C G GLASS LIMITED., BARODA. v. THE ACIT, SPL.RANGE-1, BARODA.(OLD RANGE), BARODA.

ITA 3964/AHD/2003 | 1997-1998
Pronouncement Date: 14-05-2010 | Result: Allowed

Appeal Details

RSA Number 396420514 RSA 2003
Bench Ahmedabad
Appeal Number ITA 3964/AHD/2003
Duration Of Justice 6 year(s) 6 month(s) 15 day(s)
Appellant C G GLASS LIMITED., BARODA.
Respondent THE ACIT, SPL.RANGE-1, BARODA.(OLD RANGE), BARODA.
Appeal Type Income Tax Appeal
Pronouncement Date 14-05-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted D
Tribunal Order Date 14-05-2010
Date Of Final Hearing 05-05-2010
Next Hearing Date 05-05-2010
Assessment Year 1997-1998
Appeal Filed On 30-10-2003
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI BHAVNESH SAINI JUDICIAL MEMBER AND SHRI N.S.SAINI ACCOUNTANT MEMBER DATE OF HEARING: 06.05.2010 DRAFTED ON:06.05.2 010 ITA NO.3964/AHD/2003 & 4295/AHD/2003 ASSESSMENT YEAR : 1997-1998 & 1998-1999 C.G.GLASS LIMITED (PRESENTLY KNOWN AS PHILIPS INDIA LIMITED) VILLAGE KURAL PADRA JAMBUSAR ROAD BARODA-391 430. VS. ACIT CIRCLE-4 AAYAKAR BHAVAN RACE COURSE CIRCLE BARODA-7 PAN/GIR NO. : 31-619-CV-4359 (APPELLANT) .. (RESPONDENT) ITA NO.4326/AHD/2003 ASSESSMENT YEAR : 1998-1999 ACIT CIRCLE-4 4 TH FLOOR AAYAKAR BHAVAN RACE COURSE CIRCLE BARODA-390 007 VS. PHILIPS INDIA LIMITED (FORMERLY C.G.GLASS LTD.) VILL. KURAL G-6 PADRA JAMBUSAR ROAD BARODA-391 430. PAN/GIR NO. : 31-619-CV-4359 (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI S.N.SOPARKAR SR. ADV. RESPONDENT BY: SHRI C.K.MISHRA SR. D.R. O R D E R PER N.S.SAINI ACCOUNTANT MEMBER :- THE APPEAL IN ITA NO.3964/AHD/2003 AND THE APPEAL IN ITA NO.4295/AHD/2003 ARE FILED BY THE ASSESSEE FOR ASS ESSMENT YEARS 1997- - 2 - 98 AND 1998-99 RESPECTIVELY AND APPEAL IN ITA NO.42 36/AHD/2003 IS FILED BY THE REVENUE FOR ASSESSMENT YEAR 1998-99. ITA NO.3954/AHD/2003 2. THE SOLE GROUND OF THE APPEAL TAKEN IN ASSESSMEN T YEAR 1997-98 AND GROUND NO.1 OF THE APPEAL IN ASSESSMENT YEAR 19 98-99 ARE AS UNDER:- THE HONOURABLE COMMISSIONER OF INCOME TAX (APPEALS )-I HAS ERRED IN CONFIRMING THE ORDER PASSED BY THE ASSESSI NG OFFICER AS PER THE POINT NUMBER ONE OF THE ORDER THAT THE COMMISSI ON PAID TO CROMPTON GREAVES LIMITED OF RS.56 62 983.00 BY YOUR APPELLANT IS NOT JUSTIFIED ON THE GROUND THAT THE AMOUNT IS U NREASONABLE AND EXCESSIVE. ITA NO.4295/AHD/2003 1. THE HONORABLE COMMISSIONER OF INCOME TAX (APPEALS)- 1 HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE AS SESSING OFFICER IN CONNECTION WITH THE COMMISSION PAID TO CROMPTON GREAVES LIMITED AMOUNTING TO RS.31 20 728.00 ON THE GROUNDS THAT THE AMOUNT IS UNREASONABLE AND EXCESSIVE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE LEARNED ASSESSING OFFICER HAS STATED IN THE ORDER THAT THE ASSESSEE IN AN ASS OCIATE CONCERN OF CROMPTON GREAVES LTD. AND HAS PAID DISCOUNT