1. Art and Diseño

IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : “C” NEW DELHI
BEFORE SHRI J.SUDHAKAR REDDY, ACCOUNTANT MEMBER
AND SHRI A.T. VARKEY , JUDICIAL MEMBER
ITA Nos. 3159,3160/Del/2004
Asstt. Years 1996-97, 1997-98
M/s. GE Capital Transportation Financial
Services Ltd.,
AIFACS Building, 1 Rafi Marg,
New Delhi - 110 001.
(PAN AAACS000IN)
vs. JCIT, Special Range2,
New Delhi.
(Appellant)
Appellant by
Respondent
(Respondent)
: Shri Sanjeev Sabharwal, Sr. Advocate
Shri Tushar Jaswal, Advocate, Shri Rahul Sateeja,
Advocate
: Ms. Swati Thupa, Advocate, Shri R.S. Gill, CIT (DR)
ORDER
PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER
Both these appeals are filed by the assessee and are directed against separate
order of the Commissioner of Income Tax (Appeal) XV, New Delhi dated 22.2.2004
for the asstt. year 1996-97 and dated 27.2.2004 for the asstt. year 1997-98. As both
the appeals have common issues, for the sake of convenience, they are heard
together and disposed off by way of this common order. The assessee is a company
and is engaged in the business of leasing, hire purchase and finance. It filed its
return of income, declaring a loss of Rs. 14,99,82,025/- on 30.11.96 for the asstt.
year 1996-97. This return was processed u/s 143(I)(a), vide intimation dated
23.1.98, wherein the loss was determined at Rs. 14,85,81,522/-, by making prima-
ITA. Nos. 3159,3160/Del/2004
facie disallowance of Rs. 13,30,503/-. Subsequently the assessee on 21.8.1997, filed
a revised return of income, declaring loss of Rs. 15,89,59,000/- . This revised return
was processed u/s 143(1)(a) wherein a similar prima facie disallowance of Rs.
13,30,503/- was made.
2. For the asstt. year 1997-98, the assessee filed its return of income on 21.8.1997,
declaring a loss of Rs. 11,16,30,770/-. Thereafter the assessee filed a revised return
of income, claiming credit of additional TDS and declaring the same loss as claimed
in the original return of income. This return was processed u/s 143(IB). Later the
assessee filed yet another revised return of income on 30th March, 1999, declaring a
revised loss of Rs. 12,28,97,021/-.
3. For the asstt. year 1996-97 the AO determined the total income of the assessee
at Rs. 4,66,16,331/- inter alia disallowing depreciation claimed etc. For the asstt.
year 1997-98 the AO determined the total loss of Rs. 8,49,37,201/-, after making
certain disallowance. Aggrieved the assessee carried the matter in appeal before the
first appellate authority for both the assessment years. First appellate authority
granted part relief. Further aggrieved the assessee filed this appeal before us.
4. We have heard the Ld. Senior advocate Shri Sanjeev Sabharwal on behalf of the
assessee and Shri R.S. Gill Ld. CIT(DR) on behalf of the revenue.
5. Groundwise arguments were raised by both the parties. Paper books and case
laws were filed alongwith with detailed charts.
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ITA. Nos. 3159,3160/Del/2004
6.
On a careful consideration of the rival contentions, perusal of the papers on
record and the orders of the authorities below, as well as case law cited we hold as
follows :7.
We first take up the appeal for the asstt. year 1996-97
7.1
Ground No.1 is general in nature.
8.
Ground No. 2 reads as follows :-
“(i) On the facts and in the circumstances of the case and in law, the CIT(A)
erred in disallowing additional loss of Rs. 89,76,975/- to be carried forward on
account of revised return on the alleged ground that revised return was not
filed within time allowed u/s 139(3) of the Income Tax Act.
(ii) The learned CIT(A) failed to appreciate that the revised return was
strictly as per provisions of Section 139 of the Income Tax Act.”
8.1 The facts are brought out at para 2.2 of CIT(A) order which is extracted for the
ready reference :
“2.2. The A.O. disallowed the loss of Rs. 89,76,975/- stating in his order that:
Rs. 89,76,975/- over and above the loss of Rs. 14,99,12,075/- cannot be
allowed to be carried forward because the same has been claimed by way of
a return filed after due date prescribed u/s 139(1) and in view of the
provision of section 80, no loss claimed by a return filed after date prescribed
u/s 139(1) can be allowed to be carried forward. Here the argument that
revised return filed u/s 139(5) gets merged with return filed u/s 139(1) does
not survive because return filed u/s 139(5) still has a separate entity and all
the provisions like processing u/s 143(1)(a), time limit of issue of notice u/s
143(2) etc. are separately applicable with regard to a revised return.”
8.2.
First appellate authority at para 2.6 of this order held that revised return of
income can be filed, only where the assessee discovers an omission or wrong
statement in the return was due to a bonafide mistake or inadvertence by the
assessee.
After considering the submissions of the assessee he came to the
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ITA. Nos. 3159,3160/Del/2004
conclusion that the revised return of income is not filed strictly in terms of Section
139(5). Thereafter at para 2.8 held as follows :-
“2.8. The contention of Ld. AR that return filed u/s 139(5) is as good as
return filed u/s 139(3) of the I.T. Act does not hold good. The law has
undergone a change after the finance Act 1987 w.e.f. 1.4.1988, which
requires the loss return to be filed within the time allowed under section
139(3) by way of a specific addition of reference to section 139(3) in section
80 for the requirement of the right to carry forward such loss, so that this
decision can no longer be of any assistance to the tax payers to disregard
their duty enjoined by law to file the return in time, if they want to avail of
the benefit of loss to be carried forward. The AO is therefore right in
disallowing loss to be carried forward hence this ground of appeal stands
rejected.”
8.3.
