M/s. Sical Logistics Limited, CHENNAI v. DCIT, CHENNAI

CO 189/CHNY/2009 | 2005-2006
Pronouncement Date: 14-10-2010 | Result: Partly Allowed

Appeal Details

RSA Number 18921723 RSA 2009
Assessee PAN AAACS3789B
Bench Chennai
Appeal Number CO 189/CHNY/2009
Duration Of Justice 10 month(s) 28 day(s)
Appellant M/s. Sical Logistics Limited, CHENNAI
Respondent DCIT, CHENNAI
Appeal Type Cross Objection
Pronouncement Date 14-10-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 14-10-2010
Date Of Final Hearing 06-10-2010
Next Hearing Date 06-10-2010
Assessment Year 2005-2006
Appeal Filed On 16-11-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BENCH A CHENNAI (BEFORE SHRI K.K. GUPTA ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN JUDICIAL MEMBER) ..... I.T.A. NO. 1599/MDS/2009 ASSESSMENT YEAR : 2005-06 THE DY. COMMISSIONER OF INCOME TAX COMPANY CIRCLE V(1) CHENNAI - 600 034. (APPELLANT) V. M/S SICAL LOGISTICS LTD. 73 ARMENIEN STREET CHENNAI - 600 001. PAN : AAACS3789B (RESPONDENT) C.O. NO. 189/MDS/2009 (IN I.T.A. NO. 1599/MDS/2009) ASSESSMENT YEAR : 2005-06 M/S SICAL LOGISTICS LTD. 73 ARMENIEN STREET CHENNAI - 600 001. (CROSS OBJECTOR) V. THE DY. COMMISSIONER OF INCOME TAX COMPANY CIRCLE V(1) CHENNAI - 600 034. (RESPONDENT) REVENUE BY: SHRI SHAJI P. JACOB ASSESSEE BY: SHRI SATHIYANARAYANAN O R D E R PER K.K. GUPTA ACCOUNTANT MEMBER : THE REVENUE IS IN APPEAL RAISING THE FOLLOWING GRO UNDS:- 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY IN LAW AND FACTS OF THE CASE. 2.1 THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWAN CE OF ` 1 63 084/- MADE TOWARDS ENTRANCE FEES AND COST OF SERVICES PAID TO VARIOUS CLUBS. I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 2 2.2 HAVING REGARD TO THE HON'BLE KERALA HIGH COURT DECI SION IN THE CASE OF FRAMATONE CONNECTOR OEN LTD. V. DCIT (2 94 ITR 559) THE LEARNED CIT(A) OUGHT TO HAVE UPHELD T HE ACTION OF THE ASSESSING OFFICER. 3.1 THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION O F ` 55 59 100/- ATTRIBUTABLE TO DISALLOWANCE MADE WITH REFERENCE TO ACCOUNTING ENTRIES. 3.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE HO N'BLE SUPREME COURT IN THE CASE OF CIT V. THANTHI TRUST ( 239 ITR 502) HAS APPROVED IN PRINCIPLE THE PROPOSITION THAT BOOK ENTRIES DO HAVE A LEGAL EFFECT. 4.1 THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ENTIRE QUANTUM OF BAD DEBTS WRITTEN OFF BY THE ASSESSEE CO MPANY IS ALLOWABLE AS A DEDUCTION THEREBY DELETING THE ADDITION OF ` 587.59 LAKHS. 4.2 HAVING REGARD TO THE HON'BLE JURISDICTIONAL HIGH CO URTS DECISION IN THE CASE OF SOUTH INDIA SURGICAL CO. LT D. V. CIT (287 ITR 62) THE LEARNED CIT(A) OUGHT TO HAVE UPHE LD THE ACTION OF THE ASSESSING OFFICER. 5.1 THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWAN CE OF ` 6 35 099/- MADE TOWARDS POOJA EXPENSES. 5.2 THE LEARNED CIT(A) OUGHT TO HAVE NOTED THE DECISION OF THE HON'BLE DELHI HIGH COURT DECISION IN THE CASE O F CIT V. BHANNA MAL AND COMPANY PVT. LTD. (82 ITR 138) AND U PHELD THE ACTION OF THE ASSESSING OFFICER. