9911796707
TMI Blog2013 (12) TMI 1554X X X X Extracts X X X X X X X X Extracts X X X X ..... quantum would be considered taking in view all relevant facts as and when assessee choses to return the stock. Therefore it will not be proper to pass judgement regarding any future assessment year as that assessment year is an independent assessment year. 3. The Hon'ble CIT(A) has erred in holding that M/s. Marriott International Inc. USA was not assessable in India contrary to the belief of the DDIT (International Taxation)-4(1), Mumbai on whose order the Assessing Officer had relied. 4. The Hon'ble CIT(A) has erred in allowing the argument of the assessee that the Indo-US DTAA exempts the assessee from deducting tax at source as the payment made to M/s. Marriott International Inc. is not towards "fees for included services" and for royalty even though the assessee had itself clubbed one half of the payment under the head "Royalties & deed rent" and the other half of the payment was for services in the nature of included services as exhibited by the agreement between the assessee and M/s Marriott International Inc. as per the pragraphs no. 2.01, 2.02 & 2.03 of the agreement dated 05.02.1998. The service given by M/s Marriott International Inc. are in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) Whenever appellant transfers the stock of iron-ore to these two concerns, the corresponding loss needs to be given effect in the capital account without disturbing the business profits. The appellant objects to the above observations made by the learned CIT(A). 4. Without prejudice to the above, the learned CIT(A) erred in not directing the assessing officer to correspondingly adjust the opening stock of ROM and screened fines for the current assessment year 2006-07 i.e. 1 April 2005, in consequence to making an adjustment to the closing stock as on 31 March 2006. 5. Without prejudice to the above, the learned CIT(A) erred in not directing the assessing officer to correspondingly adjust the opening stock of ROM and screened fines for the subsequent assessment year 2007-08 i.e. 1 April 2006, in consequence to making an adjustment to the closing stock as on 31 March 2006." In the A.Y.2007-08, the assessee has taken following effective ground of appeal:- "1. The learned CIT(A) erred in not directing the assessing officer to correspondingly adjust the opening stock of ROM and screened fines as on 1 April 2006, in consequence to his confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of CIT(A). We have gone through the order of CIT(A) but we did not find any such finding being given by the CIT(A). In view of this fact, we dismiss the ground taken by the Revenue as not arising out of the order of CIT(A) in both the assessment years. 5. Ground no. 4 in assessment year 2006-07 and ground no. 3 in assessment year 2007-08 relate to the finding of CIT(A) that the payment made to Marriott International are not towards "fees for included services" and are for royalty and thus Assessee was liable to deduct tax at source while making payment to Marriott. Since the issue involved is common in both the years, we therefore deciding this issue after considering the facts relating to the assessment year 2006-07. 5.1 The brief facts relating to this ground for A.Y 2006-07 are that the AO disallowed marketing service fee of Rs. 58,50,487/- and reimbursement of expenses of Rs. 58,52,133/- paid to Marriott International invoking provisions of Sec. 40(a)(ia). Erstwhile M/s. Palm Hotels (India) Ltd. (now amalgamated with the Assessee w.e.f. 1.4.2003) entered into International Sales & Marketing Agreement with Marriott International. In accordance therewit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee does not make available any technical knowledge, experience, skill etc. to the Assessee nor does it involve transfer of any technical plan and design and hence the services does not fall under the definition of "fees for technical services" as provided under Indo-US DTAA. In respect of reimbursement of expenses of Rs. 58,51,427/- to Marriott International, in addition to the above submission it was submitted that they were merely reimbursement of the cost and it does not have any income or profit element and therefore no tax can be deducted u/s 195. CIT(A) going through the submissions of the Assessee noted that the payment made by the Assessee were not chargeable to tax. Therefore, he directed the AO to delete the disallowance made u/s 40(a)(ia). 5.2 Before us, the ld. DR relied on the order of the AO while the ld. AR reiterated the submissions made before the CIT(A). 