The contentions of the assessee are that as per section 139 (3), once
a
return of loss is filed within the time allowed u/s 139(5), all the provisions of the Act
will apply as if , the return of loss is a return of income filed u/s 139(1) of the Act.
Thus it was argued that section 139(5) of the Act will apply to the return of loss filed
u/s 139 (3) of the Act. Neither 139(5) 139(3) nor section 139(1) nor section 80
excludes applicability of section 139(5) to the return filed u/s 139(3) of the Act.
8.4. On the observations of the Ld. CIT(A) that, a revised return can be filed by the
assessee, only when there is an inadvertent mistake, the assessee submits that,
there is no such requirement in law that any wrong statement or omission can be
revised u/s 139(5).
8.5. Reliance was placed on the following judgments :1. Dharmpur Sugar Mills Ltd. vs. CIT 90 ITR 236 (All-HC)
2. CIT vs. Periyar District Co-operative Milk Producers Union Ltd. 266 ITR 705
(Mad-HC)
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ITA. Nos. 3159,3160/Del/2004
3. Order dated 26.7.2004 passed by Hon’ble Supreme Court in SLP No.
13472/2004 – CIT v. Periyar District- Dismissing Department’s SLP
8.6.
Ld. Departmental Representative submits that the revised return of income
itself is not maintaining and under those circumstances the claim of the assessee is
not sustainable. He relied on the order of the first appellate authority.
8.7.
After considering the rival submissions we hold as follows :The Hon’ble Allahabad High Court in the case of Dhamapur Sugar Mills vs.
CIT (supra) held that the income tax act contemplates, the filing by the assessee of
a correct and complete return of income. The law gives him a right to substitute and
bring on record a correct and complete return of income, if he discovers any
omission or wrong statement in the return originally filed by him. The law cannot
contemplate making of assessment, on the basis of a return, which even the
assessee claims contains a wrong statement. When the assessee files a revised
return , he admits that the original return filed by him was not correct or complete
and substitutes the same by a revised return which according to him is correct and
complete. The effective return for the purpose of assessment is thus the return
which is ultimately filed by the assessee, on the basis of which he wants his income
to be assessed.
8.8.
The Ld. DR could not cite any contrary judgment on this issue. Under these
circumstances we hold that the findings of the first appellate authority that the
return filed u/s 139(5) of the Act is not as per the provisions of law, for the reason
that the mistakes were not inadvertent is bad in law. We also observe that, the AO
has processed the revised return u/s 143(I)(a). The revised return has not been
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ITA. Nos. 3159,3160/Del/2004
rejected by him. Under these circumstances, it is not appropriate for the CIT(A) to
hold otherwise.
8.9.
The second issue is on the right of the assessee to carry forward of loss. The
Ld. Counsel for the assessee relied upon the decision of Hon’ble Madras High Court
in the case of CIT vs. Periyar District Co-operative Milk Producers Union Ltd. The
Hon’ble Madras High Court has held as follows :-
“A bare perusal of sub-sections (3) and (5) of section 139 of the Income-tax
Act, 1961, more particularly the provision contained in section 139(3), makes
it clear that a return of loss filed under section 139(3) may be filed within the
time allowed under section 139(1). Once such a return is filed, all the
provisions of the Income-tax Act shall apply as if such return has been filed
under section 139(1). This position is clear from the expression”... all the
provisions of this Act shall apply as if it were a return under sub-section (1).”
In other words, a return filed under section 139(3) is deemed to be a return
filed under section 139(1). The provision contained in section 139(3) makes it
clear that all the provisions of this Act shall apply to such a return as if it were
a return under section 139(1). In view of such a specific provision, there is no
reason to exclude the applicability of section 139(5) to a return filed under
section 139(3). In the face of the specific provision contained in section
139(3) laying down that all the provisions contained in the Act shall apply to a
return under section 139(1), there was no further necessity in section 80 to
refer to such provisions. On the other hand, there is no specific provision
contained either in section 80 or in section 139 excluding the applicability of
section 139(5) to a return filed under section 139 (3). Once a return of loss is
filed under section 139(3), it takes the character of return filed under section
139(1) in respect of which the assessee can file a revised return claiming a
higher amount of loss, under section 139(5).”
8.10.
No contrary decision has been cited before us by the Ld. DR. Under these
circumstances we respectfully follow the proposition of law laid down by the Hon’ble
Madras High Court and allow the ground of the assessee by holding that the
assessee can file a revised return claiming a higher amount of loss u/s 139(3) of the
Act.
In the result ground No. 2 is allowed.
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ITA. Nos. 3159,3160/Del/2004
9.
Ground No. 3 reads as follows :-
“3. On the facts and in the circumstances of the case and in law, the CIT(A)
erred in upholding the order of Assessing Officer (AO) thereby reducing
notional interest expenditure from the dividend for calculation of deduction
u/s 80M.”
The facts are brought out at para 3.1 and 3.2 of the CIT(A) order which is
extracted for ready reference :-
3.1
“During the year under consideration the appellant company received
gross dividend income other than dividend income other than dividend
income other than dividend on units of UTI amounting to Rs.
61.66,625/-. Thus, the deduction u/s 80M is computed as under :100% of dividend from shares
Rs. 61,66,625/-
Total amount eligible for deduction u/s 80M
Rs. 61,66,625/-
However, as the gross total income declared by the appellant was a
negative figure, the appellant did not claim any deduction u/s 80M.
3.2
The AO observed that investments were made out of borrowings and
therefore relying on the earlier year’s order he estimated notional
interest and expenses relating to such investments amounting to Rs.
34,51,733/- and deducted the same from the dividend received to
calculate the deduction u/s 80M on net income basis resulting in a
disallowance of Rs. 34,51,733/-. The AO’s observations at para 6 of the
assessment order are reproduced as under :“Assessee has not allocated any part of the financial/interest
expenses towards dividend income and deduction u/s 80M has
been claimed on gross dividend income. In fact, as gross total
income is at negative figure, no deduction u/s 80M actually
claimed by assessee, but according to him, deduction of Rs.
