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2007 (4) TMI 725 - ITAT DELHI

2007 (4) TMI 725 - ITAT DELHI - TMI - IT APPEAL NOS. 220 AND 826 (DELHI) OF 2005 - Dated:- 27-4-2007 - Vimal Gandhi President, And R.C. Sharma, Accountant Member For the Appellant : P.N. Mehta For the Respondent : L.M. Pandey ORDER R.C. Sharma Accountant Member. - These are the cross-appeals filed by the assessee and Revenue against the order of Ld. Commissioner of Income-tax (Appeals)-XII, New Delhi dated 19-11-2004 for assessment year 2001-02, in the matter of order passed under section 143(3) .....

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e Income-tax Act 1961. 3. This first ground of revenue's appeal relates to deletion of disallowance of ₹ 1,02,62,333 being the expenditure on advertisement. The facts in brief are that the assessee had claimed advertisement expenses of ₹ 3,07,87,000. The Assessing Officer felt that this expenditure obtained for the assessee some element of enduring benefit with regard to enhancing its brand equity. This was contested by the assessee who relied on the judgment of the Supreme Court .....

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llowed assessee's claim of entire expenditure on advertisement as revenue, in nature. Aggrieved by the order of the CIT(Appeals), the revenue is in further appeal before us. 5. We have considered the rival contentions, carefully gone thorough the orders of the authorities below and found from the record that only plea taken by the Assessing Officer for disallowing part of advertisement expenditure was that assessee has got enduring benefit, he, therefore, disallowed 1/3rd of such expenditure .....

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production of C-TVs and, therefore, to meet the competition, the assessee was to advertise its products. Hon'ble Supreme Court in case of Empire Jute Co. Ltd. (supra) have categorically observed that there may be cases where the expenditure even if incurring for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the .....

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nd more profitably while leaving the fixed capital un-touch the expenditure would be on revenue account, even though the advantage may be enduring for an indefinite future. Applying this test to the facts of the instant case, we found that by incurring expenditure on advertisement, the assessee had not got any fixed capital assets, but the expenditure was for earning better profit and facilitating assessee's sales operation. The case laws relied on by the Assessing Officer are distinguishabl .....

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k not to grant any person any lease, permit or license of lime stone in a group of query without a condition that no lime stone should be used for the manufacture of the cement. The assessee also agreed to pay ₹ 35,000 annually for 5 years as a further production fee and the lesser in consideration of that payment gave similar undertaking in respect of the whole district. The question was whether in computing the profit of the assessee, the sum of ₹ 5,000 and ₹ 35,000 paid to t .....

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been incurred by way of sales promotion for increasing the turn over of the company resulting into more profit. Similarly, in case of Arvind Mills as relied on by the Assessing Officer, the betterment charges paid towards Bombay Town Planning Scheme whereby the assessee got betterment of the land and the value of the land increased. Hon'ble Supreme Court has held that the payments so made had no direct nexus with the day to day running of the business and, as a result of the payment of the .....

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ny would suffer. We, therefore, do not find any infirmity in the order of the CIT(Appeals) for allowing the entire advertisement expenditure as revenue expenditure. 6. Ground No. 2 of revenue's appeal reads as under : (2) On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of ₹ 10,61,000 made by the Assessing Officer on account of royalty without appreciating the full facts of the case as brought out by Assessing Officer in the assessment or .....

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and reflection yokes for colour TV. The royalty was to be paid @ 5 per cent on ex-factory sales price. The Assessing Officer observed that by way of such payment of royalty the assessee had derived enduring benefit in as much as it became entitled to the right to produce the components as aforesaid. Since payment was made in respect of a "right to produce" and not with respect to day to day production, the Assessing Officer treated this expenditure as capital expenditure and added bac .....

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ders, as well as referred by the learned AR and DR during the course of hearing before us, in the context of factual matrix of the case. From the record, we found that agreement with the Japanese companies was signed in 1986, and at that time a lump sum amount of US$2,00,000 was paid. This amount was capitalized by the assessee company itself in the assessment year 1987-88. In the subsequent years, starting from 1989-90, when the assessee commenced production, royalty was paid regularly at the r .....