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING O FFICER RESTORED. THE CROSS OBJECTION PREFERRED BY THE ASSESSEE-RESPO NDENT MAINLY SUPPORTS THE ORDER OF THE LEARNED CIT(APPEALS) ON T HE ISSUE AGITATED BY THE REVENUE BEFORE US BUT OBJECTING TO THE ACT ION OF THE LD. CIT(APPEALS) IN DIRECTING THAT THE EXPENDITURE CLAI MED FROM INCOME UNDER THE PROVISIONS OF SECTION 14A OF THE INCOME-T AX ACT 1961 I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 3 (HEREINAFTER REFERRED TO AS THE ACT) SHALL BE QUA NTIFIED UNDER RULE 8D OF THE INCOME-TAX RULES 1962. 2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDER ED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE DOCUMENT S PLACED ON RECORD VIDE PAPER-BOOK BY THE LEARNED COUNSEL FOR T HE ASSESSEE VIZ. THE VOUCHERS FOR PAYMENT OF CLUB EXPENSES LEDGER C OPY OF DRY DOCK EXPENSES INCURRED LEDGER COPIES OF POOJA EXPENSES INCURRED AND JUDICIAL PRONOUNCEMENTS TO THE PROPOSITION CITED IN THE GROUNDS RAISED BY THE REVENUE BEFORE US. 3. THE ASSESSEE IS A BUSINESS ENTITY MANUFACTURING AUTO- COMPONENTS AND ENGAGED IN SERVICES FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR DECLARING INCOME OF ` 41.14 CRORES. THE ASSESSING OFFICER IN HER SCRUTINY ASSESSMENT UNDER SECTION 143(3) NOTED THAT THE AUDITORS IN THEIR REPORT IN FORM 3CD DISCLOSED THAT PAYMENT TO CLUBS COMPRISING SUBSCRIPTION AND EXPENS ES TO THE TUNE OF ` 1 63 084/- WAS CONSIDERED NOT AN ADMISSIBLE EXPEND ITURE UNDER SECTION 37 OF THE ACT WAS DISALLOWED. SHE ALSO NO TED THAT THE CLAIM ON DRY DOCK EXPENSES WAS DEBITED IN THE BOOKS AS ` 55 59 100/- FOR THE IMPUGNED ASSESSMENT YEAR AND REMAINING 50% WAS DEFERRED FOR THE NEXT ASSESSMENT YEAR BUT WAS CLAIMED IN THE CO MPUTATION OF I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 4 TAXABLE INCOME BY CLAIMING 100% IN THE IMPUGNED ASS ESSMENT YEAR. SHE ALSO NOTED THAT THESE DEFERRED EXPENSES ARE MOR E SUBSTANTIAL IN NATURE THAN THOSE CLAIMED IN THE EARLIER ASSESSMENT YEAR HENCE IN CONSONANCE WITH THE STAND ADOPTED BY THE DEPARTMENT THE EXPENSES PERTAINING TO THE SUBSEQUENT YEAR WERE INTER ALIA TO BE ALLOWED FOR THE NEXT YEAR. ON THE ISSUE OF CLAIMING BAD DEBTS WRITE OFF SHE NOTED THAT THE ASSESSEE HAD WRITTEN OFF DEBTS WHICH WERE OWED BY GOVERNMENT AND PUBLIC SECTOR UNDERTAKINGS WHICH IN VIEW OF THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE O F SOUTH INDIA SURGICAL COMPANY LTD. V. ACIT REPORTED IN 287 ITR 6 2 WAS CONSIDERED AS GOVERNMENT AGENCIES CANNOT BECOME BAD WHATSOEVER AND WRITING THEM OFF BAD DEBTS WAS PREMATURE. SHE DISALLOWED THE CLAIM OF THE ASSESSEE FOR WRITING OFF OF AMOUNT OF ` 587.59 LAKHS AS ADMISSIBLE. IN HER ORDER UNDER SECTION 143(3) THE ASSESSING OFFICER ALSO NOTED THAT ASSESSEE HAS CLAIMED ` 6 35 099/- AS EXPENSES TOWARDS POOJA WHICH SHE CONSIDERED NOT PERTAINING T O ASSESSEES BUSINESS ACTIVITY AND ADDED BACK TO THE RETURNED IN COME. AGGRIEVED THE ASSESSEE APPEALED BEFORE THE FIRST APPELLATE AU THORITY WHO CONSIDERED THESE ISSUES BY NOTING