Stamp duty used while VRS employees is duductible as Revenue Expenses

1. These cross appeals are directed against separate orders of the CIT(A) relating to the assessment years 1998-99 and 1999-2000, respectively. The appeals arise out of the assessments made under section 143(3) of the Income tax Act, 1961. As they involve some common issues, they were heard together and are being disposed of by this common order for the sake of convenience.

2. The assessee has filed charts in respect of individual appeals as well as paper books, which have been taken into consideration while disposing of the appeals.

3. Ground No.1 relates to the decision of the CIT(A) disallowing the deduction of Rs.  18,01,43 1 of pro-rata premium on leasehold land.

4. Learned representatives fairly agree that this issue stands covered against the assessee on identical facts by the orders of the Tribunal in assessee’s own case for the assessment years 1989-90 to 1997-98. Copies of these orders have been placed on record. In view of this and respectfully following the orders of the Tribunal, we uphold the order of the CIT (A) in disallowing the deduction of Rs. 18,01,341 on pro-rata premium on leasehold land.

5. This ground is thus dismissed.

6. The second ground is an alternate ground to the one considered above, wherein, the argument of the assessee is that the entire premium needs to be considered as cost of building and plant so as to allow depreciation thereon. Since the issue is considered against the assessee in ground No.1, accordingly, this ground is also dismissed.

7. Ground No.2 is thus dismissed.

8. Ground No.3 relates to disallowance of license and process technology fees of Rs. 7,92,00,396. This ground was not pressed, therefore, same is dismissed as not pressed.

9. In Ground No.4, the assessee is aggrieved by the CIT (A)’s action in not allowing Rs. 1,00,83,271 claimed by the assessee towards cost of catalyst issues.

10. Facts in brief are that during the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction of Rs. 1,00,83,271 on the new method which was not allowed by the Assessing Officer in full. The view taken by the AO was upheld by the first appellate authority.

11. Before us, it was argued that on similar issue in assessee’s own case for the assessment years 1987-87 to 1997-98, the matter has been restored back to the file of the Assessing Officer with directions to re-compute the profits in accordance with the old method followed by the assessee. Since, there is no change in the facts in the current year, respectfully following the orders of the Tribunal; we also restore this issue to the file of the Assessing officer with the same directions as were given by the Tribunal in the years cited before us.

12. Ground no. 4 is thus allowed for statistical purposes.

13. Ground No.5 & 6 is against confirmation of disallowance of Rs. 17,29,454 being prior period expenditure.

14. We find that similar issue had come up for consideration before the Tribunal in assessee’s own case for the assessment years, 1991-92 , 1996-97 and 1997-98, wherein, the same has been decided in favour of the assessee by the Tribunal. Since in the year under consideration, there is no change of facts, respectfully following the earlier orders of the Tribunal, we decide the issue in favour of the assessee with the direction to the Assessing Officer to ensure that no double deduction is allowed. Subject to this remark, Ground No.5 & 6 is allowed.

15. Ground No.7 is against CIT (A)’s confirming the disallowance of over-riding commission of Rs. 35,07,321 paid to Neeraj Consultants.

16. Facts in brief are that during the course of assessment proceedings, the Assessing Officer noticed that the assessee had paid Rs. 35,07,321 to Neeraj Consultants Ltd., towards overriding commission. In the course of assessment proceedings, the assessee was unable to produce any evidence to show that Neeraj Consultants Ltd has rendered any service to the assessee. It was in this backdrop, the Assessing Officer disallowed the expenses of Rs. 35,07,321. The action of the Assessing Officer was also upheld in the first appeal. Aggrieved, the assessee is in appeal before us.

17. Learned representative fairly agree that this issue is covered against the assessee by the decision dated 28^th January, 2011 of a co-ordinate Bench of this Tribunal in assessee’s own case for the assessment year 199 7-98, copy of which is placed on record. We, therefore, confirm the disallowance made by the authorities below.

18. Ground No.7 is thus dismissed.

19. Ground No.8 & 9 is against confirmation of disallowance of expenditure of Rs. 17,58,270 incurred on purchase of property time share in a holiday resort. Both the grounds were not pressed, therefore, dismissed as not pressed.

