TMI Blog2017 (1) TMI 1608X X X X Extracts X X X X X X X X Extracts X X X X ..... owance of Lease Rent - sale and lease back transaction - AO observed that, sale and lease back transaction with Arvind Mills Ltd. was nothing but a financial transaction and accordingly lease rentals constituted capital payment and hence not allowable. - Held that:- following the earlier decision of tribunal, deduction allowed - Decided in favor of assessee. Enhancement of the income out of Lease Rent expenses payable to ICICI - Method of accounting - Claiming of expenditure of ₹ 7,84,86,179/- in the Income Tax Return - The assessee strongly contended that the company had incurred expenditure on lease rental, legal and consultancy fees and retrenchment compensation which is enduring benefit and, therefore, it has been treated as deferred revenue expenditure to be written off in subsequent years and an amount of ₹ 1,87,03,288 has been debited to the Profit and Loss account of the year under consideration. - Held that:- Considering the aforementioned ratios laid down by the Hon’ble Supreme Court and the Hon’ble Jurisdictional High Court, in our considered opinion, whatever expenditure has been accrued during the year under consideration has to be allowed to be writte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that this issue has been examined in detailed in the order for A.Y. 1994-95 wherein it was held that sale and lease back transaction with Arvind Mills Ltd. was nothing but a financial transaction and accordingly lease rentals constituted capital payment and hence not allowable. Taking a leaf out of the findings given in earlier assessment years, the A.O. disallowed the principal repayment and sales- tax thereon amounting to ₹ 1,30,36,117/-. 6. Assessee carried the matter before the ld. CIT(A) who dismissed the appeal of the assessee following the finding given in A.Y. 1994-95. 7. Before us, the ld. counsel for the assessee drew our attention to the decision of the Tribunal in ITA No. 1800/Ahd/2009 for A.Y. 1994-95 and pointed out that the Tribunal has restored the issue to the files of the ld. CIT(A) with a direction to decide the same afresh. 8. After giving a thoughtful consideration to the facts in issue and considering the decision of the Co-ordinate Bench (supra), we find that this issue was considered by the Co-ordinate Bench at Para 8 of its order and the relevant findings of the Co-ordinate Bench reads as under:- 10. We have considered rival submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 782891/- in respect of expenditure deferred in the books of accounts but claimed as revenue expenditure was disallowed. 13. Assessee carried the matter before the ld. CIT(A) and reiterated its claim. 14. After considering the facts and the submissions and after perusing the assessment order, the First Appellate Authority issued a notice of enhancement. Assessee strongly objected to the enhancement notice issued by the ld. CIT(A). 15. After considering the detailed submissions made by the assessee, the ld.CIT(A) observed as under:- In the case of appellant the lease agreement have been entered into and lease rentals have been fixed in such a manner that in initial 4/5 years abnormally high lease rents are paid and for the remaining 25 years the lease rents are nominal. Hence these high lease rentals in initial years has been paid to secure a business advantage for a much longer period of 29/30 years. The note regarding average annual rent as pointed out also prove this point. Thus in view of decision of the apex court it is apparent that lease rentals have to be spread over the entire period of existence of lease and every year lease rentals have to be allowed only to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of ₹ 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the asses see has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminum Corporation Ltd. v. CIT [1982] 30 CTR (Cal) 363; [1983] 144 ITR 474 (Cal), the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee Kedarnath Jute Manufacturing Co. Ltd. v. CIT 1971] 82 ITR 363 (SC) ; [1972] 3 SCC 252; Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT1997] 227 ITR 172 (SC) ; [1997] 6 SCC 117; Sutlej Cotton Mills Ltd. v. CIT 1978] 4 SCC 358 ; [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355 (SC); [1999] 8 SCC 338. 19. At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage inasmuch as in the Income-tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of section 36(l)(iii) of the Act. Once a return in that manner was filed, the Assessing Officer was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppels against the statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed. 20. In view of the aforesaid discussion, we are of the opinion that the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore needs no separate adjudication. 24. Ground no. 4 relates to not allowing ₹ 1,86,961/- being amount disallowed under Rule 6D of the Income Tax Rules. 25. An identical issue was considered by the Tribunal in assessee s own case in ITA No. 2782/Ahd/2002 for A.Y. 1997-98 qua ground no. 4 of that appeal. The relevant part reads as under:- 3. The fourth ground relates to the disallowance of ₹ 33,198/- under Rule 6D of the IT Rules. In para-5 of the assessment order, the AO invoked the judgment of the Andhra Pradesh High Court in CIT Vs. Coramandel Fertilizers Ltd., (1996) 220 ITR 298 to disallow the aforesaid amount. Rule 6D provides for the disallowance of travelling expenses. In the return the assessee computed the disallowance by taking into consideration all the trips undertaken by a person during the relevant accounting year. The AO however enhanced the disallowance by a further sum of ₹ 33,198/- by calculating the amount allowable on the actual number of days travelled by the employee during each trip. The disallowance made by the AO was challenged before the CIT(A) and it was contended that the order of the Tribunal in the assessee's own case was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stock amounting to ₹ 55,73,818/-. 