61,66,625/- u/s 80M equal to gross dividend income other than
UTI dividend is available to him. In earlier years, Rs.
85,62,623/- out of interest paid was allocated towards
investment of amount of Rs. 34,51,733/- shall be allocated
towards investments of Rs. 5.5. crores in shares and thus net
dividend income shall be Rs. 27,14,892/- (61,66,625/- 34,51,733/-). Therefore, deduction u/s 80M shall be available to
maximum of Rs. 27,14,892/- depending upon gross total
income.”
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ITA. Nos. 3159,3160/Del/2004
9.1.
The finding of the first appellate authority in para 3.3 which is extracted for
ready reference :-
3.3
9.2.
“The learned AR contended that the units of UTI were held by the
appellant in compliance with the statutory liquidity requirements (SLR)
prescribed under rule 12 of the NBFCs(RBI) Directions, 1997 and that
the dividend warrants issued by UTI were payable at par all over India,
hence no direct expenses were incurred in realising the dividend. The
learned AR also contended that there is no scope for estimation of
expenditure being made and no notional expenditure can be deducted
for the purpose of earning the income.”
The Ld. Counsel for the assessee contends that a) All expenses are to be
allowed on actual basis and no disallowance can be made on presumptive or
estimate basis , while computing deduction of dividend income u/s 80M of the Act.
b) Investments have been made out of internal accruals. The Ld. CIT(A) for the
asstt. Year 1990-91, 1991-92, 1992-93 and 1993-94, considered the cash flow
statement, internal accruals and on facts had directed the AO to allow the claim of
the assessee for deduction of dividend u/s 80M, without deducting any expenses on
account of interest on borrowed funds.
9.3.
Similar orders were passed by Commissioner of Income Tax for asstt. Year
1994-95 and 1995-96. This order of the first appellate authority was not challenged
by the revenue.
9.4.
Reliance was placed on the following judgements :1. CIT vs. United Collieries Ltd. (Calcutta High Court) 203 ITR 857
2. CIT vs. HDFC Bank Ltd. ITA No. 330 of 2012 (Bombay High Court)
9.5.
Ld. DR opposed the contentions of the assessee and submitted that on facts
the first appellate authority has come to the conclusion that the Ld. Authorised
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ITA. Nos. 3159,3160/Del/2004
representative has not been able to prove that investments in units of UTI were
made out of the internal accruals and not out of the borrowed funds.
9.6
After considering rival submissions we hold as follows :
The assessee has provided a chart showing its surplus internal accruals. Its chart
is at page 5 of the CIT (A) order which is extracted for ready reference :Particular
1
Internal
Accruals
Investments
2
3
Surplus
internal
accruals after
deducting
investment
4
A
Balance as on May 31, 25,886,701
1987
450,758
25,435,943
B
March 31, 1989
69,257,245
8,264,265
60,992,980
C
March 31,1990
138,960,982
14,996,392
123,964,490
D
March 31, 1991
219,437,407
35,758,971
183,678,436
E
March 31, 1992
292,891,077
52,451,305
240,439,772
F
March 31, 1993
396,491,000
83,937,000
312,439,772
G
March 31, 1994
732,879,000
140,077,000
592,802,000
H
March 31, 1995
1,006,904,000
500,475,000
506,429,000
I
March 31, 1996
1,819,990,000
400,894,000
1,419,096,000
J
March 31, 1997
1,949,358,000
475,984,000
1,473,374,000
A perusal of the chart demonstrates that the annual
internal accruals are much
higher than the investments made during that particular year. Under these
circumstances the presumption is that the investments have been made from
internal accruals and that no borrowed funds have been made for these
investments. The Hon’ble Bombay High Court in the case of HDFC Bank Limited in
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ITA. Nos. 3159,3160/Del/2004
Income Tax Appeal 330 of 2012 judgment dated 23rd July, 2014 followed its own
judgment in the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR
340 (Bombay) and page 6 held as follows:-
“In the present case undisputedly the assessee’s capital, profit reserves,
surplus and current account deposits were higher than the investments in the
tax free securities. In view of this factual position, as per the judgment of this
court in the case of Reliance Utilities and Power Ltd. (supra) it would have to
be presumed that the investments made by the assessee would be out of
interest free funds available with the assessee”.
Respectfully following the proposition laid down, we allow this ground of the
assessee.
10.
Ground No. 4 is regarding the disallowance of the claim of the assessee, for
deduction of provisions for doubtful debts, amounting to Rs. 9,55,726/-. After
considering rival submissions we find that the issue is covered against the assessee
by the judgment of Hon’ble Supreme Court in the case of Southern Technologies
Limited vs CIT 320 ITR 577 (SC). Respectfully following the same this ground of the
assessee is dismissed.
11.
Ground No. 5 is on the disallowance of adhoc interest of Rs. 20 lacs, out of
total interest paid during the year, on account of interest free loans, given to
companies.
The facts have been recorded as follows by the Ld. CIT(A) :-
“10.1
During the year under consideration the appellant gave advances
aggregating to Rs. 199.38 lacs to its subsidiary company M/s. SRF Investcare
Ltd. and Rs. 213 lacs to its subsidiary company M/s. SRF Asset Management
Ltd. It was submitted by the appellant during the course of the assessment
proceeding that these subsidiary companies were integrally related to the
business of the appellant and the advances were given to these companies
wholly and exclusively to promote the business interest of the appellant.