AND COM MISSION @ 18% ON THE SALES MADE BY THEM TO THE CUSTOMERS AND 3% ON T HE SALES OF THE ASSESSEE WHICH ARE CONSUMED BY THEM FOR THEIR PROD UCTION. DISCOUNT AND COMMISSION PAID TO OTHER CUSTOMERS RANGES BETWEEN 2 .5% TO 5%. THE ASSESSEE WAS ASKED TO EXPLAIN WHY HIGHER RATE IS PA ID TO BE ASSOCIATE CONCERN. IT WAS ALSO ASKED TO SUBMIT SALE PRICE ON WHICH FINISHED GOODS ARE SOLD TO THE ASSOCIATE CONCERN AND OTHER CUSTOM ERS AND DETAILS OF OTHER FACILITIES TAKEN FROM ASSOCIATE CONCERNS. FROM THE DETAILS FILED IT BECAME APPARENT THAT THE SALES PRICE TO CROMPTON GREAVES W AS RS.525/- WHICH WAS THE LOWEST AND THE HIGHEST WAS RS.625/- TO M/S. KALPANA BULB - 3 - INDUSTRIES. ON PERUSING THE DETAILS THE LEARNED ASS ESSING OFFICER FOUND THAT THE ASSESSEE HAS PURCHASED SCRAP AND WASTE OF GLASS FROM CROMPTON GREAVES @ RS.0.95 PER KG AND ON THIS NO COMMISSION IS PAID BY CROMPTON GREAVES TO BE ASSESSEE. ASSESSEE HAS ALSO BORROWED CERTAIN FUNDS FROM ASSOCIATE CONCERN ON WHICH IT HAS PAID I NTEREST @ 17%. HE THEREFORE CONCLUDED THAT ON THE ONE HAND ASSESSEE IS NOT GETTING ANY BENEFITS FROM CROMPTON GREAVES AND IS PURCHASING FR OM THEM AT MARKET RATE. ON THE OTHER HAND IT IS PAYING DISCOUNT AND COMMISSION MORE THAN THE MARKET RATE. THE FACTORY OF CROMPTON GREAVES IS SITUATED NEXT DOOR TO THE ASSESSEE COMPANY HENCE WHATEVER GOODS ARE SOLD THROUGH THEM REQUIRES NO EFFECT OF DELIVERY. 3% COMMISSION ON GO ODS FOR OWN CONSUMPTION IS THEREFORE PAID WITHOUT ANY REASONS AND EVEN 18% COMMISSION AND DISCOUNT ON OTHER SALE IS EXCESSIVE COMPARED TO OTHER CUSTOMERS. APPLYING SECTION 40A(2)(A) HE HELD THAT THE EXCESS PAYMENT SHOULD BE DISALLOWED. ON INTERNAL CONSUMPTION HE DI D NOT ALLOW ANY COMMISSION AND ON SALE TO OTHER CUSTOMERS HE ALLO WED 5% COMMISSION. THIS LEAD TO AN ADDITION OF RS.56 62 983/-. SIMILA R DISALLOWANCE WAS MADE IN THE ASSESSMENT YEAR 1998-99 WHICH RESULTED IN AN ADDITION OF RS.31 20 728/-. 4. IN APPEAL BEFORE THE LEARNED COMMISSIONER OF IN COME TAX(APPEALS) THE APPELLANT SUBMITTED THAT THERE AR E TWO ELEMENTS OF COMMISSION ONE IS UNDER THE 18% STOCK SALES BASIS WHICH IS PAID TO MEET THE EXPENSES SUCH AS SALARIES OFFICE EXPENSES AND CARRYING COST. IF THESE EXPENSES ARE DEDUCTED FROM THE GROSS COMMISSION AS ALSO NOTIONAL COST OF CARRYING INVENTORY THEN THE NET COMMISSION ACTUALL Y WORKS OUT TO 5%. THE APPELLANT COMPANY IS ACTUALLY DERIVING THE ADVA NTAGE OF THE ALL INDIA NET WORK THAT M/S.CROMPTON GREAVES HAS AT ITS DISPO SAL AND USES TO - 4 - ACHIEVE SALES TARGETS. IF THE APPELLANT WAS TO SET UP SIMILAR NETWORK IT WOULD BE MUCH COSTLIER THAN THE COMMISSION COST. IT WAS STATED THAT IN LINE WITH THE COMMISSION ON ORIGINAL MANUFACTURERS SALES OF 5% THE COMMISSION PAID TO STOCK SALES SHOULD ALSO BE ALLOW ED. THE SECOND ITEM IS 3% PAID ON INTERNAL SALES TO TH E LIGHTING DIVISION