20. Ground No.10& 11 is against CIT(A)’s confirming the disallowance for the loans and advances of Rs. 2,50,000 given to Samarat Housing and Leasing written off during the year.

21. Learned counsel for the assessee fairly agrees that the ld CIT (A ) has been quite fair in reducing the quantum of disallowance to Rs. 2,50,000 out of Rs. 50,18,059. He, accordingly, did not press this ground. In view of this, Ground No.10& 11 is dismissed as not pressed.

22. Ground Nos.12 to 14 relate to confirmation of disallowance of expenditure of Rs. 87,14,824 were not pressed, therefore, same are dismissed as not pressed.

23. Ground No.15 relates to the disallowance of fees of Rs. 3,65,51,614 paid for restructuring the assessee’s business.

24. Having considered the rival contentions and having perused the material on record, we find that the CIT (A) has merely followed the decision for the assessment years 1993-94 to 1997-98. However, the Tribunal has reversed the order of the CIT(A) and accepted the grievance of the assessee for the above years. Since, there is no change in facts in the year under consideration, respectfully following the same, this ground is allowed.

25. Ground No.16 relates to disallowance of consultancy and advisory fees of Rs. 1,50,000 for modernization project.

26. Having considered the rival contentions and having perused the material on record, we find that the CIT (A) has merely followed the decision for the assessment years 1993-94 to 1997-98. However, the Tribunal has reversed the order of the CIT(A) and accepted the grievance of the assessee for the above years. Since, there is no change in facts in the year under consideration, respectfully following the same, this ground is allowed.

27. Ground Nos.17 to 23 are consequential in nature and does not call for specific adjudication.

28. In the result, appeal is partly allowed.

29. Now we take up revenue’s appeal for the assessment year 1998-99 in ITA No.3677/M/03:

30. In Ground No.1, the Assessing Officer is aggrieved the CIT (A)’s deleting the disallowance of Rs. 1,86,52,315 being interest on advance made to M/s. Orbit Finance Ltd & other parties.

31. Having considered the rival contentions and having perused the material on record, we find that the Assessing Officer has disallowed notional interest paid on advance to Orbit Finance but the CIT (A) deleted the disallowance following the decision of his predecessor for the assessment years 1993-94 to 1997-98. The orders of the CIT (A), has since been upheld by the Tribunal deleting the disallowance. In view of this, respectfully following the decision of the Tribunal (supra), we uphold the order of the CIT (A) and decline to interfere.

32. Ground No.1 is thus dismissed.

33. In Ground No.2, the revenue has taken the following grievance:

“On the facts and in the circumstances of the case and in law, the CIT (A) erred in deleting the disallowance of Rs. 13,17,81,278 in respect of interest on capital work in progress, ignoring the fact that the funds invested (assets) were not immediately used for the existing business of the assessee and, therefore, the interest attributable to such investment could not be allowed as revenue expenditure out of the income of the existing business of the assessee.”

34. Having considered the rival contentions and having perused the material on record, we find that this issue is covered against the revenue by the decision of the Tribunal in assessee’s own case for the assessment years 1992-93 to 1997-98. Respectfully following the same, this ground is dismissed.

35.     In Ground No.3, the Assessing Officer has taken the following grievance:

“On the facts and in the circumstances of the case and in law, the ld CIT (A) has erred in directing the AO to exclude the amount of Rs. 31,10,688 on account of write back of commission payable to M/s. Gwalior Transmissions System Ltd from the total income of the assessee.”

36. Facts in brief are that the assessee appointed M/s. Gwalior Transmission Systems Limited for a period of one year from 1.4.1994 subject to review every year to promote sale of rubber chemicals to M/s. J.K. Industries Limited. The AO noticed that the agreement entered with Gwalior Transmission systems Limited was not renewed beyond one year. The assessee could not produce any evidence regarding the services rendered. It was in backdrop that the AO disallowed Rs. 31,10,688 towards commission payable to M/s. Gwalior Transmissions System Ltd. The assessee carried the matter in appeal before the CIT(A). It was submitted before the CIT(A) that this amount was disallowed in A.Y. 1997-98 as expenditure claimed by the assessee and the same is written back in the year under consideration. After considering the assessee’s submissions, the CIT(A) found that the said amount was disallowed in the year 1997-98. Therefore, he was of the view that taxing this amount in the year under consideration will amount to double taxation. Accordingly, he directed the AO to delete the same. Aggrieved, the Assessing Officer is in appeal before us.