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ITA. Nos. 3159,3160/Del/2004
10.2 The Assessing Officer did not agree with the contentions of the appellant.
He held that no business interest of the appellant was involved since no
income accrued to the appellant from such advances. Accordingly, he
disallowed a sum of Rs. 20 lacs being the proportionate interest on borrowings
on the ground that to this extent the loans taken have been diverted for nonbusiness purposes.”
The first appellate authority upheld the order of the AO by observing that a) the
assessee has not denied that the company has borrowed huge funds, on which huge
interest has been paid. b) The business expediency in creating new entities in the
shape of subsidiary companies and giving interest free loans, while paying huge
interest to third parties has not been explained. c) It is not established whether
loans are out of surplus funds or out of borrowed funds and the nexus is not
established.
At para 10.6 held as follows :-
“10.6
I have considered the matter carefully. The jurisdictional High Court in
CIT vs. Motor General Finance Ltd. (2002) 254 ITR 449 pointed out that section
114 of the Indian Evidence Act, 1870 left no option to the Tribunal except to
decide against the assessee on its claim that interest free loans given to a
subsidiary company out of proprietary funds and not borrowed funds in the facts
of the case. When the AO asked the assessee to prove the same with reference
to the bank accounts, they were not produced. It is in this context, it was found
that the estimated interest disallowance should have been confirmed by the
tribunal. Following the above decision of the Jurisdictional High Court, I hereby
uphold the disallowance made by AO.”
12.
After hearing rival contentions we find that the assessee has promoted and
formed
the
subsidiary
companies,
to
undertake
stock-broking
and
asset
management activities. The Ld. AR contended that the assessee is a financial service
company and in order to promote its business further, it had to undertake the entire
gamut of financial services, and hence this subsidiary companies are formed, as the
existing regulations required separate companies to be set up for this purpose. At
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ITA. Nos. 3159,3160/Del/2004
para 10.4 of the CIT order the submissions of the assessee that the net owned funds
and internal accruals are far in excess of the investment in question is recorded. We
extract the same for your ready reference.
Investments
Surplus internal
accruals after
deducting investments
Balance as on 25,886,701
May 31, 1987
450,758
25,435,943
March 31, 1989
69,257,245
8,264,265
60,992,980
March 31, 1990
138,960,982
14,996,392
123,964,590
March 31, 1991
219,437,407
35,758,971
183,678,436
March 31, 1992
292,891,077
52,451,305
240,439,772
March 31, 1993
396,491,000
83,937,000
312,554,000
March 31, 1994
732,879,000
140,077,000
592,802,000
March 31, 1995
1,006,904,000
500,475,000
506,429,000
March 31, 1996
1,819,990,000
400,894,000
1,419,096,000
Total
4,702,697,412
1,237,304,691
3,465,392,721
Particular
13.
Internal Accruals
A perusal of the same demonstrates that the propositions based on which
we had decided ground No. 3 of the assessee are applicable to the facts of the
ground also. The assessee has led evidence to prove his case and hence the decision
of the Jurisdictional High Court in the case of Motor General Finance Ltd. (supra) is
not applicable as the facts are different. Thus respectfully following the preposition
laid down in the judgment of Hon’ble Bombay High Court in the case of CIT vs.
Reliance Utilities and Power Ltd.(supra)
and the propositions laid down by the
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ITA. Nos. 3159,3160/Del/2004
Jurisdictional High Court in the case of CIT vs. Bharti Televenture Ltd. 331 ITR 502
(Delhi High Court) we allow this ground of the assessee.
14.
Ground No, 6 is against the disallowance of a claim of interest and old
expenses of Rs. 88,11,147/-, which are claimed as incurred during the year, but had
been disclosed as deferred revenue expenditure in the books of the assessee. The
facts are brought out at para 12.1 and 12.2 of the Ld. CIT(A) order which is
extracted for ready reference :-
“12.1
During the year under consideration, the appellant has claimed
an amount of Rs. 88,11,147/- for interest, commitment charges, service
charges and other expenses incurred for obtaining secured loan from IFC
Washington and FMO Netherlands, which was deferred in the books of
account and was not debited to the Profit and Loss account of
assessment year 1996-97. However, as the same has been incurred and
actually paid during the current assessment year, the appellant claimed
the same as an allowable deduction in the return of income.
12.2 The AO rejected the claim of the appellant and disallowed the
aforesaid expenses on the ground that the same is deferred in the books
of account and has not been debited in the Profit and Loss account of the
assessment year 1996-97.”
15.
After hearing rival contentions we agree with the contentions of the Ld.
Counsel for the assessee that there is no concept of deferred revenue expenditure
under the Income Tax Act. In the case of CIT vs SBI Cards & Payment Services Pvt.
Ltd. in ITA Nos. 603 and 604 of 2014 judgment dated 29.9.2014 the Hon’ble Delhi
High Court held as follows:-
“13. The Delhi High Court has repeatedly held that advertisement expenditures
in the present day context should normally be treated as revenue expenditure,
unless there are special circumstances and reasons to hold that the expenditure
was capital in nature. The reason is that the advertisements do not have a
lasting and long term effect and the memory of the customers or targeted
audience is short lived. The advertisements fade away and do not have an
enduring impact. If there is a lack of advertisement by one, the vacuum and
space is taken over by others with benefit and advantage to the detriment of the
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ITA. Nos. 3159,3160/Del/2004
first. Reference can be made to CIT vs. Salora International Ltd. (2009) 308 ITR
199 (Delhi) and the subsequent decision in ITA No. 597/2014 titled CIT vs. M/s.
Spice Distribution Ltd. decided on 19th September, 2014.