31. At the very outset, the ld. counsel for the assessee stated that this issue is now squarely covered in favour of the assessee and against the revenue by the decision of the Hon ble Bombay High Court in the case of Melmould Corporation 202 ITR 789. The ld. D.R. fairly conceded to this. 32. We have carefully considered the facts in issues qua the decision of the Hon ble Bombay High Court (supra), the relevant part of the Hon ble High Court reads as under:- Whenever there is a change in the method of valuation, there is bound to be some distortion in the calculation of profit in the year in which the change takes place. But if the change is brought about bona fide and is in accordance with the normally accepted accounting practice, there is no reason why such a change should not be permitted. Undoubtedly, the proviso to section 145 of the Income- tax Act, 1961, lays down that : Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of Assessing Officer, the income cannot properly be deduced therefrom, then the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplained that the assessee has capitalized the interest in the books of accounts according to its accounting policy and accounting treatment given by the assessee and it is as per the method of accounting regularly followed by the assessee. The A.O. was of the firm belief that in view of the correct accounting treatment, the claim of the assessee is not acceptable. The A.O. accordingly disallowed ₹ 1,62,21,881. 38. Assessee carried the matter before the ld. CIT(A) and reiterated its claim. 39. After considering the facts and the submissions and drawing support from the decision of Hon ble Jurisdictional High Court in the case of Core Healthcare Ltd. 251 ITR 194. The ld. CIT(A) deleted the additions/disallowance. 40. Before us, the ld. D.R. could not bring any distinguishing decision in favour of the revenue. We find that an identical issue was considered by the Co- ordinate Bench in assessee s own case in ITA No. 1800/Ahd/1999 for A.Y.1994-95. The relevant findings of the Co-ordinate Bench reads as under:- 4. We have considered rival submissions and have perused the orders of the AO and the CIT(A). We find that the CIT(A) has passed O a well reasoned order on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly and the ground no. l is accordingly disposed of. 41. Respectfully following the findings of the Co-ordinate Bench, we decide accordingly. 42. Ground no. 4 relates to the deletion of the disallowance of ₹ 16,89,379/- being accrued liability in respect of premium @ 5% payable at the time of redemption of non convertible debenture. 43. An identical issue was considered by the Tribunal in assessee s own case in ITA No. 2311/Ahd/1999 for A.Y. 1995-96 qua ground no. 1 of that appeal. The relevant findings of the Tribunal reads as under:- 22. The ground no.l of the Revenue's appeal reads as under: 1. The ld.CIT(A) has erred in law and on fats in deleting the disallowance of provision made amounting to ₹ 16,98,7397- in respect of accrued liability in respect of premium payable at the time of redemption of non-convertible debenture. 23. The learned DR relied on the order of the AO. The learned counsel for the assessee submitted that the issue of accrued liability of premium payable at the time of redemption of non-convertible debenture is covered with the decision of the Hon'ble Apex Court in the case of Madras Industrial Investment Corporation Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount in question is provision for interest liability on central excise refund. In reply to specific query from the Bench that whether the amount has been taxed in a latter year, if the provisions of Section 41(1) of the Act applies in the case of the assessee, no definite and clear answer could be given on behalf of the assessee. In these facts and circumstances of the case, we consider it reasonable to set aside the issue to the file of the CIT(A) to verify by calling for a report from the AO, the relevant facts and then to decide the same afresh in accordance with law after allowing due opportunity of hearing to both the sides. We direct accordingly. 47. Respectfully following the findings of Co-ordinate Bench (supra), we direct accordingly. 48. Ground no. 6 relates to the deletion of the disallowance of ₹ 52,50,000/- for power expenses of earlier years. 49. While scrutinizing the return of income, the A.O. noticed that the assessee has claimed power expenses of ₹ 52,50,000/- pertaining to earlier years. The assessee was required to explain as to how this claim was admissible during the year under consideration. The assessee replied that Gujarat Electricity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport of the case of the Revenue. He relied on the decision of the Hon'ble Delhi High Court in the case of Punjab Stainless Steel Inds. Vs Commissioner of Income-tax, 324ITR 396 (Delhi). He relied on the order of the AO. The learned counsel for the assessee submitted that the amount of interest of ₹ 80.24 lakhs relates to parties viz. Amir Trading Co. and Gujarat Synthood Ltd.