THAT IN THE IMPUG NED ASSESSMENT YEAR HAVING MULTIPLE ACTIVITIES AND SEVERAL DIVISIO NS ASSESSEE HAS ITS OWN INTERNAL MECHANISM FOR DETERMINING RECOVERABILI TY OF ANY I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 5 PARTICULAR DEBT AND THE TIME OR CONDITIONS UNDER WH ICH A PARTICULAR DEBT WAS TO BE CLASSIFIED AS IRRECOVERABLE WAS TO BE WRITTEN OFF IN THE BOOKS AS AVAILABLE UNDER THE PROVISIONS OF SECTION 36(1)(VII) READ WITH SECTION 36(2) OF THE ACT. THE PRINCIPLE WILL HOLD VALID FOR THE ENTIRE QUANTUM OF BAD DEBTS WRITTEN OFF WHICH DISALLOWANCE WAS DELETED BY THE CIT(APPEALS). ON THE ISSUE OF RECEIPT OF DIVID END OF ` 4.56 CRORES WHEN THE ASSESSING OFFICER COMPUTED EXPENDI TURE RELATABLE TO EARNING OF THE SAME AS EXEMPT UNDER SECTION 10(3 4) OF THE ACT THE LD. CIT(APPEALS) OBSERVED THAT THE CLAIM OF ` 9 11 642/- WAS TO BE IN ACCORDANCE WITH CBDT INSTRUCTIONS UNDER THE NEWLY I NSERTED RULE 8D BY NOTIFICATION DATED 24 TH MARCH 2008 BY INCOME TAX (FIFTH AMENDMENT) RULES 2008 AS NOTIFIED IN 299 ITR (ST.) 88 REQUIRING AN ALLOCATION BY PROVIDING A FORMULA WHICH IS NOW MADE MANDATORY. ON THE LAST ISSUE NAMELY DELETION OF POOJA EXPENSES THE CIT(APPEALS) NOTED THAT IT WAS AN OPINION OF THE ASSESSING OFFIC ER THAT IT DID NOT PERTAIN TO THE BUSINESS ACTIVITY OF THE ASSESSEE WH ICH HE HELD OTHERWISE IN THE GROUND AGITATED BY THE ASSESSEE BE FORE HIM. 4. ON THE ISSUE OF CLUB EXPENSES THE LEARNED COUNS EL FOR THE ASSESSEE HAS RELIED ON THE DECISION OF JURISDICTION AL HIGH COURT IN THE CASE OF CIT V. SUNDARAM INDUSTRIES LTD. REPORTED IN 240 ITR 335 AS AGAINST THE PLACING OF RELIANCE BY THE REVENUE ON T HE DECISION OF I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 6 HON'BLE KERALA HIGH COURT IN THE CASE OF FRAMATONE C ONNECTOR OEN LTD. V. DCIT REPORTED IN 294 ITR 559. HE POINTED O UT THAT THE FACTS OF THE ASSESSEE ARE DIFFERENT IN SO FAR AS ONLY ONE TI ME PAYMENT WAS CONSIDERED BY THE HON'BLE KERALA HIGH COURT AS NOT R EVENUE BEING ENTRANCE FEE WHICH AS PER THE EXPENDITURE PURPORTED TO BE DISALLOWED BY THE ASSESSING OFFICER. PAGE NOS. 24 TO 143 AT P APER-BOOK CLEARLY INDICATE THAT THE EXPENSES ARE INCURRED THROUGHOUT THE YEAR FOR THE EMPLOYEES OF THE ASSESSEE-COMPANY WHICH BECOME NECE SSARY BUSINESS EXPENDITURE AS PER THE CONTRACTUAL OBLIGAT ION CAST UPON THE ASSESSEE VIS--VIS THE EMPLOYEES. HE POINTED OUT T HAT THESE EXPENSES BEING PRACTICAL IN NATURE CAN BY NO STRET CH OF IMAGINATION BE CONSIDERED AS EXPENDITURE GIVING ENDURING BENEFI T TO THE ASSESSEE. 5. WE FIND FORCE IN THE SUBMISSION OF THE LEARNED C OUNSEL FOR THE ASSESSEE IN SO FAR AS HAVING PERUSED THE EXPENSES G IVEN IN PAGES 24 TO 143 OF PAPER-BOOK. WE ARE INCLINED TO HOLD THAT THESE EXPENSES INCURRED BY THE EMPLOYEES ARE BUSINESS EXPENSES OF THE ASSESSEE UNDER CONTRACTUAL OBLIGATIONS AND ARE TO BE ALLOWED AS SUCH. THIS GROUND TAKEN BY THE REVENUE STANDS DISMISSED ON THE BASIS OF FACTS ON RECORD. I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 7 6. THE SECOND ISSUE RELATING TO DEFERRED