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t. While disallowing assessee's claim, the Assessing Officer has relied on the decision of the Hon'ble Supreme Court in case of Gotan Lime Syndicate v. CIT [1966] 59 ITR 718, where the Hon'ble Supreme Court has held that the royalty payment constitute revenue expenditure, thus, the case laws rather supports the assessee's contention than the Assessing Officer. Similarly, in case of Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC), as relied on by Assessing Officer, the lumpsum .....

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IT(Appeals) for treating the royalty payment as revenue in nature. Moreover, in view of decision of Hon'ble Supreme Court in case of Radhasoami Satsang v. CIT [1992] 193 ITR 321, wherein it was held that even though the rule of doctrine of res judicate does not apply to the proceedings under the Income-tax Act, 1961, but at the very same time, it is equally true that unless there is a change of circumstances, the authorities will not depart from their previous decision at their sweet will in .....

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. With regard to disallowance of bad-debts written by the assessee, the revenue grounds reads as under : (3) On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of ₹ 41,26,603 and ₹ 37,50,495 made by the Assessing Officer on account of writing of irrecoverable advances to Shing Shung Textile Co. and Qualitron Components Ltd. respectively without appreciating the full facts as brought out by the Assessing Officer in the assessment order. Gr .....

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disallowance of irrecoverable advances written off, the facts in brief are that the Assessing Officer noticed from Schedule '5' to the profit and loss account that the assessee had debited this amount as irrecoverable advances written off in the final account under the head "manufacturing & other expenses". The details of the written off amount is as under : (a) Interest receivable from Shing Shung Textile Co. Ltd. for the financial year 1996-97, 1997-98 & 1998-99 S .....

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l year 1995-96 as interest bearing advance. The interest accrued on this amount of ₹ 1.50 crores was duly accounted for and offered for taxation in the three financial years, as aforesaid. When the amount of interest was not found by the assessee as recoverable, the same was written off under section 26(1)(ii). The Assessing Officer disallowed the same by relying on certain decisions. In the case of Hasimara Industries Ltd. v. CIT [1998] 231 ITR 842 (SC) relied upon by the Assessing Office .....

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of assessee's case are distinguishable. 14. By the impugned order, CIT(Appeals) allowed the deduction of impugned amount of interest under section 36(1)(vii). 15. We have considered the rival contentions and gone through the orders of the authorities below. In the instant case, the principal of ₹ 1.50 crores is not the amount in issue. This amount could be recovered by the assessee and, therefore, the question of writing off this amount did not arise, what has been written of is the i .....

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dvance was given in normal course of business, interest thereon offered as revenue receipt on accrual basis, non-recovery/receipt of interest in subsequent year amounts to business loss to be allowed under sec. 28 of the Income-tax Act, 1961. 16. With regard to the write off of ₹ 37,50,494 receivable from M/s. Qualitron Components Ltd., the facts are that the assessee company had made advances to M/s. Qualitron Components for the supply of picture tubes. The picture tubes supplied were not .....

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cumstances, M/s. Qualitron was not in the position to return this amount. The same was written off by the assessee in its books. 17. By the impugned order, CIT(Appeals) allowed assessee's claim under section 36(1)(vii) of the Act. 18. We have considered the rival contentions and found from the record that in respect of amount advanced, the hope of recovery was very slim, is not in doubt. However, the Assessing Officer has considered that the amount advanced by the assessee company to M/s. Qu .....

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hares held by this director represented only 2 per cent of the voting power in M/s. Qualitron. Thus, there was no substantial interest of a director of the assessee company in M/s. Qualitron Components Ltd. Under these circumstances, the provisions of section 40A(2)(B) are not attracted to the facts of the case. Further, regarding the issue as to whether the write-off represents a revenue item or a capital loss, what has to be considered is the nature of the transaction. Here, the assessee compa .....