( GSL for short). He submitted that with regard to first party, M/s. Amir Trading Co., the same was not a case of loss of money advanced to them by the assessee-company, but in fact are outstanding in respect of shares sold by the assessee to Amir Trading Co., and therefore no case for disallowance out of interest payment was made out by the Revenue. With respect to the second party, M/s. Gujarat Synthood Ltd., the learned counsel for the assessee submitted that initially the money was advanced on interest bearing loan at the rate of 17% per annum and the interest was taxed in the relevant years as business income of the assessee. Subsequently, the GSL became sick and as a matter of commercial expediency, the assessee-company stopped charging interest since common financial institutions were lendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.O. noticed that the assessee has claimed debenture issue expenses of ₹ 4,38,397/- as deductible revenue expenditure in the statement of total income although these expenses are debited to the share premium account. The A.O. was of the opinion that since the assessee has given an accounting treatment whereby the expenses are treated as capital expenses. Therefore, the assessee cannot be allowed to depart from this accounting treatment in its computation of total income. The A.O. accordingly made the disallowance. 58. Assessee carried the matter before the ld. CIT(A). The ld. CIT(A) was convinced that entries in books of accounts could not determine the deductibility of an expenditure and it is to be governed by provisions of law. The ld. CIT(A) was of the opinion that expenditure incurred on issue of debenture is an allowable expenditure in view of decision of the Apex Court in the case of India Cements. The ld. CIT(A) accordingly deleted the disallowance made by the A.O. 59. Before us, the ld. D.R. could not point out any fallacy in the findings of the First Appellate Authority. There is no dispute that accounting entries cannot decide the liability on otherwise of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the appeal filed by the Revenue is partly allowed. 67. Ground no. 1 relates to the disallowance of provision for bad debts amounting to ₹ 3.77 lacs. 68. While scrutinizing the return of income, the A.O. noticed that the assessee has made provision for doubtful advances of ₹ 3.77 lacs and has claimed the same. Drawing support from the provision of section 36(1)(vii), the A.O. was of the opinion that no provision for doubtful debt is allowable. Accordingly, ₹ 3.77 lacs were disallowed. 69. Assessee carried the matter before the ld. CIT(A) but without any success. 70. After hearing the rival submissions, we find that the lower authorities have simply disallowed the provision without going much further. In our considered opinion, if the provision is reduced from the asset side of the balance sheet then it fulfills the requirement for the claim as bad debts. Further, the A.O. has nowhere mentioned whether the assessee fulfills the condition of section 36(2) of the Act. In the interest of justice and fair play, we restore this issue to the files of the A.O. The A.O. is directed to verify whether the provision is reflected on the liabilities side of the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deletion of the addition of ₹ 6,46,24,799/- being deferred revenue expenditure. 81. An identical issue has been considered by us in ITA No. 939/Ahd/2002 qua ground no. 2 of that appeal for A.Y. 1996-97. For our detailed discussion therein, we decide accordingly. 82. Ground no. 2 relates to the deletion of interest expenditure of ₹ 1,92,50,548/- incurred on purchase of plant machinery of existing business. 83. An identical issue has been decided by us in ITA No. 1093/Ahd/2002 for A.Y. 1996-97 (supra). For our detailed discussion therein, we decide accordingly. 84. Ground no. 3 relates to the deletion of ₹ 16,99,379/- being provision made in respect of premium payable on redemption of debenture. 85. An identical issue has been decided by us in ITA No. 939/Ahd/2002 qua ground no. 4 of that appeal. For our detailed discussion therein, we hold accordingly. 86. Ground no. 4 relates to the deletion of ₹ 72,27,981/- being interest expenditure on outstanding loans/advances to subsidiary companies and jointly promoted companies. 87. An identical issue has been decided by us in ITA No. 939/Ahd/2002 qua ground no. 7 of that appeal (supra). For ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur considered opinion, the amount of 33.06 crores received in consideration of non-compete agreement has to be treated as capital receipt. The Hon ble Supreme Court in the case of Guffic Chemicals Pvt. Ltd. 332 ITR 602 has held and the relevant part reads as under:- 5. The position in law is clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/restrictive covenant is a capital receipt. 6. The above dichotomy is clearly spelt out in the judgment of this court in Gillanders' case (supra) in which the facts were as follows. The assessee in that case carried on business in diverse fields besides acting as managing agents, shipping agents, purchasing agents and secretaries. The assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an agreement which was, terminable at will the assessee acted as a sole agent of explosives manufactured by Imperial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from April 1, 2003. Hence, the said section 28(va) is amendatory and not clarificatory. Lastly, in CIT v. Rai Bahadur Jairam Valji reported in [1959] 35 ITR 148 it was held by this court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both the Commissioner of Income-tax (Appeals) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business ; that payment was received under the negative covenant and therefore the receipt of ₹ 50 lakhs by the assessee from Ranbaxy was in the nature of a capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under noncompetition agreement with effect from April 1, 2003. 