OF CROMPTON GREAVES TO WHOM A BULK OF THE SALE TAKE S PLACE. THE APPELLANT STATES THAT THERE IS A COST FACTOR ATTACH ED TO EVERY TRANSACTION AND HENCE THERE IS JUSTIFICATION ON PAYMENT OF SUCH COM MISSION ALSO CONSIDERING THAT 39% OF THE TOTAL SALES ARE OF THIS NATURE. IT IS ALSO MENTIONED THAT THE RELATION BETWEEN THE TWO COMPANI ES IS PURELY PROFESSIONAL AND COMPARABLE WITH MARKET RATES. RELI ANCE WAS PLACED ON THE DECISION OF CIT VS. JAIN CABLES PVT. LTD. 252 I TR 785. THE APPELLANT HAS FURTHER STATED THAT OUT OF TOTAL SALES THIS YEAR OF RS.40.23 CRORES THE TOTAL SALES TO CROMPTON GREAVE S IS RS.10.25 CRORES. THEY HAVE ALSO FILED THE AGREEMENT BETWEEN THE APPE LLANT COMPANY AND CROMPTON GREAVES TO SHOW THAT THE DISCOUNT AND COMM ISSION OFFERED ARE INCLUDED IN THE AGREEMENT. THE LEARNED ASSESSING OF FICER HAS ACCEPTED THE TERMS OF COMMISSION OFFERED TO OTHER PARTIES DE SPITE LOWER QUANTUM OF SALES HENCE IN BULK SALES HIGHER COMMISSION SHOU LD BE ALLOWED. IN RESPECT OF INTERNAL SALE ALSO 3% SHOULD BE ALLOWED AS A HIGHER PERCENTAGE HAS BEEN OFFERED TO EVEN PARTIES WITH VERY SMALL SA LES. 5. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS FOUND THAT IN FACT 5% DISCOUNT IS GIVEN ON CAPTIVE CONSUMPTION OF CROMPTON GREAVES 5% COMMISSION ON ORDERS GENERATED BY CGL O N DIRECT BILLING BASIS AND 20% COMMISSION ON ORDERS SOLD THROUGH REG IONAL DEPOTS. THE - 5 - AGREEMENT ALSO CLEARLY STATED THAT THE APPELLANT CO MPANY WILL DISPATCH THE PRODUCT BY ROAD TRANSPORT ON FREIGHT TO PAY/FREIGHT PAID BASIS TO OUTSIDE DESTINATION IN PACKING STIPULATED BY CGL. INSURANCE ALSO IS TO BE DONE BY C.G. GLASS WHICH INCLUDES THE TIME AT TRANSPORTERS GODOWN ETC. BASICALLY THE AGREEMENT IS TO ENSURE THAT A BULK OF 39% SALE IS ROUTED THROUGH M/S. CROMPTON GREAVES THROUGH THEIR REGIONAL GODOWN. AF TER GOING THROUGH THE DETAILS SUBMITTED I AM INCLINED TO AGREE WITH THE LEARNED ASSESSING OFFICER THAT THE PAYMENT APPEARS TO BE CERTAINLY IN EXCESS ESPECIALLY AS REGARDS TO THE 18% PAID TO CGL. THE AGREEMENT DOES NOT SHOW WHOSE SALARIES AND OTHER EXPENSES ARE COVERED IN THIS 18 % MERELY BY USE OF GODOWNS. IN FACT THE APPELLANT COMPANY IS TO BEAR T HE COST OF TRANSPORTATION OR THE BUYER HAS TO BEAR IT. THE INS URANCE IS DONE BY THE APPELLANT COMPANY. FOR MERE USE OF REGIONAL GODOWNS AND SMALL INFRASTRUCTURE MADE AVAILABLE BY THE ASSOCIATE CONC ERN 18% COMMISSION IS BEING CHARGED WHICH CANNOT BE JUSTIFIED EVEN IN VIEW OF BULK SALES. M/S. CROMPTON GREAVES IS ALSO PURCHASING FROM THE A PPELLANT COMPANY IN BULK SIMILAR ITEMS AND SELLING THEM THROUGH THE SA ME GODOWN. THEREFORE IT IS INCURRING THE EXPENDITURE IN ANY C ASE. A SMALL MARGIN OF HIGHER REMUNERATION WOULD HAVE BEEN UNDERSTANDABLE LOOKING TO THE USE OF GODOWN ETC. HOWEVER THE SAME IS OFFSET BY THE FA CT THAT IN REVERSE THE APPELLANT COMPANY IS