The DCIT, Circle-4(1),, Baroda v. Munjal Auto Industries Ltd.,, Baroda

ITA 2761/AHD/2006 | 2003-2004
Pronouncement Date: 09-04-2010 | Result: Partly Allowed

Appeal Details

RSA Number 276120514 RSA 2006
Assessee PAN AAACB8588L
Bench Ahmedabad
Appeal Number ITA 2761/AHD/2006
Duration Of Justice 3 year(s) 3 month(s) 29 day(s)
Appellant The DCIT, Circle-4(1),, Baroda
Respondent Munjal Auto Industries Ltd.,, Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 09-04-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 09-04-2010
Date Of Final Hearing 06-04-2010
Next Hearing Date 06-04-2010
Assessment Year 2003-2004
Appeal Filed On 11-12-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH AHMEDABAD (BEFORE S/SHRI G. D. AGARWAL VP AND BHAVNESH SAINI JM) ITA NO.2761/AHD/2006 A. Y.: 2003-04 THE D. C. I. T. CIRCLE-4(1) 4 TH FLOOR AAYAKAR BHAVAN RACE COURSE CIRCLE BARODA VS M/S. MUNJAL AUTO INDUSTRIES LTD. 187 G. I. D. C. ESTATE WAGHODIA DIST. BARODA PA NO. AAACB 8588L (APPELLANT) (RESPONDENT) APPELLANT BY SHRI ANIL KUMAR DR RESPONDENT BY SHRI MILIN MEHTA AR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY REVENUE IS DIRECTED AGAINST ORDER OF THE CIT(A)-III BARODA DATED 29-0 9-2006 FOR ASSESSMENT YEAR 2003-04. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND C ONSIDERED THE MATERIAL ON RECORD. 3. THE REVENUE ON GROUND NO.1 OF THE APPEAL CHALLE NGED THE ORDER OF THE LEARNED CIT(A) IN DELETING THE ADDITION OF RS.5 0 LAKHS BEING PAYMENT OF RE-COMPENSATION. THE AO NOTED THAT THE ASSESSEE HAD DEBITED THIS AMOUNT IN THE PROFIT & LOSS ACCOUNT. IT WAS NOTED T HAT EXPENDITURE WAS INCURRED BY WAY OF ONE TIME SETTLEMENT FOR THE SACR IFICES MADE BY THE FINANCIAL INSTITUTIONS FOR WAIVER OF THE INTEREST A ND LATE PAYMENT WHICH THE ASSESSEE COMPANY LED TO FINANCIAL SICKNESS. THE AO HELD THAT THE PAYMENT IS IN THE NATURE OF CAPITAL EXPENDITURE ON THE GROUND THAT THAT IT WAS ONE TIME PAYMENT WHICH BROUGHT AN ADVANTAGE WH ICH WAS OF ENDURING IN NATURE AND WOULD BENEFIT THE COMPANY OV ER LONG RUN. ITA NO.2761/AHD/2006 M/S. MUNJAL AUTO INDUSTRIES LTD. 2 4. THE ADDITION WAS CHALLENGED BEFORE THE LEARNED C IT(A) AND IT WAS SUBMITTED THAT THE ASSESSEE COMPANY HAD BORROWED AN AGGREGATE AMOUNT OF RS.956.37 LAKHS IN 1988-89 FOR BUSINESS P URPOSE FROM ICICI IDBI IFCI SBI AND PNB. LOANS WERE TO BE REPAID AS PER THE REPAYMENT SCHEDULE AND WERE TO CARRY INTEREST AT THE RATES RA NGING FROM 14.5% TO 18.5%. HOWEVER THE ASSESSEE COMPANYS PERFORMANCE WAS BELOW EXPECTATION AND IN 1994-95 IT HAD TO APPROACH THE BIFR FOR SUPPORT. THE BIFR AFTER HEARING THE ASSESSEE COMPANY AND THE ABOVE FINANCIAL INSTITUTIONS/BANKS GOVERNMENT OF GUJARAT AND THE D EPARTMENT OF REVENUE AND GOVERNMENT OF INDIA AND OTHER CONCERNED PARTIES SANCTIONED A REHABILITATION SCHEME VIDE ITS ORDER D ATED 10-12-1995 WHEREBY ALL FINANCIAL INSTITUTIONS AND BANKS WERE T