37. Having considered the rival contentions and having perused the material record, we see no reasons to interfere in the matter. Since the expenditure itself has been disallowed in the year in which it was incurred, it is only corollary thereto that write back of such an expenditure disallowed cannot constitute taxable income in the year of write back. The CIT (A) was thus quite justified in deleting the impugned amount. We confirm and approve his order on this issue as well.

38. Ground No. 3 is thus dismissed.

39. Ground No.4 relates to the disallowance of the expenditure of Rs. 25,12,528 incurred on making a new road, water pipe lines and overhead transmission lines owned by MIDC and MSEB.

40. Having heard the rival contentions and having perused the material on record, we find that similar issue had come up for consideration in assessee’s own case for the assessment years 1993-94 to 1997-98, wherein, the issue has been decided against the assessee. Learned Representatives fairly agree that this issue is as such covered against the assessee by decisions of the coordinate bench in assessee’s own case. Therefore, respectfully following the orders of the Tribunal, we reverse the decision of the CIT (A) and restore that of the Assessing Officer.

41. Ground No.4 is thus allowed.

42. Ground No.5 reads as under:-

“On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that the expenditure incurred of Rs. 6,06,99,550 on account of stamp duty on amalgamation was necessary for the smooth and efficient conduct of the assessee’s business and that the said expenditure was laid out wholly and exclusively for the purposes of the business of the assessee.”

43. The short reason for which this disallowance, in respect of stamp duty expenses on amalgamation of Polyfins Industries Limited with the assessee company, was made by the Assessing Officer on the ground that it has resulted in an advantage of enduring nature, and, as such, is capital expenditure in nature. In appeal, however, CIT(A) deleted the disallowance by relying upon Hon’ble Supreme Court’s judgment in the case of CIT Vs Bombay Dying & Manufacturing Co Ltd (219 ITR 521). The Assessing Officer is not satisfied and is in appeal before us.

44.    Having heard the rival contentions and having perused the material on record, and having noted that the Assessing Officer has not disputed that amalgamation was necessary for smooth and necessary conduct of business, we find that the issue in appeal is squarely covered by Hon’ble Supreme Court’s judgment in the case of Bombay Dying & Manufacturing Co Ltd (supra) wherein Their Lordships have, inter alia, observed as follows :

……….. …, the Tribunal upheld the assessee’s contention. It disagreed with the revenue’s contention that inasmuch as the said amalgamation resulted in acquisition of the other company by the assessee, which acquisition was in the nature of acquisition of a capital asset, the legal expenses incurred in that behalf partake the nature of capital expenditure. The Tribunal was of the opinion that “as both the companies were carrying on complimentary business and their amalgamation was necessary for the smooth and efficient conduct of the business”, it is an expenditure laid out wholly and exclusively for the purpose of the business of the assessee. In view of the said finding and also in view of the decision of this Court in Bombay Steam Navigation Co. [1953] (P.) Ltd. v. CIT [1965] 56 ITR 52, we are of the opinion that the Tribunal was right in its conclusion. The decision in Bombay Steam Navigation Co. (1953) (P.) Ltd. ‘s case (supra) also pertains to amalgamation of two shipping companies . The assessee-company took over the assets of the other company and part of the price was treated as a loan secured by a promissory note and hypothecation of all movable properties of the assessee-company. The loan was to carry simple interest at 6 per cent. The question that arose in the said case was whether the interest paid upon the said loan was deductible as revenue expenditure. It was held by this Court that it was an expenditure deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held that transaction of acquisition of the asset was closely related to the commencement and carrying on of the assessee’s business and, therefore, interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expenditure for the purpose of the business which was carried on in the accounting periods. In the course of the judgment this Court referred to the earlier decision of this Court in State of Madras v. G.J. Coelho [1964] 53 ITR 186 wherein it was held that the interest on the amount borrowed for acquiring a capital asset is deductible as revenue expenditure. It is true, that in the said decision this Court re-affirmed the well established principle that any expenditure laid out for acquiring an asset of a permanent character would be capital expenditure, held at the same time that inasmuch as the acquisition of the other company was in the course of carrying on of the assessee’s business, the interest paid thereon was deductible under section 10(2)(xv). In this case too, the Tribunal has recorded a finding that the acquisition of Nawrosjee Wadia Ginning & Pressing Company was necessary for the smooth and efficient conduct of the assessee’s business. Following the ratio of the aforementioned decisions of the Court, we hold that the expenditure incurred towards professional charges of the Solicitors’ firm for the services rendered in connection with the said amalgamation was in the course of carrying on of the assessee’s business and, therefore, deductible as a revenue expenditure.