NOT RECEIVING ANY BENEFITS FRO M CROMPTON GREAVES AS POINTED OUT BY THE ASSESSING OFFICER. SIMILARLY HE HELD THAT 3% PAID TO CROMPTON GREAVES ON SALES FOR INTERNAL CONSUMPTION IS NOT JUSTIFIED WHEN THE ITEMS IS AVAILABLE NEXT DOOR. IN THE SUM TOTAL HE HELD THAT THE 3% COMMISSION ON INTERNAL SALES STANDS CONFIRMED AND O UT OF THE 18% PAID TO CROMPTON GREAVES 5% ONLY CAN BE ALLOWED WHICH COM PARES TO THAT OF OTHER PARTIES. HENCE THE ADDITION MADE BY THE ASSE SSING OFFICER IS CONFIRMED. KEEPING IN LINE WITH THE DECISION FOR ASSESSMENT YEAR 1997- 98 THE DISALLOWANCE OF 3% COMMISSION ON INTERNAL S ALE WAS CONFIRMED IN - 6 - ASSESSMENT YEAR 1998-99 ALSO AND THE LEARNED ASSES SING OFFICER WAS DIRECTED TO ALLOW COMMISSION TO CROMPTON GREAVES OF 5% AND DISALLOW THE BALANCE. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE RELEVANT FACTS OF THE CASE ARE THAT THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS PA ID COMMISSION OF RS.67 51 562/- TO M/S.GCL. THE AFORESAID COMMISSIO N WAS CONSISTING OF 3% OF THE SALES MADE TO GCL FOR INTERNAL CONSUMPTIO N AND 18% WAS PAID IN RESPECT OF SALES MADE TO OTHER PARTIES THROUGH S AID GCL. THE LEARNED ASSESSING OFFICER ALSO OBSERVED THAT THE SAID GCL W AS ASSOCIATE SISTER CONCERN OF THE ASSESSEE COMPANY. IN VIEW OF THE ABO VE THE LEARNED ASSESSING OFFICER IN THE ASSESSMENT YEAR 1997-98 D ISALLOWED ENTIRE COMMISSION OF RS.28 32 680/- PAID ON INTERNAL CONSU MPTION OF ASSOCIATE CONCERN AND DISALLOWED 13% OUT OF COMMISSION PAID O N SALES TO OTHER PERSONS AMOUNTING TO RS.28 30 303/- AND ALLOWED 5% COMMISSION PAID ON SALES TO OTHER PERSONS AMOUNTING TO RS.10 88 578/- ON THE GROUND THAT THE SAME WAS NOT REQUIRED FOR THE PURPOSE OF THE BUSINE SS OF THE ASSESSEE AND THEREFORE EXCESSIVE AND PROVISIONS OF SECTION 40A( 2)(B) WAS INVOLVED. SIMILARLY IN THE ASSESSMENT YEAR 1998-99 FOR THE S AME REASONS DISALLOWED RS.14 92 862/- ON ACCOUNT OF COMMISSION @ 3% PAID ON INTERNAL CONSUMPTION OF ASSOCIATE CONCERN AND DISAL LOWED 15% OUT OF THE 20% COMMISSION CLAIMED ON SALES TO OTHER PERSONS AM OUNTING TO RS.16 27 866/- AND ALLOWED THE BALANCE AMOUNT OF CO MMISSION @ 5% PAID ON SALES TO OTHER PERSONS AMOUNTING TO RS.5 42 621/-. IN THIS WAY HE MADE DISALLOWANCE OF RS.31 20 728/- OUT OF THE COMM ISSION CLAIMED BY THE ASSESSEE. IN APPEAL THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) CONSIDERING THE FACT THAT GODOWN OF SA ID GCL WERE USED BY THE ASSESSEE COMPANY FOR DISTRIBUTION OF ITS GOODS OPINED THAT 5% COMMISSION ON SALES MADE TO OTHERS WAS JUSTIFIED A ND CONFIRMED THE - 7 - ORDER OF THE LEARNED ASSESSING OFFICER MAKING DISAL LOWANCE OF COMMISSION EXPENSES OF 13% IN ASSESSMENT YEAR 1997 -98 AND 15% IN ASSESSMENT YEAR 1998-99 FROM COMMISSION PAID TO OTH ERS AND ALSO CONFIRMED THE DISALLOWANCE OF COMMISSION PAID @ 3% ON SALES MADE TO