EXPENDITUR E NOTED BY THE ASSESSEE ITSELF BY CLAIMING FULL DEDUCTION IN THE I MPUGNED ASSESSMENT YEAR REQUIRES RE-CONSIDERATION BY THE AS SESSING OFFICER IN VIEW OF THE REVENUE RELYING ON THE DECISION OF H ON'BLE SUPREME COURT IN THE CASE OF CIT V. THANTHI TRUST REPORTED IN 239 ITR 502 WHICH ONLY INDICATES THAT IN PRINCIPLE THE PROPOSIT ION THAT BOOK ENTRIES DO HAVE A LEGAL EFFECT WOULD ONLY INCREASE THE WORK LOAD OF THE ASSESSEE AS WELL AS REVENUE WHEN A CLAIM IS MADE BU T PUBLISHED ACCOUNTS INDICATE OTHERWISE OUGHT TO HAVE ARRIVED A FINALITY IN SO FAR AS IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE DEFERRED PAYMENT WAS CLAIMED IN THE BOOKS BUT OFFERED TO TA X OR ADDED BACK BY THE ASSESSEE HIMSELF WHEN SUCH CLAIM WAS MADE OU TSIDE FROM THE BOOKS. WITHOUT GOING INTO THE CONTROVERSY OF CAPIT AL AND PART REVENUE EXPENDITURE WE ARE OF THE CONSIDERED VIEW THAT DRY DOCK EXPENSES ARE STATUTORY TO BE BORNE AND INCURRED AS REVENUE E XPENDITURE BY THE ASSESSEE AND THEREFORE BEING A HIGH AMOUNT CHOSE T O BE SPLIT IN TWO YEARS WHEN THE REQUIREMENT OF DRY DOCK REPAIRS IS T O BE NECESSARILY CARRIED OUT. THE ASSESSING OFFICER IS REQUIRED TO VERIFY THAT HAVING DEFERRED 50% OF THE PAYMENT IN THE SUBSEQUENT YEAR WHETHER THE ASSESSEE HAS ALSO ADDED BACK THE SAME ONCE THE 100% CLAIM IS TO BE ALLOWED IN THE IMPUGNED ASSESSMENT YEAR WITHIN T HE FRAME WORK OF I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 8 THE ACCOUNTING PRINCIPLE ADOPTED BY THE ASSESSEE AS PER THE PROVISIONS OF INCOME-TAX ACT. 7. ON THE ISSUE OF CLAIMING OF BAD DEBTS THE LEARN ED COUNSEL FOR THE ASSESSEE HAS RELIED ON THE DECISION OF HON'BLE A PEX COURT IN THE CASE OF T.R.F. LTD. V. CIT IN CIVIL APPEAL NO.5293 AND 5294 OF 2003 DATED 9 TH FEBRUARY 2010 ON THE CLAIM OF BAD DEBTS WHICH IND ICATE THAT AFTER 1 ST APRIL 1989 IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT A DEBT IN FACT HAS BECOME IRRECOVERABLE AND IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACC OUNTS OF THE ASSESSEE WHICH PROPOSITION WAS DIRECTED TO BE CONSI DERED BY THE ASSESSING OFFICER AGAIN IN THE LIGHT OF THE FACT TH AT IT HAS BECOME BAD TO THAT EXTENT THE ASSESSEE HAS CHOSEN TO WRITE IT OFF. ON OUR PERUSAL OF THE ASSESSMENT ORDER WE ARE INCLINED TO HOLD TH AT THE ASSESSING OFFICER ON PAGE NO.5 OF HER ORDER IN PARA 9.1 AND 9 .3 HAD NOTED THAT BALANCE OWED BY THE SUNDRY DEBTORS WERE TO BE CONSI DERED FOR VERIFYING OF NON-EXISTING PARTIES OR GOVERNMENT AGE NCIES ON BECOMING BAD. ON THIS PROPOSITION ALSO WE ARE INCL INED TO HOLD THAT THE FACTS ARE TO BE CLARIFIED IN THE LIGHT OF THE D ECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF SOUTH INDIA SURGIC AL COMPANY LTD. (SUPRA). THIS ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER TO VERIFY IN THE LIGHT OF THE DECISION OF HON'BLE APEX COURT IN THE CASE OF I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 9 T.R.F. LTD. (SUPRA). NEEDLESS TO SAY THAT ASSESSEE BE AFFORDED WITH AN OPPORTUNITY TO EXPLAIN THE NATURE OF BAD DEBT WH ETHER WRITTEN