.G. was holding 99.7 per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for executing various projects. The assessee executed turn-key contracts by using technologies of the other company of the Lurgi group. Thus, the assessee acted in close co-operation with various group companies. In this year, various payments have been made to the associate company as technical know-how fees or consultation fees. It is also mentioned in the notes to the accounts that the Directors considered it appropriate to prepare the accounts on the going concern basis in view of continued support from the parent company. Thus, it was held that there was a close connection between the assessee-company and its parent company. It was further held that the receipt was not unsolicited and without expectation. The parent company and other associate companies had substantial stakes in the assessee-company as amongst them there was a relationship of close dependence. In such circumstances, the payment could not be said to be a windfall. 2.4 The assessee had also relied on the decision in the case of Indian Textile Engineers (P.) Ltd., in which subvention payments were made by the holding company and other associate companies to the assessee-company against losses, which were treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t while the cases cited by the assessee were distinguishable on facts, the cases relied upon by the Assessing Officer supported the view that the impugned amount was a revenue receipt. The amount was credited to profit loss account for recouping the loss. Therefore, the Assessing Officer rightly brought the impugned amount to tax in the hands of the assessee. It was further argued that the learned CIT(A) ignored factual and legal position and erroneously held that the amount was a capital receipt. 2.7 Before proceeding with the submissions made on behalf of the assessee, we may briefly summarize the ratio of the cases relied upon by the Assessing Officer. It was his case that the impugned amount was not a gift made by the parent company to the subsidiary company in view of the decision in the case of K.L. Aggarwal. The facts of that case were that the assessee claimed receipt of a gift of Rs. 50,000. The Assessing Officer disbelieved the contention and made the addition of the amount to the income of the assessee. The submission on behalf of the assessee was that the donor was not examined by the Assessing Officer. TheHon'ble Courtpointed out that the onus to prove the validity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the deceased saint. The offerings were not made in return of any services rendered by the assessee. Further, it was held that Jalaram gudee was not a temple as the elaborate rituals for installation of the idols were not carried out. There was no evidence that there was dedication of the property for the use and worship of idols. Thus, the institution was not a private religious endowment. Even if it is assumed that it was a private religious endowment, the family of the assessee and not the assessee alone would be the beneficiary of the offerings. Thus, the surplus in the hands of the assessee was not income. The Assessing Officer had also referred to the decision of Hon'ble Supreme Court in the case of P.H. Divecha. In that case, the assessee was holding exclusive rights in a particular territory to sell electric lamps manufactured by Philips, for which he was entitled to certain commissions and discount for breakage, etc. The agreement remained in existence for 16 years. Thereafter Philips decided to take over distribution of lamps on its own also in that territory and served a notice to the assessee for termination of the agreement. As a result of discussion between the tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a vocation if not a profession. If any business, profession or vocation produced income, it was properly taxable even if the vocation was not carried out with a motive to produce income. The teachings made by him was the main cause of payment made by the disciple. The income could not be termed as casual or non-recurring, for which it has to be shown that it had not arisen from exercise of a vocation. 3. In reply, the learned counsel for the assessee referred to page 20 of the order of the learned CIT (A) where it was mentioned the loss reimbursed by the holding company had not occurred due to transactions undertaken by the subsidiary company and the holding company on behalf of the holding company. According to him, this finding was central to his case that in absence of any such business connection, the receipt was in the nature of a capital receipt. He referred to page 2 of the paper book, being a notice under section 142(1) of the Act, in which it was pointed out that the assessee had received capital grant of Rs. 13 crore for recoupment of losses, which was considered as a capital receipt not chargeable to tax under the Act, by placing reliance on the decision in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection, he referred to the discussion on pages 2 and 3 of the order of the learned CIT(A), being the submissions made before her to the effect that due to losses, the capital of the assessee had eroded, non-refundable capital grant of Rs. 13 crore was received from the holding company as evidenced by the FIRC and the receipt was not liable to tax, in view of the decision of Hon'ble Delhi High Court in the case of Handicrafts Handloom Export Corpn. Thus, his case was that all the facts had been disclosed and it was for the revenue to initially discharge the onus that the receipt was in the nature of income. 3.2 The learned counsel referred to the assessee's submissions before the learned CIT(A) and her findings in the matter. In particular, it was pointed out that the FIRC clearly showed the purpose of remittance to be "non-refundable capital grant". There was no evidence to the contrary. Therefore, the Assessing Officer should have accepted the claim that the receipt was a capital grant. Further, the payment was a voluntary one as a request from the recipient will not make the payment to be non-voluntary on the part of the payer. Therefore, the allegation that Lurgi A.G. was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such as a father meeting losses incurred by his son in carrying on a business. The losses incurred by the assessee could not have been ignored merely because they were made good by the holding company. It was further pointed out that the position will be clearer if a converse situation is considered, in which the Corporation made profit and claimed that the profit should not be assessed because they have been transferred to the holding company. Such a contention would clearly not be tenable for the reason that making over the profits to the holding company would merely be a case of application of income and not the expenditure incurred for earning the income. Therefore, in the converse situation obtained in the case of the assessee, the loss had been clearly incurred which cannot be ignored merely because it had been recouped by another person. Further, "he referred to the decision in the case of Handicrafts Handloom Export Corpn. ofIndia, relating to assessment year 1970-71. The holding company agreed to recoup the losses and give a further cash assistance at the rate of 6 per cent of the foreign exchange earning. TheHon'ble Courtheld that the reimbursement of losses and cash