ASSOCIATE CONCERNS FOR INTERNAL CONSUMPTION. BEING AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. THE LEARNED AUTHOR ISED REPRESENTATIVE OF THE ASSESSEE CONTENDED THAT THE 3% COMMISSION PAID TO GCL FOR INTERNAL CONSUMPTION WAS IN THE NATURE OF DISCOUNT AND THE S AME WAS NOT A PAYMENT FOR ANY SERVICES RENDERED AND THEREFORE TH E LOWER AUTHORITIES WERE NOT JUSTIFIED IN DISALLOWING THE SAME BY INVOK ING THE PROVISIONS OF SECTION 40A(2)(B). IN SUPPORT OF THE ABOVE CONTENTI ON HE PLACED RELIANCE ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF UNITED EXPORTS VS. CIT [2009] 185 TAXMAN 374 (DEL) WHEREI N IT WAS HELD THAT PROVISIONS OF SECTION 40A(2) DO NOT APPLY TO TRADE DISCOUNT INASMUCH AS TRADE DISCOUNT IS NOT AN EXPENSE WHICH IS INCURRED OR WITH RESPECT TO WHICH A PAYMENT IS MADE. IN RESPECT OF COMMISSION PAID TO GCL @ 18% IN ASSESSMENT YEAR 1997-98 AND @ 20% IN ASSESSMENT YEAR 1998-99 ON SALES MADE TO OTHER PARTIES THROUGH GCL THE LEARNE D AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE C OMMISSION WAS PAID FOR VARIOUS SERVICES RENDERED BY THE SAID GCL IN THE CO URSE OF THE BUSINESS OF THE ASSESSEE. FOR THE DETAILS OF SERVICES RENDERED BY THE SAID GCL HE HAS DRAWN OUR ATTENTION TO THE AGREEMENT DATED 12 TH DAY OF SEPTEMBER 1999 BETWEEN SAID GCL AND THE ASSESSEE COMPANY WHICH WAS PLACED AT PAGE 71 OF THE PAPER BOOK AND WHICH WAS ALSO CLAIMED TO HAV E BEEN FILED BEFORE THE LOWER AUTHORITIES. FROM THE SAID AGREEMENT THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE POINTED OUT THAT THE COMMISSION WAS PAID IN CONSIDERATION OF FOLLOWING:- - 8 - 3. COVERAGE 3.1 MARKETING WITHIN THE TERRITORY 3.1.1 CGL SHALL UNDERTAKE TO SOURCE ALL ITS REQUIR EMENTS OF PRODUCTS FOR CAPTIVE USE AS THE FIRST OPTION FROM C GC PROVIDED: (I) CGC IS ABLE TO STRICTLY ADHERE TO THE DELIVERY SCHEDULE SPECIFIED BY CGL: (II) THE PRICE SUBJECT TO REVIEW BY THE PRICING COM MITTEE UNDER CLAUSE 4.4 IS AS MUTUALLY AGREED BY AND BETWE EN CGG & CGL BASED ON THE MARKET AND THE QUALITY IS AS SPE CIFIED IN CLAUSES 8.1 AND 8.2. IT IS UNDERSTOOD THAT CGL WILL AGREE TO SOURCE ITS REQUIREMENT TO THE TUNE OF ABOUT 36% OF THE VALUE OF THE PRODUC TION OF CGG AND IN ACCORDANCE WITH VOLUMES SPECIFIED IN SCH EDULE 2. 3.2 SUBJECT TO (I) AND (II) OF 3.1.1. ABOVE CGL AG REES TO BOOK ORDERS FOR AND ON BEHALF OF CGG TO THE TUNE OF ABOU T 39% OF THE VALUE OF PRODUCTION OF CGG AND IN ACCORDANCE WI TH VOLUMES SPECIFIED IN SCHEDULE 2. FOR THE PURPOSE OF VALUE OF PRODUCTION THE BASIS SH ALL BE EXFACTORY SALE PRICE WHICH SHALL MEAN THE PRICE EXC LUSIVE OF DUTY SALE TAX FREIGHT & INSURANCE. 3.2.1 EITHER ON DIRECT BILLING BASIS TO THE BULK CU STOMERS. 3.2.2 OR ON STOCK AND SALE BASIS THROUGH REGIONAL G ODOWNS MAINTAINED BY CGL. 3.3 EXPORTS TO THE TUNE OF AMOUNT 25% OF THE TOTAL VALUE OF THE PRODUCTION OF CGG WILL BE MADE EITHER THROUGH GB GL ASS OR DIRECTLY. 