O KEEP THEIR CLAIMS IN RESPECT OF REPAYMENT OF PRINCIPAL AND INTEREST IN A BEYANCE TILL THE REVIVAL OF THE COMPANY. IN CASE THE UNIT REVIVES AFTER IMPL EMENTATION OF THE SCHEME THE FINANCIAL INSTITUTIONS BANKS ETC. RESE RVE THE RIGHT TO RECOVER THE FULL AMOUNT OF INTEREST AND PRINCIPAL AMOUNT KE PT IN ABEYANCE IN ACCORDANCE WITH THE DIRECTIONS OF BIFR UNDER THE RE HABILITATION SCHEME. ULTIMATELY THE ASSESSEE COMPANY REVIVED AND ITS FI NANCIAL HEALTH IMPROVED. SINCE THE COMPANY WAS IN BETTER FINANCIAL HEALTH CONSORTIUM OF BANKS AND FINANCIAL INSTITUTIONS TOGETHER AGREED TO ACCEPT A TOTAL AMOUNT OF RS.50 LAKHS IN FULL AND FINAL SETTLEMENT OF THE OUTSTANDING INTEREST PAYMENT OF APPROXIMATELY RS.200 LAKHS. IT WAS EXPLAINED THAT THE NATURE OF PAYMENT IS INTEREST AND IS PURELY REV ENUE IN NATURE WHICH WAS PAID AS PER THE AGREEMENT BETWEEN THE PARTIES. IT WAS SUBMITTED THAT HAD THE BIFR NOT INTERVENED AND THE BANKS NOT AGREE D TO RESTRAIN THEMSELVES FROM RECOVERING THE INTEREST THE ASSESS EE COMPANY WOULD NOT HAVE SURVIVED SINCE THE BURDEN OF INTEREST UNDER TH E ADVERSE CIRCUMSTANCES WOULD HAVE LED TO COLLAPSE OF THE ASS ESSEE COMPANY. IT WAS THEREFORE INTEREST OF THE PAST WHICH CANNOT B E TREATED AS CAPITAL EXPENDITURE. NO ENDURING BENEFIT WAS DERIVED AND NO ASSET WAS CREATED IN FAVOUR OF THE ASSESSEE. ITA NO.2761/AHD/2006 M/S. MUNJAL AUTO INDUSTRIES LTD. 3 5. THE LEARNED CIT(A) CONSIDERING THE EXPLANATION O F THE ASSESSEE AND MATERIAL ON RECORD AGREED THAT THE BIFR IMPOSED CON DITIONS FOR KEEPING THE PAYMENT SCHEDULE IN ABEYANCE DUE TO POOR FINANC IAL HEALTH OF THE ASSESSEE. THE SHARE OF EACH FINANCIAL INSTITUTION W HICH HAD AGREED FOR ACCEPTANCE OF RS.50 LAKHS AS FULL AND FINAL SETTLEM ENT IS MENTIONED IN PARA 7.2 OF THE IMPUGNED ORDER TO SHOW THAT THE PRI NCIPAL HAVE AGREED TO ACCEPT PART OF THE INTEREST AS AGAINST HUGE LIABILI TY OF THE INTEREST. THE LEARNED CIT(A) THEREFORE NOTED THAT THE NATURE OF PAYMENT WAS THAT OF INTEREST AND THE LIABILITY FOR PAYING INTEREST WAS CRYSTALLIZED UPON THE AGREEMENT OF CONCERNED CREDITOR INSTITUTIONS TO ACC EPT PART PAYMENT IN FINAL SETTLEMENT. THE LEARNED CIT(A) RELIED UPON TH E DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MADRAS AUTO SE RVICE 233 ITR 468 (SC) IN WHICH IT WAS HELD THAT THE EXPENDITURE INCU RRED IN LIEU OF REVENUE EXPENDITURE WAS ITSELF TO BE CONSIDERED TO BE REVEN UE NATURE. THE LEARNED CIT(A) THEREFORE HELD THAT IN THE INSTANT CASE THE PAYMENT REPRESENTS ACCUMULATED INTEREST WHICH IS PAYABLE DURING THE AS SESSMENT YEAR UNDER CONSIDERATION AND WAS ALSO PAID IN THE ASSESSMENT Y EAR IN QUESTION. THEREFORE THE NATURE OF PAYMENT WAS THAT OF THE IN TEREST WHICH IS REVENUE IN NATURE. THE ADDITION WAS ACCORDINGLY DEL ETED. 6. THE LEARNED DR RELIED UPON THE ORDER OF THE AO. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE ASSESSEE REITERAT ED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. 7. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE DO NOT FIND ANY MERIT IN THE DEPARTMENTAL APPEAL ON THIS GROUND. THE ASSE SSEE HAS SPECIFICALLY EXPLAINED THAT IT BORROWED LOANS FROM VARIOUS FINAN CIAL INSTITUTIONS AND WAS UNDER OBLIGATION TO PAY HEAVY INTEREST. AS PER BIFR ORDER THE PAYMENT OF INTEREST WAS KEPT IN ABEYANCE AND IT WAS PROVIDED THAT IN CASE OF ASSESSEE REVIVES ITS FINANCIAL GROWTH INTE REST SHOULD BE RECOVERED BY THE FINANCIAL INSTITUTIONS AND THE BANKS. THE AS SESSEE AND THE ITA NO.2761/AHD/2006 M/S. MUNJAL AUTO INDUSTRIES LTD. 4 FINANCIAL INSTITUTIONS AND THE BANKS ENTERED INTO A N AGREEMENT ON REVIVAL OF FINANCIAL GROWTH OF THE ASSESSEE THAT RS.50 LAKH S BE PAID AS INTEREST IN FULL AND FINAL SETTLEMENT OF THE INTEREST PAYMENT. THE INTEREST THEREFORE BECAME ASCERTAINED LIABILITY ON SETTLEMENT BETWEEN THE PARTIES IN THE YEAR UNDER CONSIDERATION AND PAYMENT IS ALSO MADE I N THE YEAR UNDER CONSIDERATION. THE SETTLEMENT OF PART PAYMENT OF TH E INTEREST IN FULL AND FINAL SETTLEMENT WAS IN THE INTEREST OF THE ASSESSE E AND WAS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS. THE LEARNED CIT(A) WAS THEREFORE JUSTIFIED IN HOLDING THAT NA TURE OF THE PAYMENT WAS THAT OF THE INTEREST WHICH IS REVENUE IN NATURE. TH E LEARNED CIT(A) WAS THEREFORE JUSTIFIED IN DELETING THE ENTIRE ADDITIO N. THIS GROUND OF APPEAL OF THE REVENUE IS ACCORDINGLY DISMISSED. 8. ON GROUND NO.2 OF THE APPEAL THE REVENUE CHALLE NGED THE ORDER OF THE LEARNED CIT(A) IN DIRECTING THE AO TO RECOMPUTE D BOOK PROFIT U/S 115 JB OF THE IT ACT WITHOUT INCREASING THE NET PROFIT BY THE SUM OF RS.8 21 03 761/- ON ACCOUNT OF PROVISION FOR DEFERR ED TAXATION. THE AO NOTED THAT THE ASSESSEE HAD DEBITED RS.1 20 83 000/ - ON ACCOUNT OF PROVISION FOR CURRENT TAXATION AND FURTHER A SUM OF RS.8 21 03 761/- ON ACCOUNT OF PROVISION FOR DEFERRED TAXATION. THE PRO VISION FOR CURRENT TAXATION WAS ADDED BACK IN THE COMPUTATION OF BOOK PROFIT U/S 115JB OF THE IT ACT. HOWEVER THE OTHER AMOUNT REPRESENTING THE PROVISION FOR DEFERRED TAXATION WAS NOT ADDED BACK. THE AO DID NO T ACCEPT THE ASSESSEES EXPLANATION THAT THE PROVISION FOR DEFER RED TAXATION DO NOT FALL UNDER CLAUSE (A) OF EXPLANATION TO SECTION 115JB (2 ) OF THE IT ACT. IT WAS HELD THAT IT WAS IMMATERIAL WHETHER THE PROVISION F OR CURRENT TAXATION OR FOR DEFERRED TAXATION. THE NATURE OF BOTH THE AMOUN TS IS SAME AS BOTH ARE THE PROVISION FOR INCOME TAX. ACCORDINGLY THE B OOK PROFIT WAS COMPUTED AFTER ADDING BACK THE SAID AMOUNT OF RS.8 21 03 761/- TO NET PROFIT UNDER EXPLANATION (A) TO SECTION 115JB (2) O F THE IT ACT. ITA NO.2761/AHD/2006 M/S. MUNJAL AUTO INDUSTRIES LTD. 5 9. IT WAS BRIEFLY SUBMITTED BEFORE THE LEARNED CIT( A) THAT THE AO HAS NOT APPRECIATED THE DISTINCTION BETWEEN THE PROVISI ON FOR DEFERRED TAXATION AND THE PROVISION