45. In this view of the matter, we confirm the action of the CIT(A) on this issue as well and decline to interfere in the matter.

46. Ground No. 5 is thus dismissed.

47. Ground No.6 reads as under:-

“On the facts and in the circumstances of the case and in law, the ld CIT (A) has erred in deleting the addition of Rs. 29,40,41,392 made by the AO, ignoring the facts that the expenditure incurred under the voluntary retirement scheme of the assessee company for its employees brought enduring benefit to the assessee and was thus of capital nature and was not allowable.”

48. Briefly stated the material facts are like this. The Assessing Officer noticed that the assessee has claimed deduction of `Rs.  29,40,41,392 on account of the compensation paid to the employees of the assessee company under Voluntary Retirement Scheme. The Assessing officer disallowed the same, holding that the voluntary retirement scheme brings about an enduring benefit to the assessee and, therefore, to be treated as capital expenditure. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT (A) following the judgment of the Hon’ble Madras High Court in the case of CIT vs. Simpson and Co.op.Ltd, 230 ITR 703, directed the AO to delete the disallowance. Aggrieved, the Assessing Officer is in appeal before us.49. Having considered the rival contentions and having perused the material on record, we do not find any infirmity in the order of the Learned CIT (A). We also find that the issue is covered in favour of the assessee by the judgment of the Hon’ble Supreme Court in the case of Bhor Industries Ltd., 264 ITR 180. Respectfully following the same, this ground of the Revenue is also dismissed.

50.       Ground No. 6 is also dismissed.

51. Ground No.7 relates to deletion of disallowance of Rs. 47,68,059 on account of write off of loans and advances.

52. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed write off of loans and advances amounting to Rs 5 0,18,059 but these are not bad debts as the same are not trade debts and since the assessee is not in the business of money lending. These write offs were in the nature of partial write off of housing loan to employee , write off of security deposits insurance claims loans recoverable from ex-employees and miscellaneous recoverable etc. When matter was carried in appeal, CIT(A) gave partial relief in respect of this claim for deduction by observing that as advances were given during the course of normal business and loss was incidental to the business, the same is allowable under section 28. The Assessing Officer is not satisfied and is in appeal before us.

53. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in the conclusions arrived at by the CIT(A) on this issue either. Learned Departmental Representative could not point out a single instance where the advances written off were not made during the course of, and as incidental to the business of the assessee. As long as amounts written off have been in the course of, and as incidental to assessee’s normal business activities, the loss so incurred is admissible as business loss. The CIT(A) was, therefore, quite justified in his conclusions and the same do not call for any interference from us. We decline to interfere in the matter.

54. Ground No. 7 is thus dismissed.

55.    The appeal of the Assessing Officer is thus partly allowed in the terms indicated above.

ITA No.5296/M/03: A.Y. 1999-2000

19. In our considered view, the gross method has got to be followed as per provisions of section 145A in contrast with the net method as mandated under the said section, which in our view, will put an end to the unnecessary litigation. According to our limited understanding, there may not be any substantial benefit or loss to the assessee by following gross method in respect of the inputs and the inventories etc. as mandated under section 145A. We accordingly consider it appropriate to direct the AO to go through the exercise and work out the addition or relief, as the case may be, by making the following adjustments in accordance with section 145A read with the decision of the Delhi High Court in the case of Mahavir Aluminium Ltd. (supra), after giving reasonable opportunity of being heard to the assessee :

(a)         value the opening stock inclusive of-element of taxes, even if the Modvat credit is available in respect of the same.

