Chhatariya Rubber & Chemical Industries, Mahuva v. The Jt.CIT.,Circle-2,, Bhavnagar

ITA 3668/AHD/2008 | 2005-2006
Pronouncement Date: 21-01-2011 | Result: Partly Allowed

Appeal Details

RSA Number 366820514 RSA 2008
Bench Ahmedabad
Appeal Number ITA 3668/AHD/2008
Duration Of Justice 2 year(s) 2 month(s) 14 day(s)
Appellant Chhatariya Rubber & Chemical Industries, Mahuva
Respondent The Jt.CIT.,Circle-2,, Bhavnagar
Appeal Type Income Tax Appeal
Pronouncement Date 21-01-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 21-01-2011
Date Of Final Hearing 19-01-2011
Next Hearing Date 19-01-2011
Assessment Year 2005-2006
Appeal Filed On 07-11-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD C BENCH (BEFORE S/SHRI BHAVNESH SAINI JUDICIAL MEMBER AND N.S. SAINI ACCOUNTANT MEMBER) ITA NO.3668/AHD/2008 [ASSTT. YEAR : 2005-2006] DICTATED ON: 20-01-2011 CHHATARIYA RUBBER & CHEMICAL INDUSTRIES 90/1 GIDC MAHUVA 364 290. VS. JCIT CIR.2 BHAVNAGAR. (APPELLANT) (RESPONDENT) REVENUE BY : MS.ANURAG SHARMA ASSESSEE BY : SHRI ANIL R. SHAH O R D E R PER BHAVNESH SAINI JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME-TAX(APPEALS)-XX AHMEDABAD DATED 11.07.2008 FOR THE ASSESSMENT YEAR 2005-2006. 2. LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS G ROUND NOS.1 AND 2 OF THE APPEAL OF THE ASSESSEE CHALLENGING DISALLOWANCE ON ACCOUNT OF GIFT AND DEMURRAGE CHARGES. THESE GROUNDS ARE ACCORDINGLY D ISMISSED. 3. ON GROUND NO.3 THE ASSESSEE CHALLENGED THE ADDI TION OF RS.2 16 395 ON ACCOUNT OF LATE DELIVERY CHARGES. THE AO NOTED IN THE ASSESSMENT ORDER THAT THE LATE DELIVERY CHARGES ARE PENALTY WHICH ARE DIS ALLOWABLE AND ACCORDINGLY DISALLOWED THE SAME AND THE ADDITION WAS ACCORDINGL Y MADE. IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) THAT LATE DELIVERY CHARGE S WERE THE EXPENSES INCURRED BY THE ASSESSEE WHICH WAS COLLECTED BY THE SUPPLIE RS AND IT WAS NOT A PENALTY BUT LESS PAYMENT FOR THE BREACH OF THE TERMS AND CO NDITIONS OF THE AGREEMENT. THE LEARNED CIT(A) HOWEVER DID NOT ACCEPT THE CON TENTIONS OF THE ASSESSEE BECAUSE THE ASSESSEE FAILED TO EXPLAIN AS TO HOW I T IS NOT THE PENALTY AND ONLY A CONTRACTUAL PENALTY RELATING TO THE YEAR UNDER CONS IDERATION. THE LEARNED CIT(A) ALSO NOTED THAT IT COULD NOT BE RELATED WITH SPECIFIC TERMS OF AGREEMENT AS STATED BY THE ASSESSEE AND THE PARTY-WISE AND YE AR-WISE BREAK UP OF THE CLAIM HAS NOT BEEN FILED. IN THE ABSENCE OF SUCH CLARIFI CATION AND EXPLANATION ITA NO.3668/AHD/2008 -2- DISALLOWANCE WAS CONFIRMED AND THE APPEAL OF THE AS SESSEE WAS ACCORDINGLY DISMISSED. 4. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND REFERRED TO THE DE TAILS ON THIS ISSUE WHICH ARE FILED IN THE PAPER BOOK FROM PAGE NOS.22 TO 34 AND EXPLAINED THAT THE AMOUNT WAS DEDUCTED FOR LATE DELIVERY OF THE GOODS WHICH IS NOT A PENALTY IN NATURE AND ONLY LIQUIDATED DAMAGES HAVE BEEN PAID. HE HA S RELIED UPON THE ORDER OF THE ITAT IN THE CASE OF KCP LTD. VS. ITO 34 ITD 50 IN WHICH IT WAS HELD THAT WHERE CLAIM FOR DAMAGES AROSE AT POINT OF BREACH AN D AT THAT POINT OF TIME LIABILITY ACCRUED THE PROVISIONS FOR LIQUIDATED DAM AGES WERE ALLOWABLE. HE HAS ALSO RELIED UPON THE ORDER OF THE ITAT IN THE CASE OF SURVIR ENTERPRIDESES P. LTD. VS. ITO 51 TTJ 197 IN WHICH IT WAS HELD THAT LOSS DUE TO FORFEITURE OF SECURITY