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facts and circumstances, we do not find any infirmity in the orders of the CIT(Appeals) for deleting the disallowance of bad debts as claimed by the assessee. 19. With regard to short receipt of duty draw-back, we found that the assessee was entitled to receive duty draw back from the Government on exports made by it during earlier years. The assessee company accordingly treated the receivable amount as income under section 28(iii)( c). However, subsequently, the government reduced amount of du .....

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f the licenses for taxation in financial year 1999-00 relevant to assessment year 2000-01. The special import licenses specified a cut-off date by which the imports are to be effected. The assessee could utilize only part of its entitlement and a certain portion amounting to ₹ 4,13,661 remained unutilized. This unutilized portion has now been written off, having been already taxed in the earlier years. 20. In view of the above facts and circumstances, the duty draw back received in short w .....

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possibility of receiving any benefit under these licenses. Thus, the amount was written off having already suffered tax on the full amount in earlier years on accrual basis. As per our considered view, it was a business loss to the assessee and are of revenue nature. The disallowance of this amount was thus correctly deleted by the CIT(Appeals). 21. With regard to disallowance on account of bad debts written off amounting to ₹ 45,54,907 in respect of 24 parties, we found that during the co .....

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of the proceedings that the settlement was made for certain claims of the parties and this amount was allowed to them in the form of discount/special incentive as they had represented to the assessee company that they had incurred the expenditure on certain advertisement and other items. But as the amount of claim made by these parties did not relate to the year under consideration, the amount was treated in the nature of bad debts and were written off as bad debts, with regard to the amount out .....

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not be traced the amount was written off as bad debt. The CSD canteen had informed the assessee company that the amount were paid to their agent Salora Valley Vision and therefore, they refused to pay the amount. The Assessing Officer objected to the writing of amount receivable from the Army. He, therefore, disallowed the same. 22. By the impugned order, the CIT(Appeals) observed that as per the amended provision of section 36(1)(vii), the assessee is entitled to claim the amount as bad debt. 2 .....

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unt so written off, is required to be allowed as bad debts or as business loss, in so far as the assessee had taken all the measures to recover the same but the same could not be recovered. 24. With regard to writing off ₹ 88,800 in respect of small balance of 97 parties, which were basically in the nature of short recovery of billed amount. We found that parties have paid the bill after deducting some amount attributable to specific defect in the TV sets sold to them, the short recovery m .....

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in future. We do not find any infirmity in the order of CIT(Appeals) for allowing claim of bad debts amounting to ₹ 20,90,073 in respect of these parties, which were already offered as income in earlier years. 26. In respect of a sum of ₹ 12,72,922, the Assessing Officer observed that no details were filed. It was explained before the CIT(Appeals) that most of the details as called were duly filed before the Assessing Officer and some details were in the process of compilation, ther .....

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ues received from these parties were dishonoured and payments were made in parts. After taking all efforts, the assessee written off on the last date of the accounting year. We have considered the rival contentions. As all the conditions prescribed for allowing bad debts under section 36(1)(vii) have been satisfied and necessary finding to this effect has also been recorded by the CIT(Appeals), we do not find any reason to interfere in his order for deleting the disallowance of ₹ 12,72,922 .....

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as filed against them. As a result of the police action, recovery of a substantial amount could be effected. However, ₹ 2,46,467 could not be recovered. It is this amount which was claimed as a business loss on account of embezzlement. The two employees were working as a manager and show room in-charge at the assessee's Jaipur Shor-Room. Both had been working there for the last 10 years or so. They occupied positions of responsibility and trust. Reliance upon trusted employees is norma .....

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al course of the assessee's business activity. In view of the decision of the Hon'ble Supreme Court in case of Badridas' Daga v. CIT [1958] 34 ITR 10 and Associated Banking Corpn. of India v. CIT [1965] 56 ITR 1(SC), we do not find any infirmity in the action of the CIT(Appeals) for allowing the assessee's claim of embezzlement loss. 29. Ground taken by the assessee with regard to disallowance of expenses reads as under : The Commissioner (Appeals) is wrong is disallowing ₹ .....