as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the assessee-company and the holding company. It is also mentioned that the assessee had business connection with associate concerns, namely, Lurgi Oel Gas Chemie and Lurgi Anlugabau Chemnitz and consultation fees and technical know-how fees were paid to them for various projects. The assessee had also undertaken refinery expansion projects inGermanyandMexicofor Lurgi Oel Gas Chemie. This, according to the Assessing Officer, proved that there was a business consideration. On perusing this part of the order, it is seen that no business connection has been brought out between the assessee and the holding company as only the names of the associated concerns have been mentioned. Further, it is not shown that transactions with these associated concerns were not at arm's length leading to the loss to the assessee-company in the past. It is also not shown that such a loss was wholly or partly reimbursed by the holding company. We could have accepted the argument wholly or partly if it had been shown that the assessee suffered losses in the past on account of transactions with the holding company or associated companies not being conducted at arm's length, which were reimbursed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are in the capital field in view of the decisions in the case of Handicrafts Handloom Export Corpn. 4.3 In the result, ground No. 1 is dismissed. 5. Ground No. 2 is to the effect that on the facts and in the circumstances of the case, the ld. CIT(A) erred in holding that business income of the assessee-company, amounting to Rs. 35.20 lakh on account of receipt from running bills, is not a revenue receipt. In this connection, the learned DR drew our attention towards paragraph "G" at page 11 of the assessment order regarding "Method of accounting". It is mentioned that in the return of income as well as in the audit report, the method of accounting was described as "mercantile". In the notes to the account, it was mentioned that the revenue from the contract is recognized on a percentage of completion method. However, the profit is not recognized unless the work on the contract has progressed to a reasonable extent. It was explained to the Assessing Officer that the assessee has followed Accounting Standards-7 (AS-7), issued by Institute of Chartered Accountants of India (ICAI) in this behalf. In view thereof, the revenue and the corresponding expenditure was not accounted for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf may be set aside. 6. In reply, the learned counsel pointed out that there were receipts, but the question is whether, any income accrued to the assessee in respect of these receipts? In this connection, he referred to the order of Hon'ble ITAT, Bombay Bench 'A',Bombayin the case of Champion Construction Co. v. First ITO [1983] 5 ITD 495. In that case, the assessee executed a project for construction and sale of a multi-storeyed building. The construction was completed in the previous year relevant to assessment year 1978-79, and 80 per cent of the area was sold by that time. The assessee filed return for assessment years 1977-78 and 1978-79 showing nil income. It was mentioned that the income could not be assessed until the whole project was completed. The ITO prepared a draft assessment order by applying net profit rate of 15 per cent, which was forwarded to the Inspecting Asstt. Commissioner along with the objections of the assessee. However, under the instructions of the IAC ,under section 144A, the ITO prepared one more draft order, in which the income was computed by applying the rate of 30 per cent. The Hon'ble Tribunal pointed out that the proposition that profits from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case. Thus it did not involve any point of law. It was pointed out by him that the assessee had been following the aforesaid method of accounting for the last five years, as explained to the Assessing Officer and the learned CIT(A). In any case, the assessee has been suffering losses consistently, including in this year and, therefore, no profit could have been estimated from the receipts. 7. We have considered the facts of the case and rival submissions. The decision of Hon'ble Delhi High Court in the case of Woodward Governor was that the increase in the liability on revenue account due to fluctuation in the rate of foreign currency prevailing on the last day of the financial year is not a notional liability and, therefore, it is deductible in computing the income. In this connection, it was pointed out that since the expression "actual cost" has not been defined, the expression will have to be understood in the normal commercial sense and the normal rules of accountancy prevailing in commerce and industry. Thus, the normal rules of construction or the Accounting Standards can be taken into account in a case where certain term has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would work out to be a loss as the assessee has consistently incurred losses. Therefore, we are of the view that no adjustment was required to be made to the profits declared by the assessee on this account. 7.1 In the result, this ground is also dismissed. 8. Ground No. 3 is to the effect that on the facts and in the circumstances of the case, the CIT(A) erred in deleting the addition of Rs. 13,26,724, even though the same was in the nature of a provision for expenses. In this connection, the learned DR referred to page 13 of the assessment order where this issue has been discussed under the head "Provision for expenses". It is mentioned that the assessee debited an amount of Rs. 1,00,68,514 to the project expenses as "provision for expenses". This amount included a sum of Rs. 13,26,724, which did not accrue till31-3-2000. It was held that this provision was made to meet certain anticipated expenditure which had not accrued till the last date of the previous year. Thus, the amount was disallowed. The case of the learned DR was that the liability did not accrue or arise in this year and, therefore, it was rightly disallowed by the Assessing Officer. 8.1 In reply, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the expenditure of Rs. 11,67,210 was incurred within six months from the end of the previous year. In these circumstances, the estimation of liability can be termed as reasonable. It was also the case of the learned counsel that the balance amount has been offered for taxation as provision of section 41(1) will become applicable in respect of the balance amount. Subject to verification of the offering of the balance amount for taxation, it is held that the liability was an accrued liability. In case the balance amount has been offered for tax, it is also held that the same represented deductible expenditure. However, if it is found that the balance amount has not been offered for tax in the subsequent year, then, the allowance shall be restricted to Rs. 11,67,210. 8.3 In the result, this ground is also dismissed, as discussed above. 9. In the result, the appeal of the revenue is dismissed. ITA No. 4104( Delhi )/2004 - Assessment year 2001-02 10. In this appeal, the revenue has raised two grounds, which are similar to the grounds raised in ITA No. 4697(Del.)/2003, except for the amounts involved. In this year, the assessee received a sum of Rs. 8,91,71,860 as non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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