14. This brings us to ITA No. 604/2014. Addition of Rs. 17,93,59,566/- was
made by the Commissioner of Income Tax (Appeals) after issuing notice of
enhancement. The Assessing Officer had not made the said addition. The
Commissioner of Income Tax (Appeals) held that the expenditure under the
head, “Card Acquisition Expenses” had been amortised or divided into two years
in the books of accounts and accounts prepared under the Companies Act,
1956. But, in the Profits & Loss account etc. prepared for the purpose of income
tax, the entire amount was treated as revenue expenditure in one assessment
year. The Commissioner of Income Tax (Appeals) held that the assessee being a
company was bound to prepare profit and loss accounts and the balance sheet
which would give true and fair account of its financial affairs. Reference was
made to the provisions of the Companies Act and the Accounting Standard 5,
issued by the Institute of Chartered Accountants of India (ICAI), to the effect
that the same accounting policy should be normally adopted for similar events
and transactions in each period. With reference to Section 145 of the Act, it was
observed that CBDT has notified accounting standards vide SO 69(E) dated 25th
January, 1996, which mandated an assessee to follow accounting policy which
represents the true and fair view of the state of affairs of business, profession
etc. Relying upon the decision of the Supreme Court in Madras Industrial
Investment Corp. Ltd. vs. CIT (1997) 225 ITR 802 (SC), the Commissioner of
Income Tax (Appeals) held that the expenditure in question should be treated
as deferred revenue expenditure and Rs. 1,70,79,469/- should be allowed in the
current assessment year and the balance amount of Rs. 17,93,59,566/- should
be allowed as expenditure in the next assessment year, i.e. 2007-08.
15.
The aforesaid addition has been deleted by the Tribunal and we are in
agreement with their findings. Before, we elucidate, it will be relevant and
important to reproduce the reply of the assessee, which for the sake of
convenience is reproduced below :
“Till 31st March,2005 sales force compensation, card acquisition cost
(sales service provider expenses, incentives related to card acquisition,
credit investigation cost, application printing cost), consumption of
plastic cards, and delivery charges were recognized on an upfront basis.
During current year (with effect from 1 April, 2005), the Company has
changed its policy to recognize productive sales force compensation,
card acquisition cost, consumption of plastic cards and delivery charges
over a period of one year as this more closely reflects the period of
which the fee relates to. As a result of this change in accounting policy,
profit before tax for the current year is higher by Rs. 19,64,39,035/-.
9.2 This accounting treatment is being explained by the under-noted
illustration.
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ITA. Nos. 3159,3160/Del/2004
“ If card-marking expenses of Rs. 1000/- has been incurred in the month
of July 2005, then as per the above accounting policy, the amount to be
charged to the Profit & Loss Account for the Financial Year 2005-06
would be computed as under :
=Rs. 1000*9/12 = Rs. 750
The balance amount to be deferred & claimed in the next Financial
Year i.e. 2006-07 would be calculated as under :
=Rs. 1000*3/12 =s. 250”
16. It is clear from the aforesaid reply and is an accepted position that till
the assessment year in question, sales force composition, card acquisition
costs etc. were recognised on upfront basis i.e. in the year in which they were
incurred. In the current assessment year in question, i.e. 2006-07, the
assessee consequent to change in policy had spread over or divided the
expenditure over a period of one year in the books of accounts from the date
they were incurred. It is meant that the expenditure could partly fall in the
current year and partly in the next year. The change would have imperatively
impacted the first assessment year. Albeit, from the second year, it would not
make much difference, though the figures for each year would be different.
The aforesaid change or modification was restricted to the entries in the
books of account and was as per the mandate of the Companies Act, 1956.
However, in the Income Tax Return and tax accounts, the earlier method or
treatment was continued. Section 145 postulates that accounts should give
true and fair picture of the financial position or the income of the assessee. It
is further noticeable that the Act i.e. the Income Tax Act, 1961 only refers to
capital or revenue expenditure. There is no provision in the Act which
postulates or refers to deferred revenue expenditure. Deferred revenue
expenditure is, therefore, not as such recognised in the Act. The Act to this
extent is at variance and does not accept deferred revenue expenditure as a
plausible and acceptable method. Accounting principles or standards have to
be applied and adopted and they must disclose fair and true financial position
and the income, but they cannot be contrary to the provisions or the mandate
of the Act. The Act would then override the accountancy principles. There
are several provisions in the Act like Section 43B which provide for different
treatment than required under the provisions of the Companies Act or the
accounting principles or standards. Reference can be made to Kedarnath Jute
Mfg. Co. Ltd. versus CIT, (1971) 82 ITR 363 where it was held,
“..., We are wholly unable to appreciate the suggestion that if an
assessee under some misapprehension or mistake fails to make an entry
in the books of account and although under the law, a deduction must be
allowed by the Income Tax Officer, the assessee will lose the right of
claiming or will be debarred from being allowed that deduction. Whether
the assessee is entitled to a particular deduction or not will depend on
the provision of law relating thereto and not on the view which the
assessee might take of his rights nor can the existence or absence of
entries in the books of account be decisive or conclusive in the matter....”
15
ITA. Nos. 3159,3160/Del/2004
In Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 at
page 184, it was observed,
“”It is true that this Court has very often referred to accounting practice
for ascertainment of profit made by a company or value of the assets of a
company. But when the question is whether a receipt of money is taxable
or not or whether certain deductions from that receipts are permissible in
law or not, the question has to be decided according to the principles of
law and not in accordance with accountancy practice. Accounting practice
cannot override Section 56 or any other provision of the Act. As was
pointed out by Lord Russel in the case of B.S.C. Footwear Ltd. (1970) 77
ITR 857, 860), the Income Tax law does not march step by step in the
footprints of the accountancy profession.”
It was held by the Bombay High Court in Commissioner of Income Tax
versus Bhor Industries Limited (2003) 264 ITR 180,
“...If (sic, It) is well settled that, ordinarily, revenue expenditure, which is
incurred wholly and exclusively for the purposes of business, must be
allowed in its entirety in the year in which it is incurred and it cannot be
spread over a number of years even though the assessee has written it off in
its books over a period of years. It is only in cases of special type of assets
that the spread over is warranted....”