3.4 CGL SHALL ENDEAVOR TO FILL THE GAP INCASE OF AN Y SHORTFALL IN THE EXPORTS OF GSL SHELLS UNDER 3.3. 3.5 CGG SHALL ENSURE THAT IT FIRST MEETS THE REQUI REMENTS OF CGL REFERRED TO IN SUB CLAUSE 3.1.1 HEREINABOVE THEREAF TER CGG IS FREE TO SELL THE BALANCE OF ITS PRODUCTION TO OTHER CUSTOMERS THROUGH CGLS DEALER NETWORK THROUGHOUT THE TERRITO RY. 3.6 THE TERRITORY SHALL MEAN THE TERRITORY OF INDIA BHUTAN SRILANKA BANGLADESH AND NEPAL. 3.7. MARKETING OUTSIDE THE TERRITORY BOTH CGL AND CGG HEREBY AGREE THAT ALL EXPORTS OF PRODUCTS MANUFACTURED BY CGG SHALL BE ROUTED WITH WHICH CGG ENTERS INTO AGREEMENT PROVIDED GBL OR SUCH OTHER PA RTY IS ABLE TO PROCURE COMPETITIVE PRICES AND FAIR RETURNS TO CGL AND CGG. 3.8 THE PARTIES INTEND THAT PRODUCT MIX FOR THE PUR POSE OF ORDERS TO IN 3.2ABOVE IS AS INDICATED IN SCHEDULE 2 HERETO . HOWEVER - 9 - BASED ON MARKET DEMAND THE PARTIES SHALL MUTUALLY D ISCUSS AND FINALISE THE ORDER FOR THE PRODUCT MIX FROM TIM E TO TIME. 7. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE CONCLUDED THAT AS NO MATERIAL COULD BE BROUGHT ON RECORD EITH ER BY THE LEARNED ASSESSING OFFICER OR BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) TO SHOW THAT SIMILAR SERVICES WERE AVA ILABLE IN THE MARKET FOR LOWER RATE OF COMMISSION THE LEARNED COMMISSIO NER OF INCOME TAX(APPEALS) WAS NOT JUSTIFIED IN ARBITRARILY ALLOW ING COMMISSION ONLY @ 5% AND DISALLOWING THE BALANCE COMMISSION OF 13% IN ASSESSMENT YEAR 1997-98 AND ALLOWING COMMISSION ONLY @ 5% AND DISAL LOWING THE BALANCE COMMISSION OF 15% IN THE ASSESSMENT YEAR 19 98-99. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND SUPPORTED THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS). WE FIND THAT IT IS NOT IN DISPUTE THAT COMMISSION @ 3% WAS PAID TO GCL FOR THEIR PURCHASE MADE FROM THE ASSESSEE OR THEIR OWN INTERN AL CONSUMPTION. THUS IT IS CLEAR THAT THE SAID PAYMENT WAS NOT A CONSIDE RATION FOR ANY SERVICES RENDERED BUT WAS IN RELATION TO THE PURCHASES MADE FOR OWN CONSUMPTION. ON THE ABOVE FACTS IN OUR CONSIDERED VIEW THE TRU E NATURE OF THE ABOVE PAYMENT OF 3% TO SAID GCL WAS OF TRADE DISCOUNT AND NOT COMMISSION. FOLLOWING THE ABOVE DECISION OF THE HON'BLE DELHI H IGH COURT IN THE CASE OF UNITED EXPORTS (SUPRA) IN OUR CONSIDERED VIEW T HE DISALLOWANCE OF THE ABOVE TRADE DISCOUNT BY INVOKING PROVISIONS OF SECT ION 40A(2)(B) WAS NOT JUSTIFIED. 