5.3 We have heard the rival submissions and carefully considered the same. We noted that two types of payments have been made by the assessee to Marriott International; one relates to the services rendered by Marriott International outside India and the other relates to the reimbursement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the Assessee and Marriott International. In view of this, we dismiss ground no. 4 in assessment year 2006-07 and ground no. 3 in assessment year 2007-08 taken by the Revenue. 6. The only issue involved in ground nos. 1 to 4 is the valuation of the closing stock of ROM and screened fines. The brief facts relating to this issue are that there had been a survey in the case of the Assessee conducted on 7.12.2005. The AO noted that the Assessee has valued certain stock as per the Hon'ble High Court"s order dt. 14.3.1990. When inquired by the AO, the Assessee submitted that though the Court"s order is passed in 1990 there was no intention of the Assessee not to implement the Court"s order. The delay of 18 years in implementing the Court"s order is that the two groups in the litigation had to implement various directions of the Court on the issues adjudicated by the Court. The Assessee submitted that he has valued the closing stock as per the net realizable value at the close of financial year. A certain part of the stock has to be disposed off to certain parties at a price as directed by the Court. Therefore, the stock to that extent had to be valued at that price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n consistently and regularly following the practice of valuing the closing stock of Bagasse at nil value and crediting its sales proceedings to the Profit & Loss account as and when Bagasse is sold, there is no justification for making any addition. Reliance was also placed on the various decisions for the proposition of law that the stock has to be valued at cost or market value, whichever is less. After considering the submission of the Assessee, the CIT(A) dismissed the ground taken by the Assessee and confirmed the order of AO on this issue by observing as under : "5.4. Entire submission of the appellant and its reliance on various judicial pronouncements is based on the premise that rate fixed by the Hon"ble High Court is the market price for that quantity of stock of iron ore. What is material here is to analyse this premise of the appellant. The price fixed by the Honourable High Court cannot be termed as market price as market price is fixed by market forces depending upon the Demand- Supply quotient. Obviously, Honorable Court did not take into account market forces, while fixing the price for appellant. It is important to analyse the order of the court to understand the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7, following conditions must be fulfilled: a) Expenditure not specified in sec. 30 to 36. b) Not being in the nature of capital expenditure c) Not being in the nature of personal expenses. d) Should be expended wholly and exclusively for the purposes of the business of the assessee. e) Expenditure what is "paid out" or "paid away" is something which is gone away irretrievably. These provisions regarding allowability of expenditure also gets supported by the decisions in the cases of J.K. Cotton Mfrs. Ltd. vs. CIT (SC) 101 ITR 221 and CIT vs. Indian Molasses Co. (P) Ltd. (SC) 78 ITR 474. f) A mere liability to satisfy an obligation is not expenditure; a mere forbearance to realise a claim is not expenditure- CIT vs. National Bank Ltd. (SC) 62 ITR 638. 5.5. In view of the above discussion, in my opinion, the appellant had incorrectly valued its stock, by not valuing the stock at cost or market value, whichever is lower. In the instant case, the cost is lower than the market value, and the A.O. has correctly, adopted the cost to value the stock of iron ore of the appellant. Whenever appellant transfers the stock of iron-ore to these two concerns, the corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee can value the ROM at the price at which the Assessee has to sell it to M/s. Salitho Ores Ltd. In this regard, a clarification was submitted by the Assessee as promised vide letter dt. 2.11.2013 that the Company has stock of ROM which is available for conversion. The Company from the beginning intended to supply the quantity of 93,387 MT of Lumpy from the available quantity of ROM after conversion and therefore the said earmarked stock of ROM has been valued at the price as stipulated by the Hon'ble High Court. The Assessee has consistently valued the inventories of these items for the last so many years at the same value and Department has also accepted the same. However, under protest and without prejudice to the