Judgement of the Supreme Court in Madras Industrial Investment
Corp. (supra) was considered and distinguished in CIT vs. Panacea Biotech
Ltd. , ITA No. 22 & 24/2012 and CIT vs. Citi Financial Consumer Fin Ltd.
(2011) 335 ITR 29 (Del.), holding that the asseseee’s claim to spread over
the expenditure over a period of time is tenable provided it is justified as in
the case of issue of bonds at a discount. However, the same principle would
not apply if the assessee treats the same as revenue expenditure and in fact
per Section 37(1) of the Act, the expenditure is revenue in nature and has
been incurred or has accrued. This right to claim deferred revenue
expenditure is given to the assessee and not to the revenue. In the facts of
the present case, as already noticed, the expenditure as per the
Commissioner of Income Tax (Appeals) should be partly spread over two
years, instead of the year in which it was incurred. But it is accepted and
admitted that the expenditure in question was revenue in nature. It had
accrued and was paid. Nothing and no acts had to be performed and
undertaken in future. It is not shown how and why, if the said expenditure
was allowed in the current year, it would not reflect true and correct financial
position or income of the assessee in the current assessment year. We,
therefore, do not see any reason to interfere with the order of the Tribunal
and issue notice in ITA No. 604/2014. “
16
ITA. Nos. 3159,3160/Del/2004
16.
As the expenditure in question is undisputedly in the revenue field we apply
the principles laid down by the Jurisdictional High Court and allow the claim of the
assessee. Thus ground of the assessee is allowed.
17.
Ground No. 7 is on the restriction of claim of depreciation in respect of
commercial vehicles given on lease, on the ground that the assessee is not engaged
in the business running trucks on hire. The first appellate authority has rejected the
claim of the assessee that the assessee has leased the commercial vehicles to
various transport operators, who inturn used these vehicles in the business of
running them on hire. Admittedly this issue is covered in favour of the assessee by
the decision of Tribunal in the assessee’s own case for the asstt. year 1994-95 and
for the asstt. year 1998-99, which is reported in 113ITD 22 (Delhi). The prepositions
laid down by the Tribunal in these decisions, are in consonance with, the
propositions laid by the Jurisdictional High Court in the case of CIT vs. MGF (India)
Ltd. 285 ITR 142 (Delhi) and the judgment of the Hon’ble Supreme Court in the
case of M/s. ICDS vs. CIT reported in (2013) 350 ITR 527 (SC).
18. Hence, consistent with the view taken by us for the asstt. year 1994-95 and
1998-99 we allow this ground of the assessee.
19. Ground No. 8 is on disallowance of depreciation amounting to Rs. 8,65,25,609/on assets which are purchased and leased back. The Ld. CIT(A) has brought out the
facts at para 14.1 to 14.3 of his order. The same is reproduced hereunder :-
“14.1
The above grounds deal with the disallowance of depreciation
amounting to Rs. 4,00,00,000/- on certain assets purchased from and leased
back to M/s. PSEB and RS. 3,90,31,359/- (net of Principal recovery) on assets
purchased and leased back to some other parties.
17
ITA. Nos. 3159,3160/Del/2004
14.2 The AO disallowed the claim of depreciation on the assets leased to
M/s. Oswal Sugar Ltd. and M/s. PSEB in view of the following :(1) Same assets were purchased from M/s. PSEB and M/s. Oswal Sugar Ltd.
and leased back to them respectively.
(2) The assets involved are old and these parties had claimed 100%
depreciation on these assets and therefore the WDV of the assets in the
books of the parties at the time of sale to the appellant was Nil.
(3) No physical delivery of plant and machinery took place and only title for
leased assets were transferred and mere raising of invoice by these parties
for sale of the assets cannot really amount to sale of those assets.
(4) The assets were part and parcel of their manufacturing units and if those
were removed, the units with which they were attached could not be run.
15.3 In the case of transactions with the parties other than PSEB and Oswal
Sugar Ltd. the AO questioned the business expediency on the part of the
appellant to first purchase those assets and to give them back on lease to the
same party. The AO denied depreciation on those transactions alleging it to
be a device adopted by the parties for avoidance of the legitimate tax due.
14.3 The Ld. AR submitted the details of depreciation claimed on these
assets and their present status, which are as follows :-
Depreciation
claimed
Depreciation
Status
after
minus principal the expiry of
recovery
lease tenure
Oswal
Sugar 25,000,000
Ltd. New Delhi.
25,000,000
22,113,862
Retained by GE
Punjab State 40,000,000
Electricity
Board
40,000,000
37,277,915
------
Filatex
India 10,000,000
Ltd. New Delhi
10,000,000
8,952,936
-------
Datar
Switchgear
Ltd. Nasik
7,494,250
6,294,250
Retained GE
Pioneer Alloy 2,500,000
Casting
Ltd.
Tamil Nadu
2,500,000
2,256,449
Retained GE
High
Temp 3,062,717
Furnace
Ltd.
1,531,359
1,235,495
Retained GE
Party Name
Net of assets
14,988,500
18
ITA. Nos. 3159,3160/Del/2004
Bangalore
20.
After hearing rival contentions, we find that the genuineness of the purchase
and lease back transactions have been upheld by the ITAT the assessee’s own case
for the asstt. year 1994-95 and 1995-96. The decision of the Tribunal, admittedly,
has been accepted by the revenue and no further appeal has been filed.
21.