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years to which these were pertained. After allowing deduction of a sum of ₹ 26,848 representing sales tax paid during the year under section 43-B, the CIT(Appeals) confirmed the balance addition of ₹ 2,61,470. Aggrieved by the same, the assessee is in appeal before us. 32. We have considered the rival contentions, carefully gone thorough the details of expenses claimed in the books of account. We found that bills with regard to these expenses were received by the assessee after the .....

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7; 2,61,410. 33. Ground taken by the revenue with regard to computation of total turnover for calculating deduction under section 80HHC reads as under: "On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing the Assessing Officer not to include the amount of excise duty in total turnover while calculating the quantum of deduction under section 80HHC." 34. This grievance of the revenue relates to computation of total turn over while working out deduction un .....

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003] 132 Taxman 7. It was observed by the Hon'ble Court that sales tax and excise duty collected by the assessee is not income and the same is collected in a fiduary capacity payable to the state, therefore, does not form part of total turn over. Respectfully following these decisions, we confirm the action of the CIT(Appeals) for exclusion of excise duty from total turn over while working out deduction under section 80-HHC of the Act. 36. Ground taken by the revenue with regard to disallowa .....

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ircumstances of the case the Commissioner (Appeals) is wrong in disallowing exchange difference of ₹ 1,92,000 1.1 The appellant company took short term working capital loan against foreign currency demand loan from State Bank of India, New Delhi and the exchange fluctuation was paid to the same bank, therefore, the short term working capital loan was a current liability and the loss suffered is a revenue loss and not a capital loss as held by the Commissioner (Appeals)." 38. This issu .....

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due to foreign exchange rate fluctuation. In addition, it also suffered loss of ₹ 1,92,000 on exchange rate variation in respect of working capital loan taken abroad for US$9,75,000. The net effect was a loss of ₹ 53,99,000 which was charged to revenue account. The Assessing Officer has treated the net amount as a capital loss and accordingly disallowed the same. 39. By the impugned order, the CIT(Appeals) held foreign exchange loss attributable to import of raw materials amounting .....

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decision of the Hon'ble Supreme Court in case of Satluj Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. We, therefore, do not find any infirmity in the order of the CIT(Appeals) for treating such loss as revenue in nature. With regard to loss on account of repayment of working capital, we found that assessee was required to pay more to the bank on account of exchange rates fluctuation adversely effecting the total sum which was required to be paid. Even though the excess sum paid due to exchanged .....

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d due to exchanged fluctuations was attributable to the trading loss. We, therefore, do not find any merit in the action of the CIT(Appeals) for disallowing a sum of ₹ 1,92,000 attributable to repayment of working capital. 41. Ground taken by the revenue with regard to under valuation of stock reads as under : "On the facts and in the circumstances of the case, the Ld. CIT(A) erred in. deleting the addition of ₹ 36,33,433 made by the Assessing Officer on account of under valuati .....

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taled and components were used for servicing and repair, remaining items were sold as scrap, income of which was offered for taxation and the balance amount was written off on account of valuation of closing stock. The Assessing Officer did not accept the assessee's contention and he made an addition of ₹ 36,33,433 on account of under valuation of closing stock. 43. By the impugned order, CIT(Appeals) deleted the addition by observing that number of defective sets as a proportion of to .....

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e on the last day of the accounting period. However, in this particular year, for the first time, a quality audit of inventory was also conducted whereby it was revealed that the number of defective sets was in fact much larger than expected. It is not the case that all these defective sets were produced only during this year. They were lying in stock and were carried forward from the previous years and remained unsold. They were counted as good sets and valued as such. To that extent, the closi .....

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mparing the number of defective sets, we found that it was a negligible percentage of 0.47 per cent of total production. 45. In view of the above, we do not find any infirmity in the order of the CIT(Appeals) for deleting the addition of ₹ 36,33,433 on account of under valuation of closing stock. 46. Ground taken by the revenue and assessee for disallowance under section 43B reads as under : "On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addit .....