(b)        debit the purchases inclusive of taxes, even if Modvat credit is available in respect of the same.

(c)         credit the sales as per the bills and add the Modvat credit that has accrued to the assessee in respect of the consumption of the inputs including in respect of the opening stock.

(d)        value the closing stock inclusive of element of taxes without deduction of Modvat credit available to the assessee in respect of the unutilized stocks.

If the Modvat credit accrued on consumption of inputs is not credited, the assessee will get double deduction for the taxes paid on inputs, firstly, on opening stock and secondly, on exclusion of Modvat credit accruing on the same. We direct the AO to go through the exercise indicated above and work out the consequences, if any. We direct accordingly.

62. We, accordingly, remit the matter to the file of the Assessing Officer for fresh adjudication, inter alia, in the light of the above decision of the coordinate bench.

63. Ground Nos. 3 to 6 are thus allowed for statistical purposes in the terms indicated above.

64.       Ground Nos.7 to 10 relate to disallowance of royalty of Rs. 66,49,146 paid to M/s. Goechst AG, Germany are dismissed as not pressed.

65. Ground No.11 is similar to Ground No.4 for the assessment year 1998-99 and it relates to the cost of catalyst issues. As was done in the assessment year1998-99, we restore this issue to the file of the AO with the same direction. Hence, this ground is treated as allowed for statistical purposes.

66. Ground No.12 relates to the disallowance of Rs. 69,87,908 being prior year expenditure net of prior year’s income. This issue is decided in favour of the assessee in A.Y. 1998-99. In line with our decision, while we uphold the grievance of the assessee in principle, we may also clarify that while allowing the assessee’s claim, the AO may verify that there is no double claim made by the assessee.

67. Ground No.12 is thus allowed.

68. Ground No.13 is that the CIT (A) erred in holding that expenditure of Rs. 69,87,908 is not crystalised during the year relevant to assessment year 1999- 2000 and Ground No.14 is without prejudice to ground Nos.12 and 13, the CIT (A) erred in not directing the AO to allow deduction for the aforesaid expenditure in the year to which it relates.

69. In line with our decision in ground No.12, Ground Nos.13 & 14 are rendered infructuous.

70. Ground No.15 relates to confirmation of overriding commission of Rs. 15,92,258 paid during the previous year to Neeraj Consultants.

71. In line with our decision in the assessment year 1998-99, this ground is dismissed.

72. Ground Nos.16 & 17 relate to expenditure on purchase property time share are dismissed as not pressed.

73. Ground No.18 relates to consultancy and advisory fees of Rs. 52,73,315 for modernization project. In line with our decision in Ground No.16 for the assessment year 1998-99, and for the reasons set out therein earlier in this consolidated order, this ground is allowed.

74. Ground No.19 relates to confirmation of disallowance of Rs. 39,95,995 being proportionate expenditure on substantial expansion. In line with our decision in Ground No.16 for the assessment year 1998-99, and for the reasons set out therein earlier in this consolidated order, this ground is allowed.

75. Ground No.20 relates to TDS credit at Rs. 1,66,56,956 is dismissed as not pressed.

76. Ground No.21 relates to interest under section 201(1A) is dismissed as not pressed.

77. Ground Nos.22 to 25 are general in nature. Therefore, same are dismissed as general in nature. The appeal is thus partly allowed in the terms indicated above.

ITA No. 5176/M/03; Assessment year 1999-2000

78. We now take up Assessing Officer’s cross appeal for the assessment year 1999-2000.

79. In Ground No.1, the Assessing Officer is aggrieved the CIT (A)’s deleting the disallowance of Rs. 1,85,08,947 being interest on advance made to M/s. Orbit Finance Ltd & other parties.