OFF COMPLETE AND ADJUSTED AGAINST ITS PROVISION AND REC OVERY IF ANY IS TAXED WITH NATURE OF INCOME IN THE DEBT. 8. ON THE LAST ISSUE REGARDING DISALLOWANCE OF POO JA EXPENSES THE LD. CIT(APPEALS) HAS HELD THAT POOJA WAS CONDUC TED BY THE ASSESSEE FOR ITS BUSINESS PURPOSE AGAINST WHICH THE LEARNED COUNSEL FOR THE ASSESSEE HAS FILED THE DETAILS OF EXPENSES INCURRED IN PAPER- BOOK PAGES 145 AND 146 WHICH TOTAL TO ` 1 96 890/- ONLY. WE HAVE PERUSED THESE EXPENSES WHICH RELATE TO A TYPICAL PO OJA CARRIED OUT BY THE ASSESSEE REGULARLY ON FRIDAYS AND ALSO AYUDH PO OJA AND PAYMENTS TO POOJARIS. WE DIRECT THE ASSESSING OFFI CER TO RE-CONSIDER THE EXPENSES TO BE DISALLOWED BEYOND THE SUM OF ` 1 96 890/- AS DETAILED BY THE ASSESSEE IN ACCORDANCE WITH PROPOSI TION BY THE LD. CIT(APPEALS) THAT ALL WERE INCURRED FOR THE PURPOSE OF ASSESSEES BUSINESS. HOWEVER FOR THE REMAINING EXPENSES OF APPROXIMATELY ` 6 35 099/- LESS THE ABOVE THE ASSESSEE IS REQUIRED TO ESTABLISH AS TO HOW THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. BHANNA MAL AND COMPANY PVT. LTD. REPORTED IN 82 ITR 138 IS NOT APPLICABLE TO THE FACTS AS NOTED BY THE ASSESSING O FFICER. THE I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 10 ASSESSEE IS REQUIRED TO EXPLAIN THE NEED TO CLAIM S UCH EXPENSES IN THE LIGHT THEREOF. 9. IN THE RESULT THE APPEAL FILED BY THE REVENUE S TANDS PARTLY ALLOWED AS INDICATED ABOVE. 10. THE CROSS OBJECTION ONLY SUPPORTS THE ORDER OF THE CIT(APPEALS) WHICH WE HAVE DEALT WITH AS ABOVE EXC EPT OBJECTING THE LD. CIT(APPEALS)S DIRECTION TO ASSESSING OFFIC ER TO ALLOW THE EXPENDITURE TO THE EXTENT PROVIDED UNDER RULE 8D EX CEPT EXEMPTED UNDER SECTION 10(34) OF THE ACT. THE ASSESSEE CONT ENDED THAT RULE 8D CAME INTO EFFECT WITH EFFECT FROM 1.4.2007. ONC E THE SAME COULD NOT BE APPLIED TO THE CURRENT ASSESSMENT YEAR VIS- -VIS THE DECISION OF BOMBAY HIGH COURT INDICATING ALLOWABILITY OF EXP ENDITURE HAS BEEN CONSIDERED IN THE DECISION RENDERED IN THE CASE OF GODREJ BOYLE REPORTED IN 234 CTR 7 HAS TO BE FOLLOWED. IN THE L IGHT OF THE ABOVE THE ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER TO CONSIDER THE ALLOWABILITY OR EXTENT OF ALLOWABILITY OF NOTIO NAL EXPENSES WHEN THE LD. CIT(APPEALS)S DIRECTION IS TO RECOMPUTE THE QU ANTUM OF EXPENSES WHICH SHOULD NOT BE AVAILABLE FOR DEDUCTION BUT IN CONFORMITY WITH THE PROVISIONS OF RULE 8D. WE ACKNOWLEDGE THE DECISION OF LD. I.T.A. NO. 1599/MDS/09 C.O. NO. 189/MDS/09 11 CIT(APPEALS) ON THIS ISSUE AS HE HAS GIVEN APPROPRI ATE DIRECTION TO THE ASSESSING OFFICER. 11. THE CROSS OBJECTION IS THEREFORE PARTLY ALLOW ED AS NOTED ABOVE. 12. IN THE RESULT THE APPEAL AND THE CROSS OBJECTI ON STAND PARTLY ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON 14 TH OCTOBER 2010. SD/- SD/- (GEORGE MATHAN) (K.K. GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI DATED THE 14 TH OCTOBER 2010. KRI. COPY FORWARDED TO: (1) ASSESSEE (2) ASSESSING OFFICER (3) CIT(A)-V CHENNAI-34 (4) CIT CHENNAI-III CHENNAI (5) D.R. (6) GUARD FILE