FOR CURRENT TAXATION. IT WAS SUBMITTED THAT ONLY VARIATION TO THE PROFIT & LOSS ACCOUNT PREPARE D IN ACCORDANCE WITH THE PROVISIONS OF PART II AND III OF SCHEDULE VI TO THE COMPANIES ACT WOULD BE AS PER THE ITEMS (A) TO (F) OR ITEMS (I) T O (VII) UNDER THE EXPLANATION. THE AO HAS INCREASED THE PROFITS BY TA KING RECOURSE TO CLAUSE (A) OF THE EXPLANATION. AS PER THIS CLAUSE THE BOOK PROFIT HAS TO BE INCREASED BY THE AMOUNT OF INCOME TAX PAID OR PAYAB LE AND THE PROVISIONS THEREOF. THE ASSESSEE HAS DULY INCREASE D THE BOOK PROFIT BY THE AMOUNT PROVIDED TOWARDS CURRENT TAXATION SINCE IT REPRESENTED INCOME TAX PAYABLE. HOWEVER THE ASSESSEE HAS NOT I NCREASED THE BOOK PROFIT BY THE AMOUNT OF PROVISION FOR DEFERRED TAXA TION SINCE IT DOES NOT REPRESENT INCOME TAX PAID OR PAYABLE. THE ASSESSEE ALSO REFERRED TO ACCOUNTING STANDARD 22 (AS-22) ISSUED BY ICAI IN SU PPORT OF CONTENTION THAT THEY WERE NOT REQUIRED TO ADD BACK THE QUANTUM OF PROVISION FOR DEFERRED TAXATION. THE LEARNED CIT(A) ACCEPTED THE CONTENTION OF THE ASSESSEE AND OBSERVED THAT THE IMPUGNED PROVISION C ANNOT BE BROUGHT WITHIN THE FOUR CORNERS OF EXPLANATION (1) (A) TO ( E) OF SECTION 115JB OF THE IT ACT. THEREFORE THE NET PROFIT CANNOT BE INC REASED BY THE SAID AMOUNT FOR DETERMINING THE BOOK PROFIT. THE AO WAS ACCORDINGLY DIRECTED TO RE-COMPUTE THE BOOK PROFIT WITHOUT INCREASING TH E NET PROFIT BY THE SAID AMOUNT OF RS.8 21 03 761/-. 10. THE LEARNED DR SUBMITTED THAT SUB CLAUSE (H) TO EXPLANATION (1) TO SECTION 115JB(1) OF THE IT ACT IS INSERTED IN THE A CT BY THE FINANCE ACT 2008 WITH EFFECT FROM 1 ST APRIL 2001 PROVIDING THAT THE BOOK PROFIT COULD BE INCREASED BY THE AMOUNT OF DEFERRED TAX AND THE PROVISIONS THEREOF. THE LEARNED DR THEREFORE SUBMITTED THAT SINCE THE AMENDMENT IS APPLICABLE RETROSPECTIVELY WHICH APPLY TO THE ASSES SMENT YEAR UNDER APPEAL ALSO. THEREFORE THE ORDER OF THE LEARNED CIT(A) MA Y BE SET ASIDE AND REVERSED. ITA NO.2761/AHD/2006 M/S. MUNJAL AUTO INDUSTRIES LTD. 6 THE LEARNED COUNSEL FOR THE ASSESSEE CONCEDED THAT DUE TO ABOVE AMENDMENT IN THE ACT THE ORDER OF THE LEARNED CIT( A)MAY BE REVERSED. 11. ON CONSIDERATION OF THE ABOVE FACTS AND SUBMISS IONS OF THE PARTIES WE ARE OF THE VIEW THAT THE ORDER OF THE LEARNED CI T(A) IS LIABLE TO BE SET ASIDE AND REVERSED. SUB CLAUSE (H) TO EXPLANATION ( 1) TO SECTION 115JB OF THE IT ACT HAS BEEN INSERTED IN THE ACT BY FINANCE ACT 2008 RETROSPECTIVELY WITH EFFECT FROM 1 ST APRIL 2001 WHEREBY IT IS PROVIDED THAT FOR THE PURPOSE OF THIS SECTION THE BOOK PROFIT MEA NS THE NET PROFIT AS SHOWN IN THE PROFIT & LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB CLAUSE (2) AS INCREASED BY (H ) THE AMOUNT OF DEFERRED TAX AND THE PROVISION THERE FOR. THE ABOVE PROVISION IS APPLICABLE TO THE ASSESSMENT YEAR UNDER APPEAL I.E. 2003-04. T HE LEARNED COUNSEL FOR THE ASSESSEE ACCEPTED THE SUBMISSION OF THE LEA RNED DR THAT DUE TO ABOVE AMENDMENT IN THE ACT RETROSPECTIVELY THE ORD ER OF THE LEARNED CIT(A) IS LIABLE TO BE REVERSED. 