legal submissions in Assessee"s letter dt. 23.2.2006, in order to buy peace and in order to avoid protracted litigation, based on the discussion the Assessee had with the Addl. CIT as well as CIT the Assessee agreed to revise valuation of closing stock as on 31.3.2006. It was contended that the Assessee is continuously maintaining the same stock so that whenever the Respondent nos. 14 & 29 as per the Hon'ble High Court order ask for the balance quantity, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... am Agrawal & Co. vs. CIT, 220 ITR 564 (MP) CIT vs. Mahavir Aluminium Ltd., 297 ITR 77 (Del) 6.2 The ld. DR, on the other hand, relied on the order of the authorities below. His contention was that it is not a case of valuing the stock at market value or net realizable value. It is a case where the Assessee as per the family arrangement got the consent decree from the Hon'ble High Court and Assessee himself specified the particular value at which the stock had to be transferred to the other parties belonging to one part of the larger family. The market value is the price at which the willing buyer is ready to buy and the willing seller is ready to sell. The stock has been valued by the Assessee at a price which is neither the cost nor the market value. The Assessee has not complied with the order of the Hon'ble High Court for the last over 23 years and there is no intention to comply with the order of the Hon'ble High Court. If the method of accounting followed by the Assessee is not correct, then, the AO will be free to value the stock in accordance with the correct method of accounting. Reliance was placed on the order of CIT(A). In respect of the alternate plea, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... governed by their substance and not merely by the legal form; (iii) Materiality - Financial statements should disclose all materials items, the knowledge of which might influence the decisions of the user of the financial statements." 6.3.1 On the basis of paragraph 4, the accounting policies selected by the Assessee must be based on prudency, substance over form and materiality. This paragraph recognizes prudency to be one of the major considerations for applying the accounting policies. This requires that provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information. Thus, it recognizes "anticipate all the losses but do not provide for the profit until and unless they are realized". Valuing the closing stock at cost or market value, whichever is less is a well-established method of accounting and this method, in our opinion, is based on the principles of prudency. The Hon'ble Supreme Court in the case of Chainrup Sampatram v. Commissioner of Income-tax, 24 ITR 481 (supra) as relied by the ld. AR, in our opinion, accepted this princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated, value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised. As truly observed by one of the learned judges in Whimster and Co. v. Commissioners of Inland Revenue [1926] 12 TC 813,827. 'Under this law (Revenue law) the profits are the profits realised in the course of the year. What seems an exception is recognised where a trader purchased and still holds goods or stocks which have fallen in value. No loss has been realised. Loss may not occur. Nevertheless, at the close of the year he is permitted to treat these goods or stocks as of their market value'. 6.3.2 The ICAI in their AS-2 have recognised "cost or net realisable value, whichever is less" to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4 We noted that the Panaji Bench of the Hon'ble Bombay High Court in Company Petition no. 1 of 1983 in the case of Anil Vasudeva Salgaoncar & Ors. Vs. V.M. Salgaoncar & Ors. in respect of selling of the ROM lump ores and fines has in para 87 and 88 of its order dt. 14.3.1990 on a compromise decree held as under: "87.(a) Ordered and Decreed that the following quantities of iron ore shall be allotted to the group of Petitioners No. 1, 2 & 3: VMSB SALLITHO (Respondent no. 8) (Respondent no. 29) R.O.M. - 2,71,233 m.t. Lumpy Ore 93,387 1,02,991 Fines 240,740 -- (b) Out of the above quantities, the quantity of ore belonging to Respondent No.29 will continue to remain with Respondent No.29, the shareholding of which has been ordered to be transferred to the group of Petitioners No. 1, 2 & 3. (c) The aggregate quantity of 334127) tonnes of ore belonging to Respondent No.8 shall be sold to Respondent No. 14 at or for the aggregate price of Rs. 1,29,17,000/-. (d) Out of the above quantities of iron ore, the following quantities are in possession of Respondent No. 8 : R.O.M ... 63,300 " metric tonnes Lumpy Ore ... 