8. For the above reasons, we set aside the impugned judgment of the Karnataka High Court dated October 29, 2009, and restore the order of the Tribunal. Consequently, the civil appeal filed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld D.R. strongly supported the findings of the revenue authorities. 103. We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that while taxing the Insurance Claim as short term capital gain. The A.O. has also made a passing reference to its taxability u/s. 41 of the Act. Although the First Appellate Authority has decided the taxability under head capital gains in favour of the assessee. He has not commented upon the taxability u/s. 41 of the Act. A perusal of the order of the authorities below do not show whether the damages have been charged to the Profit and Loss account or not. There is no reference to that effect in the orders of the authorities below. If the assessee has claimed the damages due to wind storm and charged the same to its profit and loss account then any claim received from the Insurance claim shall be deemed to be profit and gains of business or profession and accordingly chargeable to Income Tax as the income of that previous year. Therefore, to this limited extent, we restore this issue to the files of the A.O. The A.O. is directed to verify whether the damages/repairs and maintenance to the damaged m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decline to interfere. Ground no. 3 is accordingly dismissed. 108. Ground no. 4 relates to the confirming the decision of the A.O. that Insurance Compensation received will go to reduce the Written Down Value of the block. 109. As discussed elsewhere, the assessee has received Insurance Claim on the damage of its wind mill/wind turbine due to wind storm. The A.O. noticed that the assessee company has reduced the WDV of plant and machinery by the amount of Insurance Claim received. However, during the course of the assessment proceedings, the assessee claimed that it has wrongly reduced the WDV of plant and machinery and requested the A.O. to enhance its claim of depreciation. This request was declined by the A.O. Who did not allow the claim of enhanced depreciation. 110. Assessee carried the matter before the ld. CIT(A) but without any success. 111. Before us, the ld. counsel for the assessee reiterated its claim of enhancement of depreciation. It is the say of the ld. counsel that the assessee has wrongly reduced the Insurance Claim from the WDV of the plant and machinery and, therefore, should be allowed depreciation without reducing the same. Per contra, the ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t provision (supra), we do not find any merit in the claim of the assessee. Therefore, we decline to interfere. We hold accordingly. 115. In the result, the appeal filed by the Assessee is partly allowed. 116. Ground no. 1 relates to the deletion of the addition on account of deferred revenue expenses of ₹ 15.96 crores. 117. An identical issue has been decided by us in ITA No. 1093/Ahd/2002 (supra) for A.Y. 1996-97. For our detailed discussion therein, we decide accordingly. 118. Ground no. 2 relates to the deletion of the addition made on account of interest expenditure capitalized on plant and machinery. 119. An identical issue has been decided by us in ITA No. 939/Ahd/2002 for A.Y. 1996-97 qua ground no. 3 of that appeal. For our detailed discussion therein, we decide accordingly. 120. Ground no. 3 relates to the deletion of the addition made on account of premium payable on redemption of debenture. 121. An identical issue has been decided by us in ITA No. 939/Ahd/2002 for A.Y. 1996-97 qua ground no. 4 of that appeal. For our detailed discussion therein, we decide accordingly. 122. Ground no. 4 relates to the deletion of the addition made on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not disputed that the parts were never consumed for the routine maintenance of the plant; we find that the A.O. has simply made the disallowance on the basis of earlier act of capitalization of the assessee. In our considered opinion, the ld. CIT(A) has rightly followed the ratio laid down by the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd (supra) in allowing the claim of the assessee. We, therefore, do not find any reason to interfere with the findings of the ld. CIT(A). Ground no. 5 is accordingly dismissed. 129. Ground no. 6 relates to the deletion of the addition made on account of short term capital gain of ₹ 2.91 crores. 130. This issue has been elaborately discussion by us in ITA No. 3838/Ahd/2002 for A.Y. 1999-2000 qua ground no. 2 of that appeal. For our detailed discussion therein, we decide accordingly. 131. Ground no. 7 relates to the recalculation of book profit. u/s. 115JA. 132. The A.O. noticed that the assessee has computed income under provisions other than section 115JA as per the published accounts. However for computing the book profit, it has ignored the published accounts and prepared entirely new Profi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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