8. IN RESPECT OF BALANCE PAYMENT TO SAID GCL WHICH WERE MADE @ 18% IN THE ASSESSMENT YEAR 1997-98 AND @ 20% IN ASS ESSMENT YEAR 1998-99 WE FIND THAT THE SAID PAYMENT WAS MADE IN RESPECT OF VARIOUS SERVICES RENDERED BY SAID GCL DURING THE COURSE OF THE BUSINESS OF THE - 10 - ASSESSEE COMPANY. WE FIND THAT GENUINENESS OF THE P AYMENT AND GENUINENESS OF THE AGREEMENT WAS NOT DOUBTED BY ANY OF THE LOWER AUTHORITIES. FROM THE AGREEMENT WE FIND THAT THE S AID GCL PROVIDED THE SERVICES BY PROCURING OF ORDERS FROM THE MARKET PR OVIDING GODOWNS AND OTHER INFRASTRUCTURE FACILITIES AT VARIOUS PLACES T HROUGHOUT THE COUNTRIES GUARANTEE FOR SALE OF 39% OF THE PRODUCTION FOR DOM ESTIC MARKET AND 25% OF PRODUCTION FOR EXPORT MARKET. WE FIND THAT THE L OWER AUTHORITIES COULD NOT BRING MATERIAL TO SHOW THAT SIMILAR SERVICES WE RE AVAILABLE IN THE MARKET AT A LOWER RATE. IN ABSENCE OF ANY SUCH MATE RIAL BROUGHT ON RECORD IN OUR CONSIDERED VIEW THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) WAS NOT JUSTIFIED IN ALLOWING COMMISSI ON ONLY @ 5% WITHOUT ANY BASIS AND DISALLOWING THE BALANCE OF 13 % IN ASSESSMENT YEAR 1997-98 AND 15% IN ASSESSMENT YEAR 1998-99. WE THER EFORE MODIFY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS) AND DELETE THE DISALLOWANCE OF COMMISSION OF RS.56 62 983/- IN ASSESSMENT YEAR 1997-98 AND RS.31 20 728/- IN ASSESSMENT YEAR 1998- 99. THUS THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED IN BOTH THE ASSESSMENT YEAR UNDER CONSIDERATION. 9. GROUND NO.2 OF THE APPEAL IN ASSESSMENT YEAR 199 8-99 READS AS UNDER:- 2. THE HONORABLE COMMISSIONER OF INCOME TAX (APPEA LS)-1 HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE BY LE ARNED ASSESSING OFFICER UNDER THE HEAD SALES PROMOTION EX PENSES OF RS 2 68 498.00. 10. BRIEF FACTS OF THE CASE ARE THAT THE GROUND OF APPEAL IS REGARDING DISALLOWANCE OF RS. 2 68 498/- TOWARDS SALES PROMOTION EXPENSES. T HE ASSESSING OFFICER STATED IN THE ORDER THAT THE ASSE SSES HAS WRITTEN OFF 3 - 11 - ITEMS OF DEBIT NOTES UNDER THE HEAD SALES PROMOTION EXPENSES. THE ASSESSEE WAS ASKED TO GIVE THE NATURE OF THIS EXPEN DITURE AND PROVE THAT THE LIABILITY WAS INCURRED THIS YEAR. THE ASSESSEE EXPLAINED THAT IT HAD PAID SALES TAX ON BEHALF OF THESE 3 PARTIES IN EARLIER Y EARS BUT THE PARTIES HAVE REFUSED TO MAKE THE PAYMENTS. HENCE THE AMOUNTS ARE WRITTEN OFF TO THE P & L A/C AS BAD DEBTS ALTHOUGH SHOWN UNDER THE HEAD SALES PROMOTION EXPENSES. THE ASSESSING OFFICER HELD THAT THE CONCE RNED SALES TAX WAS PAID IN EARLIER YEARS AND AS IT WAS COVERED U/S 43 B IT CANNOT BE ALLOWED DURING THIS YEAR. SECONDLY THE AMOUNTS ARE NOT ALL OWABLE AS BAD DEBTS AS THESE AMOUNTS ARE NOT INCLUDED IN THE INCOME OF THI S YEAR OR EARLIER YEAR. 11. IN APPEAL BEFORE THE LEARNED COMMISSIONER OF I NCOME TAX(APPEALS) THE APPELLANT STATED THAT A VALID TRA DE DEBT EXISTED AND AS THE AMOUNT HAD BEEN PAID IT IS NOT RELEVANT IN WHIC H YEAR IT WAS PAID BUT THAT ALL RECOVERY METHODS HAD FAILED. THEY HAVE POI NTED OUT THAT GOODS TO THESE PARTIES WERE SOLD IN THE F.Y. 1996-97 WHEN S ALES TAX WAS NOT RECOVERED FROM THESE PARTIES. THIS FACT WAS BROUGHT TO NOTICE DURING SALES TAX AUDIT AND THE APPELLANT PAID THE SUM REQUIRED A ND ASKED THE