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The Commissioner (Appeals) is wrong in disallowing ₹ 1,58,179 on account of ESI contribution under section 43B of the Income-tax Act." 47. With regard to disallowance of PF and ESI under section 43-B, we found that the PF contribution which were made within the grace period, were directed to be allowed by the CIT(A) which amounted to ₹ 26,66,559. However, in respect of contribution of ₹ 1,58,179, which was even not paid within the grace period, the same were confirmed by t .....

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EC's circular No. E-128(1)60-IV Central Board of Trustees "that if the payment was made within the grace period already allowed by it, then such payments should not be counted as defaults even for the purpose of counting the number of defaults. 49. Stroud's judicial Dictionary (3rd edition) states in connection with "Days of Grace" that a right of action does not accrues until after the expiration of the whole of the last days of grace, Venkataramaiya's law lexicon wit .....

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. Hence, the five days period of grace after 15th for the succeeding month to be considered merely as an extension of the 15 days & all consequences of making payment within 15 days should be considered to made the payment within due date. The explanation to clause (va) of section 36(1) again define "due date" rather in vague way to "mean the date by which the assessee is required to make the payment in accordance with the relevant act, rule, order or notification or even any .....

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le Madras High Court in case of CIT v. Saluem Co-operative Spg. Mills Ltd. 258 ITR 360 and Rajasthan High Court in case of CIT v. Ram Singh Garg [2002] 256 ITR 131 have held that no disallowance is to be made if the payment of PF is within the grace period of 5 days, after the last date prescribed under the PF Act. 51. In view of the above discussion, we do not find any infirmity in the order of the CIT(Appeals) for directing the Assessing Officer to allow claim of deduction in respect of paymen .....

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hand, the learned DR relied on the order of lower authorities. 53. With regard to disallowance on account of employer and employees contribution, recently, order of the Hon'ble Madras High Court in the case of CIT v. Synergy Financial Exchange Ltd. [Tax Case Nos. 250 and 251 of 2000, dated 25-7-2006] have dealt with the issue in great detail, wherein after discussing various decisions of the High Courts, it was held that contribution to the PF, if not actually paid before the due date prescr .....

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ur Distillery Co. Ltd. [2005] 274 ITR 429, Hon'ble Calcutta High Court in case of CIT v. Sudero Services (P.) Ltd. [2004] 268 ITR 505, Halmira Estates Tea (P.) Ltd. v. CIT [2004] 268 ITR 498, Hon'ble Kerala High Court in case of CIT v. Standard Tile & Clay Works (P.) Ltd. [2004] 265 ITR 525, Hon'ble Madras High Court in case of CIT v. Madras Radiators & Pressing Ltd. [2003] 129 Taxman 709 were discussed in detail and after relying on the decisions of Sedco Forex International .....

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to the impugned deletion so as to make it applicable to the assessment year 1994-95. 55. After discussing all these decisions, Hon'ble Madras High Court finally concluded that delay \n payment of PF etc. is to be disallowed under section 43-B. Respectfully following the judgment of the Hon'ble Madras High Court, ground relating to payment of PF contribution even beyond the grace period, are decided in favour of the revenue and against the assessee. 56. In view of the above, we confirm t .....

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and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of ₹ 25,29,431 made by the Assessing Officer on account of expenditure being amortised without appreciating the full facts of the case as brought out by Assessing Officer in the assessment order." 58. This grievance of the revenue relates to deletion of disallowance of ₹ 25,29,431 on account of expenditure amortized during the year. Facts in brief are that during the year, a sum of ₹ 31,61, .....

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back to the income. 59. By the impugned order, CIT(Appeals) allowed the assessee's claim by following the ratios laid down by the Hon'ble Supreme Court in case of Empire Jute Co. Ltd. (supra). 60. We have considered the rival contentions and found from the record that the nature of services provided by Eicher was related to the reorganization of the staff and redrawing of line of responsibility which amounts to an internal improvement in the working method. There is no element of capital .....

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