Out of the six sale and lease back transaction, except in the case of PSEB and
Oswal Sugars Ltd., the AO disallowed the depreciation by questioning the
commercial expediency of the transaction. This ground of disallowances
is not
legally correct. When the genuineness of the transaction is not doubted,
disallowance of depreciation is not warranted. The AO does not have the jurisdiction
to question commercial expediencies and that too is in a transaction between
unrelated parties. As regards transaction of the PSEB and Oswal Sugar Ltd. the
submissions of the assessee counsel are extracted at para 14.4 of the CIT(A) order:-
“14.4 With regard to the transaction with PSEB and Oswal Sugar Ltd., the
AR submitted as follows :The transaction in question is admittedly a sale and lease back
transaction where the lessee was already owning the assets which it
sold to the appellant and obtained back on lease. The sale took place
exclusively for the purpose of leaseback. The two transactions i.e. sale
and lease back are distinct transactions and therefore cannot be
treated as one transaction. The Appellant had first entered into an
agreement to purchase the assets from various parties. The AO has
failed to take cognizance of the fact that both the transactions are
separate and independent and therefore cannot be regarded as one
transaction i.e Finance transaction.
The fact of no physical delivery having been made is of no significance
since the leased goods were already with the lessee prior to the lease and it
was a case of constructive delivery.
19
ITA. Nos. 3159,3160/Del/2004
Even as on the date of the transaction, the various items of the
equipment had unexpired useful life of approximately 10 years as per the
valuation report in the case of agreement with PSEB.
The lease agreement did not have any stipulation for purchase of the
assets after the expiry of lease tenure at any pre-determined price.
Merely because the WDV in the hands of the seller may have been
nominal or even nil, the appellant cannot be denied the right to claim
depreciation on the assets since the main purpose of the transfer of the asset
was not the reduction of a liability to income tax by claiming depreciation with
reference to an enhanced cost in the hands of the purchaser. In this case
there was no reduction of income tax liability in the hands of the purchaser.”
22. The first appellate authority approved the finding of the AO that the transaction
in question is a finance transaction but has been given the colour of lease
transaction. On these facts we examine the legal position.
23. The assessee had filed a valuation report in support of his claim for deduction.
The AO without considering the same, rejected the claim of the assessee. Such an
act is against the prepositions laid down by the Hon’ble Gujarat High Court in the
case of Ashwin Vanaspati Industries vs. CIT (2002) 255 ITR 26 (Guj).
The
Jurisdictional High Court in the case of CIT vs. Cosmos Films Ltd. 338 ITR 226
(Delhi) at para 20 to 22 held as follows:-
“20.
We also note that in Industrial Development Corporation of Orissa Ltd.
(2004) 268 ITR 130 (Orissa), the Orissa High Court was dealing with a case
which was similar to the one before us where, in place of the Haryana State
Electricity Board, it was the Orissa State Electricity Board (OSEB). The said High
Court observed that if the sale and lease back agreement between the assessee
and the OSEB indicate that the assessee had purchased the plant and machinery
from the OSEB for a price and had leased out the same to the OSEB on lease
rent, the Revenue Department cannot discard the said sale and lease back
agreement on the ground that the underlying motive of the assessee to enter
into the said transaction was to reduce its income-tax liability. The Orissa High
Court observed that the Revenue could, however, discard the said transaction
only if there were materials or evidence before it to show that the intention of
the parties were different from what had been incorporated in the sale and lease
back agreements and that the transaction was really a sham and dubious
transaction and was a colourable device. We are in complete agreement with
20
ITA. Nos. 3159,3160/Del/2004
these observations of the Orissa High Court in the case of Industrial
Development Corporation of Orissa Ltd. (2004) 268 ITR 130 (Orissa). We are
also in agreement with the conclusion of the said High Court that in such cases,
the court would have to find out as to what was the real intention of the parties
in entering into the sale and lease agreement and that such intention has to be
gathered from the words in the said agreement in a tangible and in an objective
manner and not upon a hypothetical assessment of the supposed motive of the
assessee to avoid tax. We have already indicated that the intention gathered
from the documents on record shows that the ownership and title of the said
equipment had been transferred to the respondent-assessee and that after the
said transfer, the lease was entered into and the said equipment was leased
back to the HSEB. It has not at all been established on the basis of evidence on
record that the transaction was a colourable device entered into by and between
the HSEB and the respondent-assessee.
21.
We also note that a similar view has been taken by the Rajasthan High
Court in the case of CIT vs. Rajasthan State Electricity Board (2006) 204 CTR
(Raj.) 415 and the Gujarat High Court in the case of CIT vs. Gujarat Gas Co. Ltd.
(2009) 308 ITR 243 (Guj) which followed the decision of the Rajasthan High
Court in the case of CIT vs. Rajasthan State Electricity Board (2006) 204 CTR
(Raj) 415.
22.
We find that the observations of the Supreme Court in the case of Asea
Brown Boveri Ltd. (2004) 126 Comp Cas 332 (SC) ; AIR 2005 SC 17, with regard
to the nature of a financial lease are not of much use to the case of the
Revenue in view of the factual backdrop that, on facts, the transaction in
question has been found to be genuine. Once it is established that the
ownership of the said equipment is that of the assessee, then it is clear that the
respondent-assessee would be entitled to claim depreciation as allowed by the
Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. “
24.
In our view the facts in the case on hand is covered by the proposition laid
down in this decision of Jurisdictional High Court. Respectfully following the same we
uphold the contentions of the assessee and allow this ground.
25.
Ground No. 9 is against the disallowance of the claim of the assessee with
regard to exclusion from income of principal amount recovered amounting to Rs.
2,55,39,269/- on lease transactions which were earlier considered as finance
transactions by the AO. In the earlier asstt. years, the assessee had offered to tax,
the lease rental received, including the principal portion, by treating the transactions
in question as lease transactions. Lease transactions were considered as finance
21
ITA. Nos. 3159,3160/Del/2004
transactions by the AO and the depreciation claimed was disallowed. Consequently
the principal portion of the lease transactions, which were offered to tax had to be
reversed. The assessee’s claim is that such consequential benefit has to be allowed.