FOR BREACH OF CONTRACT TO SUPPLY THE AGRE ED QUANTITY OF COMMODITY WITH NO DISHONEST INTENTION IS ALLOWABLE BUSINESS LOSS. HE HAS ALSO RELIED UPON THE ORDER OF THE ITAT MUMBAI BENCH IN THE CASE OF DRESSER VALVE INDIA P. LTD. VS. ACIT 30 SOT 495 (MUM) IN WHICH IT WAS HEL D THAT SINCE LIQUIDATED CHARGES WERE IN THE FORM OF ENHANCED COSTS PAID BY ASSESSEE IN VIEW OF DELAYED DELIVERY OF ORDERS SAME WERE ALLOWABLE AS BUSINESS EXPENDITURE. HE ALSO RELIED UPON THE ORDER OF THE ITAT AHMEDABAD BENCH IN THE CASE OF ACIT VS. NIKO RESOURCES LTD. 123 TTJ (AHD) 310 IN WHICH IT WAS HELD THAT DEMURRAGE PAID FOR DELAY IN CLEARING GOODS FROM CUSTOMS WAS A LLOWABLE BUSINESS EXPENDITURE. ON THE OTHER HAND THE LEARNED DR REL IED UPON THE ORDERS OF THE AUTHORITIES. 5. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE AR E OF THE VIEW THAT THE MATTER REQUIRES RECONSIDERATION AT THE LEVEL OF THE AO. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SAURASTHRA CEMENT CO. 325 ITR 422 HELD AS UNDER: THE ASSESSEE WHICH WAS ENGAGED IN THE MANUFACTURE OF CEMENT ENTERED INTO AN AGREEMENT WITH WI THE SUPPLIER FO R THE PURCHASE OF AN ITA NO.3668/AHD/2008 -3- ADDITIONAL CEMENT PLANT. THE AGREEMENT CONTAINED A CONDITION THAT IN THE EVENT OF DELAY CAUSED IN THE DELIVERY OF THE MA CHINERY THE ASSESSEE WAS TO BE COMPENSATED AT 5 PER CENT. OF THE PRICE O F THE RESPECTIVE PORTION OF THE MACHINERY WITHOUT PROOF OF ACTUAL L OSS BUT THE TOTAL AMOUNT OF DAMAGES WAS NOT TO EXCEED 5 PER CENT OF T HE TOTAL PRICE OF THE MACHINERY. THE SUPPLIER FAILED TO SUPPLY THE MACHIN ERY WITHIN THE STIPULATED TIME AND THE ASSESSEE RECEIVED RS.8 50 0 00 FROM THE SUPPLIER BY WAY OF LIQUIDATED DAMAGES. THE DEPARTMENT SOUGHT TO ASSESS THE AMOUNT TO INCOME-TAX. THE APPELLATE TRIBUNAL HELD T HAT THE AMOUNT WAS A CAPITAL RECEIPT. THE HIGH COURT ANSWERED THE REFE RENCE IN FAVOUR OF THE ASSESSEE. ON APPEAL TO THE SUPREME COURT : HELD AFFIRMING THE DECISION OF THE HIGH COURT THA T THE DAMAGES TO THE ASSESSEE WERE DIRECTLY AND INTIMATELY LINKED WITH T HE PROCUREMENT OF A CAPITAL ASSET VIZ. THE CEMENT PLANT. THE AMOUNT R ECEIVED BY THE ASSESSEE TOWARDS COMPENSATION FOR STERILIZATION OF THE PROFI T-EARNING SOURCE NOT IN THE ORDINARY COURSE OF BUSINESS WAS A CAPITAL R ECEIPT IN THE HANDS OF THE ASSESSEE. 6. WE FIND THAT THE AO HAS NOT GIVEN ANY FINDING WH ILE MAKING DISALLOWANCE ON THIS ISSUE. THE AO HAS NOT DISCUSS ED ANY FACTS EVIDENCE AND MATERIAL WHILE MAKING DISALLOWANCE. THE AO MERELY TREATED THE LATE DELIVERY CHARGES AS PENALTY. SIMILARLY THE ASSESSEE DID NO T FILE COMPLETE DETAILS BEFORE THE LEARNED CIT(A) FOR EXPLAINING THE ABOVE ISSUE. HOWEVER IN THE PAPER-BOOK SOME BILLS AND AGREEMENTS ARE FILED TO SHOW THAT LA TE DELIVERY CHARGES WERE PAID FOR NOT SUPPLYING THE GOODS WITHIN TIME WHICH WERE TREATED AS LIQUIDATED DAMAGES. IN ORDER TO CLAIM THE LATE DELIVERY CHARG ES AS BUSINESS EXPENDITURE THE ASSESSEE SHALL HAVE TO ESTABLISH THAT THE SAME WERE DIRECTLY CONNECTED WITH THE BUSINESS ACTIVITY OF THE ASSESSEE. IN THE ABSE NCE OF ANY FINDING GIVEN BY THE AO AND THAT COMPLETE DETAILS WERE NOT FILED BEFORE THE LEARNED CIT(A) WE ARE OF THE VIEW THAT MATTER REQUIRES RECONSIDERATION AT THE LEVEL OF THE AO. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND RESTORE THIS ISSUE TO THE FILE OF THE AO WITH DIRECTION TO RE-DECIDE T HIS ISSUE BY GIVING REASONS AND SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THE AO SHALL DISCUSS THE FACTS EVIDENCE AND MATERIAL ON RECORD AND SHALL PA SS ORDER ON MERITS. THE ASSESSEE IS DIRECTED TO FILE COMPLETE DETAILS AND T HE COPIES OF THE AGREEMENT BETWEEN THE PARTIES AND BILLS IN ORDER TO CLAIM THE EXPENDITURE ON ACCOUNT OF ITA NO.3668/AHD/2008 -4- LATE DELIVERY CHARGES. WITH THE ABOVE DIRECTIONS THIS GROUND OF THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 7. BY GROUND NOS.4 5 AND 6 THE ASSESSEE CHALLENGE S THE DISALLOWANCE OF TELEPHONE EXPENSES AMOUNTING TO RS.75 000/- MOTOR CAR EXPENDITURE RS.20 000/- AND DEPRECIATION ON MOTOR CAR OF RS.5 0 00/-. 8. THE AO IN THE ASSESSMENT ORDER NOTED THAT THE AS SESSEE CLAIMED EXPENDITURE FOR DIFFERENT OFFICES RESIDENTIAL TELE PHONE AND MOBILE PHONE AND PERSONAL EXPENSES HAVE BEEN SHOWN AS NIL. NO DETAI LS OF THE CALLS HAVE BEEN FURNISHED. ACCORDINGLY DISALLOWANCE WAS MADE. TH E LEARNED CIT(A) CONFIRMED THE ADDITIONS AND DISMISSED THIS GROUND O F THE APPEAL OF THE ASSESSEE. SIMILAR IS THE OTHER EXPENSES ON WHICH A LSO THE LEARNED CIT(A) CONFIRMED THE ADDITION. 9. THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO BACK PAGE NO.1 OF THE PAPER BOOKS AND OTHER PAPERS AND SUBMITTED THAT THE ADDITION IS EXCESSIVE IN NATURE. HE HAS DEMONSTRATED THAT IN THE PRECEDING ASSESSMENT YEAR THE DISALLOWANCE WAS MADE IN THE PERCENTAGE OF APPROX. 5% ON EXPENDITURE. HE HAS THEREFORE SUBMITTED THAT DISALLOWANCE MAY BE RE STRICTED TO 5%. ON THE OTHER HAND THE LEARNED DR RELIED UPON THE ORDERS O F THE AUTHORITIES BELOW. 10. ON CONSIDERATION OF THE ABOVE FACTS WE ARE OF THE VIEW THAT THE ADDITIONS BY DISALLOWING THE ABOVE EXPENDITURE HAV E BEEN RIGHTLY MADE BY THE AUTHORITIES BELOW BUT SOME DISALLOWANCES ARE EXCES SIVE IN NATURE. THE ASSESSEE IS A FIRM AND IN THE AUDIT REPORT NO PERSO NAL EXPENDITURE HAVE BEEN SHOWN ON THIS EXPENDITURE DESPITE THE TELEPHONE HA VE BEEN USED AT THE RESIDENCE AND THE CARS HAVE BEEN USED FOR PERSONAL PURPOSE. NO CALL DETAILS OR LOG BOOK HAVE BEEN FURNISHED. THE PERSONAL USER OF THE TELEPHONE AND VEHICLE BY THE PARTNERS AND THEIR FAMILY MEMBERS CANNOT BE OVERRULED. HOWEVER THE ASSESSEE IN THE PAPER BOOK EXPLAINED THAT IN THE PR ECEDING ASSESSMENT YEARS THE DISALLOWANCE WAS APPROX. MADE AT 5% OF THE EXPENDIT URE. CONSIDERING THE ITA NO.3668/AHD/2008 -5- ABOVE FACTS AND THE RETURN OF INCOME SHOWING TOTAL INCOME AT RS.13 93130/- WE ARE OF THE VIEW THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE ON THE ABOVE HEADS MAY BE MODIFIED FOR THE PURPOSE OF ADDITION A T REASONABLE AMOUNT. ACCORDINGLY WE MODIFY THE DISALLOWANCE OUT OF THE TELEPHONE EXPENSES IN A SUM OF RS.35 000/- AS AGAINST RS.75 000/-. MOTOR C AR ADDITION OF RS.20 000/- IS MODIFIED TO RS.10 000/- AND DEPRECIATION ADDITION O F RS.5 000/- IS MODIFIED TO RS.2 500/-. ACCORDINGLY GROUND NOS.4 5 AND 6 OF THE ASSESSEES APPEAL ARE PARTLY ALLOWED. 11. IN RESULT THE ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 21 ST JANUARY 2011 SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER PLACE : AHMEDABAD DATE : 21-01-2011 COPY OF THE ORDER FORWARDED TO: 1) : ASSESSEE 2) : DEPARTMENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR ITAT. BY ORDER DR/AR ITAT AHMEDABAD