80. Having considered the rival contentions and having perused the material on record, we find that the Assessing Officer has disallowed notional interest paid on advance to Orbit Finance but the CIT (A) deleted the disallowance following the decision of his predecessor for the assessment years 1993-94 to 1997-98. The orders of the CIT (A), has since been upheld by the Tribunal deleting the disallowance. In view of this, respectfully following the decision of the Tribunal (supra), we uphold the order of the CIT (A) and decline to interfere.

81. Ground No.1 is thus dismissed.

82. In Ground No.2, the revenue has taken the following grievance:

“On the facts and in the circumstances of the case and in law, the CIT (A) erred in deleting the disallowance of Rs 13,53,36,928 in respect of interest on capital work in progress

83. Having considered the rival contentions and having perused the material on record, we find that this issue is covered against the revenue by the decision of the Tribunal in assessee’s own case for the assessment years 1992-93 to 1997-98. Respectfully following the same, this ground is dismissed.

84. In Ground No.3, the Assessing Officer has taken the following grievance:

On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of Rs 2,48,20,708 being amount of expenditure on making a new road, water pipe line and overhead transmission lines which were to be property of MIDC and MSEB.

85. Having heard the rival contentions and having perused the material on record, we find that similar issue had come up for consideration in assessee’s own case for the assessment years 1993-94 to 1997-98, wherein, the issue has been decided against the assessee. Learned Representatives fairly agree that this issue is as such covered against the assessee by decisions of the coordinate bench in assessee’s own case. Therefore, respectfully following the orders of the Tribunal, we reverse the decision of the CIT (A) and restore that of the Assessing Officer.

86. Ground No.4 is thus allowed.

87. Ground No.5 reads as under:-

“On the facts and in the circumstances of the case and in law, the ld CIT (A) has erred in deleting the addition of Rs 36,67,58,988 made by the AO who held that expenditure incurred under the Voluntary Retirement Scheme of the assessee company for its employees was of capital nature and was not allowable as it has resulted in a benefit of enduring nature.

88. Briefly stated the material facts are like this. The Assessing Officer noticed that the assessee has claimed deduction of Rs 36,67,58,988 on account of the compensation paid to the employees of the assessee company under Voluntary Retirement Scheme. The Assessing officer disallowed the same, holding that the voluntary retirement scheme brings about an enduring benefit to the assessee and, therefore, to be treated as capital expenditure. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT (A) following the judgment of the Hon’ble Madras High Court in the case of CIT vs. Simpson and Co.op.Ltd, 230 ITR 703, directed the AO to delete the disallowance. Aggrieved, the Assessing Officer is in appeal before us.

89. Having considered the rival contentions and having perused the material on record, we do not find any infirmity in the order of the Learned CIT (A). We also find that the issue is covered in favour of the assessee by the judgment of the Hon’ble Supreme Court in the case of Bhor Industries Ltd., 264 ITR 180. Respectfully following the same, this ground of the Revenue is also dismissed.

90.      Ground No.5 is also dismissed.

91. Ground No.6 relates to deletion of disallowance of Rs 9,42,506 on account of write off of loans and advances.

92. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed write off of loans and advances amounting to Rs 9,50,506 but these are not bad debts as the same are not trade debts and since the assessee is not in the business of money lending. These write offs were in the nature of partial write off of housing loan to employee , write off of security deposits insurance claims loans recoverable from ex employees and miscellaneous recoverables etc. When matter was carried in appeal, CIT(A) gave partial relief in respect of this claim for deduction by observing that as advances were given during the course of normal business and loss was incidental to the business, the same is allowable under section 28. The Assessing Officer is not satisfied and is in appeal before us.

93. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in the conclusions arrived at by the CIT(A) on this issue either. Learned Departmental Representative could not point out a single instance where the advances written off were not made during the course of , and as incidental to, business of the assessee. As long as amounts written off have been in the course of, and as incidental to, assessee’s business activities, the loss so incurred is admissible as business loss. The CIT(A) was, therefore, quite justified in his conclusions and the same donot call for any interference from us. We decline to interfere in the matter.

94. Ground No. 6 is thus dismissed.

95.    The appeal of the Assessing Officer is thus partly allowed in the terms indicated above.