The Ld. Counsel submitted that, he is not pressing this ground of appeal. In view of
our decision in ground No. 8 where we accepted this claim of the assessee that
these transactions are lease transactions. In the result this ground is dismissed.
26.
Ground No. 10 is against the finding of the first appellate authority that certain
disallowance made by the AO and challenged by the assessee before the first
appellate authority, are not arising from the asstt. order. These issues are a)
exclusion of principal recovery amounting to Rs. 1,55,70,780/- from the lease rentals
in respect of transactions offered as finance transactions under the Voluntary
Disclosure of Income Scheme (VDIS 1997) 2) b) exclusion of net income amounting
to Rs. 1,22,77,685/-, which had been offered to tax under the VDIS 1997.c) claim of
long term capital loss amounting to Rs. 7,66,867/- d) claim of deduction of Rs.
77,45,779/- in respect of income of non-performing assets, which is not recognised
as income in the books of accounts, by following the prudential norms of RBI.
27.
The Ld. CIT(A) had at para 18.3, 19.4 and 20.7 held that the issue have not
been discussed by the AO and do not emanate from in the asstt. order for the year
under consideration. He dismissed the same. The Ld. Counsel for the assessee
prayed that these are legal grounds raised by the assessee and that the facts are
recorded that the Ld. CIT(A) should have adjudicated these claims on merit. Relied
on the following decisions a) CIT vs. V. Nirbheram Daluram 139 CTR 484 (SC) 2)
Jute Corporation of India 187 ITR 688 (SC). The Ld. DR opposed these contentions.
22
ITA. Nos. 3159,3160/Del/2004
28.
The Hon’ble Supreme Court in the case of Jute Corporation of India Ltd.
(supra) has held as follows :
“The appellant, a Government corporation engaged in the jute industry, had
not claimed any deduction of purchase tax liability in its return for the
assessment year 1974-75 in the belief that it was not liable to purchase tax
under the Bengal Raw Jute Taxation Act, 1941. Later on, the appellant was
assessed to the purchase tax, but it disputed the liability and preferred an
appeal and obtained a stay order. In an appeal before the Appellate Assistant
Commissioner, the appellant raised an additional ground for deduction of the
purchase tax on the ground that the tax liability should be deducted in
computing its profits, in view of the decision of the Supreme Court in
Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363. The Appellate
Assistant Commissioner permitted the appellant to raise the additional ground
and, after hearing the Income-tax Officer, allowed the claim. On appeal, the
Appellate Tribunal, placing reliance on the decision of the Supreme Court in
the case of Gurjargravures P. Ltd. (1978) 111 ITR 1, held that the Appellate
Assistant Commissioner had no jurisdiction to entertain the additional claim.
Both the Tribunal and the High Court rejected the respective applications of
the appellant for reference. On appeal to the Supreme Court.”
29.
Respectfully following these decisions we uphold the contentions of the
assessee that the Ld. CIT(A) should have considered the claim of the assessee on
merits. Hence we set aside the order to the file of the first appellate authority for
fresh adjudication, on merits, in accordance with law.
In the result, ground No.10 is allowed for statistical purpose.
Hence the appeal of the assesee is allowed in part.
ITA No. 3160/D/2004
Asstt. year 1997-98
30.
Ground No. 1 is general in nature.
31.
Ground No. 2 is against the adhoc disallowance of Rs. 30 lacs out of total
interest paid during the year, on the ground that interest free loans were given to
the subsidiary
of the assessee company. A similar issue on identical facts was
23
ITA. Nos. 3159,3160/Del/2004
considered by us while disposing off ground No. 5 in ITA No. 3159/D/09 for the
asstt. year 2006-07. Consistent with the view taken therein and for the same
reasons we allow this ground of the assessee.
32.
Ground No. 3 is against the restriction of claim of depreciation on commercial
vehicles given on lease to 25%, as against 40% claimed by the assessee. Here also
the first appellate authority followed his conclusions for the asstt. year 1996-97.
Consistent with the view taken by us, while disposing off ground No. 7 for the asstt.
Year 2006-07. On the very same issue we allow this ground of the assessee.
33.
Ground No. 4 is challenging the disallowance of claim of depreciation on
equipment which has been purchased and leased back to the same parties i.e M/s.
Datar Switchgear Ltd. and High Temp Furnance Ltd. Similar issue has been
adjudicated by us while disposing off ground No.8 for the asstt. Year 1996-97.
Consistent with the view taken therein, we allow this ground of the assessee.
34.
Ground No. 5 challenges the decision of the Ld. CIT(A) in not adjudicating the
grounds of the assessee on merits for the reason that these issues did not emanate
from the order of the AO. The issues in question are (a) disallowance of Rs.
1,27,04,732/- and Rs. 71,475/- being interest on interest tax u/s 12A and 12B of the
Interest Tax Act of 1974 (b) carry forward of assessed unabsorbed depreciation and
long term capital loss (c)
amending the opening written down value which arose
as result of disallowance of depreciation in earlier years. Similar issue was
adjudicated by us, while disposing off ground No. 10 for asstt. year 1996-97 in ITA
No. 3159/D/2004. Consistent with the view taken therein, we set aside the issue
with the file of the CIT(A) for fresh adjudication on merits in accordance with law.
24
ITA. Nos. 3159,3160/Del/2004
35.
In the result both the appeals of the assessee are allowed in part.
Order pronounced in the Open Court on
sd/(A.T. VARKEY)
JUDICIAL MEMBER
Dated:
30th January, 2015
‘veena’
Copy of the Order forwarded to:
1.
Appellant
2. Respondent
5.
DR
6. Guard File
30th January, 2015.
sd/(J.SUDHAKAR REDDY)
ACCOUNTANT MEMBER
3.
CIT
4.
CIT(A)
By Order
Deputy Registrar
25