32,200 " " Fines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 79,840* 38.66*** 3,086,531.06 4. Iron ore lying at Hospte/Yeshwant Nagar 18,450 16,593,467.79 5. SCREENED FINES a) Loaned to M/s. Salgaocar Min. Ind. Ltd.-Rs.156.22+Rs.7.86+Rs.58.22+Rs.19.64 -do- 49,159 241.94 11,893,528.46 b) Loaned to M/s. Salgaocar Min. Ind. Ltd.-Rs.156.22+Rs.7.86+Rs.58.22+Rs.19.64 -do- 29,880 241.94 7,229,167.20 c) Loaned to others -Rs.156.22+Rs.7.86+Rs.58.22+Rs.19.64 -do- 10,052 241.94 2,431,980.88 6. LUMPY Loaned to Others Rs. 156.22+Rs.7.86+Rs.58.22+Rs.19.64 -do- 2,303 241.94 557,187.82 7. SCREENED FINES Rs. 156.22+Rs.7.86+Rs.58.22+Rs.19.64+Rs.57.50 Berth No. 9 40,400 299.44 12,097,376.00 8. LUMPY Rs. 156.22+Rs.7.86+Rs.58.22+Rs.19.64+Rs.57.50 Berth No. 9 4,000 299.44 1,197,760.00 Less: 1,871,030 321,046,763.94 9. LOANED BY OTHERS TO US Screened Fines (Net) Rs. 156.22+Rs.7.86+Rs.58.22+Rs.19.64+Rs.55.50 Berth No. 9 29,591 299.44 8,860,729.04 Lumpy (Net) Rs. 156.22+Rs.7.86+Rs.58.22+Rs.19.64+Rs.55.50 Berth No. 9 (539) 299.44 (161,398.16) Add: V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no. 10(b) to the Schedule XXIII we noted that the Assessee has already sold 108559 MT of ROM to M/s. Salitho Ores Ltd. and the balance quantity of 191321 MT has to be sold by the Assessee to the said company. Thus, the Assessee as on the date of the High Court order was not having 299880 MT of ROM and Assessee was having only 63300 MT of ROM. The balance quantity of ROM has to be sold by the Assessee and delivered at Vagus in convenient lots against the payment of the price in respect of each such lots. We also noted from the valuation of the iron ore stock that the Assessee has valued 191321 MT of ROM @ Rs. 53.35. The order of the Hon'ble Bombay High Court did not state that the Assessee has to segregate and keep the stock of this much ROM. Whenever the sales will take place, the Assessee has to account for it at the time in his books of accounts. In view of this fact, as found by us, we do not agree with the Assessee that the Assessee was continuously maintaining the ROM to that extent. Even if we accept the contention of the Assessee that the price as has been ordered by the Hon'ble Bombay High Court is the market price in respect of that part of the iron ore, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be regarded to have been incurred during the course of the business. 7. Now coming to the alternate plea of the assessee that opening stock of the impugned assessment year should also be re-valued on the basis at which the closing stock has been re-valued so as to ascertain the real profit chargeable to tax for the year under consideration. We have carefully considered the rival submissions in this regard and we noted that jurisdiction High Court in the case of Melmould Corporation vs CIT (Mum.) 202 ITR 789 even after considering the decision of the privy-council in the case of CIT vs Ahmedabad New Cotton Mills Co. Ltd., 4 ITC 245 (PC) took the view that the change has to be effective by adopting the new method for valuing the closing stock which will, in its turn, become the value of opening stock of the next year. If, instead, a procedure is adopted for changing the value of the opening stock also, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on. Similar view has been adopted by the Andhra Pradesh High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Counsel that the value of the closing stock of the impugned assessment year will become the value of the opening stock of the succeeding assessment year. Since the appeal before us relate to the assessment year 2006-07 our jurisdiction are limited to give the finding in respect of the ground of appeal relating to the impugned assessment year we cannot decide the grievance of the assessee relating to the assessment year 2007-08. This issue can be taken by the assessee during the assessment year 2007-08 in accordance with the law before the appropriate authorities. We therefore, dismiss this ground. ITA No. 207/PNJ/2013 12. The only issue involved in this appeal relate to not giving the consequential direction by the CIT(A) in confirming the addition in the closing stock as on 31.3.2006 in the assessment year 2006-07. On this issue we heard the rival submissions and carefully considered the same. We agree with the ld. Sr. Counsel that the closing stock of the preceding year will become the opening stock of the succeeding. The same view has been taken as referred to us by while disposing of the appeals for the assessment year 2006-07 by the Hon'ble Mumbai High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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