12. CONSIDERING THE ABOVE PROVISIONS INSERTED IN TH E ACT RETROSPECTIVELY DEALING WITH THE MATTER IN ISSUE WE THEREFORE SE T ASIDE THE ORDER OF THE LEARNED CIT(A) AND RESTORE THE ORDER OF THE AO. THE AO IS DIRECTED TO DO THE NEEDFUL ACCORDINGLY. AS A RESULT THIS GROUND O F APPEAL OF THE REVENUE IS ALLOWED. 13. ON GROUND NO.3 OF THE APPEAL THE REVENUE CHALL ENGED THE DELETION OF ADDITION OF RS.1 73 845/- MADE ON ACCOUNT OF PRO VISION FOR GRATUITY PAYMENT WHILE COMPUTING INCOME U/S 115JB OF THE IT ACT. THE ASSESSEE PROVIDED FOR GRATUITY PAYMENT OF THE ABOVE AMOUNT. THE AO WAS OF THE OPINION THAT IT WAS PROVISION ONLY AND IT IS AN UN- ASCERTAINED LIABILITY. THE ADDITION WAS ACCORDINGLY MADE. IT WAS CONTENDED BEFORE THE LEARNED CIT(A) THAT PROVISIONS TOWARDS GRATUITY PAYABLE WAS MADE ON THE BASIS OF ACTUARIAL VALUATION WHICH IS SCIENTIFIC METHOD AND CONSISTENTLY FOLLOWED BY THE ASSESSEE. THE LEARNED CIT(A) NOTED THAT THE FACTS ARE ANALOGOUS TO THE ITA NO.2761/AHD/2006 M/S. MUNJAL AUTO INDUSTRIES LTD. 7 CASE DECIDED BY THE HONBLE SUPREME COURT IN THE CA SE OF BHARAT EARTH MOVERS LTD. VS CIT 112 TAXMAN 61 (SC) IN WHICH IT W AS HELD THAT IN CASE OF PROVISIONS MADE FOR PAYMENT OF LEAVE ENCASHMENT IF A SCIENTIFIC METHOD OF VALUATION HAS BEEN FOLLOWED FOR CALCULATI ON OF THE LIABILITY THE LIABILITY SO PROVIDED FOR WOULD BE ALLOWABLE EXPEND ITURE. THE LEARNED CIT(A) ACCORDINGLY DELETED THE ADDITION. 14. THE LEARNED DR RELIED UPON THE ORDER OF THE AO. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE ASSESSEE REITERAT ED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THA T THE ISSUE IS COVERED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS ECHJAY FORGING PVT. LTD. 251 ITR 15 (BOM.) I N WHICH IT WAS HELD THAT SINCE THE PROVISION FOR GRATUITY WAS MADE ON THE B ASIS OF ACTUARIAL CALCULATION IT WAS AN ASCERTAINED LIABIL ITY AND THE SAID AMOUNT CANNOT BE ADDED TO THE NET PROFIT. 15. CONSIDERING THE RIVAL SUBMISSIONS OF THE PARTIE S WE ARE OF THE VIEW THAT ADDITION HAS BEEN RIGHTLY DELETED BY THE LEARN ED CIT(A). IT WAS AN ASCERTAINED LIABILITY OF THE ASSESSEE BASED UPON AC TUARIAL CALCULATION. THEREFORE THE LEARNED CIT(A) WAS JUSTIFIED IN HOLD ING THAT IT WAS ASCERTAINED LIABILITY FOR WHICH NO ADDITION COULD B E MADE WHILE COMPUTING THE INCOME U/S 115 JB (2) OF THE IT ACT. AS A RESULT THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 16. AS A RESULT THE APPEAL OF THE REVENUE IS PARTL Y ALLOWED. ORDER PRONOUNCED ON 09-04-2010 SD/- SD/- (G. D. AGARWAL) VICE PRESIDENT (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 09- 04-2010 LAKSHMIKANT/- ITA NO.2761/AHD/2006 M/S. MUNJAL AUTO INDUSTRIES LTD. 8 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR ITAT AHMEDABAD