PARTIES FOR REIMBURSEMENT BY WAY OF DEBIT NOTE. THE PARTIES REF USED TO PAY THE SUM. THE DEBIT NOTES HAVE BEEN OFFERED TO TAX IN THE EAR LIER YEAR AS THEY WERE INCLUDED IN THE SALES OF THE PREVIOUS YEAR. HAD THI S NOT BEEN RAISED ON THE PARTY IN THE PREVIOUS YEAR THE AMOUNTS WOULD NOT H AVE BEEN WRITTEN OFF IN THE CURRENT YEAR. THERE IS AN ACCOUNTING ERROR BY D EBITING IT UNDER THE HEAD SALES PROMOTION EXPENSES'. BUT THE TRUE NATURE OF THE EXPENDITURE IS BAD DEBT ALLOWABLE U/S 36(1)(VII). 12. BEFORE LEARNED COMMISSIONER OF INCOME TAX(APPE ALS) THE APPELLANT HAS FILED VARIOUS CORRESPONDENCE REGARDIN G THE FIRST TWO PARTIES. - 12 - IN A LETTER ADDRESSED TO THE M.D. OF THE COMPANY I T HAS BEEN MENTIONED THAT DUE TO HEAVY COMPETITION THE MD HAD ACCEPTED THE REQUEST OF BOTH THE DISTRIBUTORS OF NORTH M/S BALAJI ENTERPRISES A ND M/S SATHE AGENCIES THAT CGGL WILL ABSORB THE CST AMOUNT CGGL WILL NOT INCREASE THEIR LANDING PRICE BY ADDING CST AMOUNT. NOW THE ACCOUNT S DEPARTMENT HAS DEBITED THE CONCERNED AMOUNT IN THE ACCOUNTS OF THE SE PARTIES HENCE APPROVAL MAY BE GRANTED TO CREDIT SIMILAR AMOUNT TO THEIR ACCOUNTS. FROM THIS CORRESPONDENCE IT IS CLEAR THAT THE AMOUNT IS NOT A BAD DEBT AT ALL BUT A CONCURRENCE FROM THE COMPANY ITSELF TO ABSORB THE C ST WHICH WOULD OTHERWISE HAVE BEEN PAYABLE BY THESE TWO DISTRIBUTO RS. HENCE THE AMOUNT CANNOT BE CLAIMED AS A BAD DEBT. SECONDLY IT IS NO T AT ALL CLEAR AS TO WHY SUCH A CONCESSION WAS GIVEN ONLY TO TWO DISTRIBUTOR S OF NORTH AND NOT TO OTHER DISTRIBUTORS. IN THE ABSENCE OF ANY REASONABL E EXPLANATION HE HELD THAT THE PAYMENT CANNOT BE STATED TO BE MADE OUT OF BUSINESS COMPULSION. IF THERE WAS A BUSINESS EXPEDIENCY IT WOULD HAVE BE EN APPLICABLE ALL OVER THE COUNTRY AND NOT ONLY IN RESPECT OF TWO PARTIES IN THE NORTH. HENCE HE HELD THAT THE ASSESSING OFFICER WAS CORRECT IN MAKI NG THIS DISALLOWANCE AND THE ADDITION IS UPHELD. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED RS.2 68 498/- RELATING TO THE FOLLOWING PARTIES UNDER THE HEAD SALES PROMOTION EXPENSES. (I) BALAJI ENTERPRISES NEW DELHI RS.1 52 012/- (II) SATHE AGENCIES GAZIABAD. RS.1 13 812/- (III) A.K.TRADERS FIROZABAD. RS. 2 674/- - 13 - THE LEARNED ASSESSING OFFICER OBSERVED THAT THESE E XPENSES RELATED TO SALES TAX WHICH WAS PAID IN EARLIER YEAR AND THEREF ORE IN VIEW OF PROVISIONS OF SECTION 43B THE SAME IS NOT ALLOWABLE DURING THE YEAR UNDER CONSIDERATION. THE LEARNED ASSESSING OFFICER ALSO O PINED THAT THE ABOVE AMOUNT CANNOT ALSO BE ALLOWED AS BAD DEBT BECAUSE S ALES TAX WAS NOT INCLUDED AS INCOME DURING THE YEAR UNDER CONSIDERAT ION OR IN ANY EARLIER YEAR. THE LEARNED ASSESSING OFFICER THEREFORE DIS ALLOWED THE CLAIM OF RS.2 68 498/-. ON APPEAL THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OBSERVED THAT RS.1 52 012/- AND RS.1 1 3 812/- RELATING TO BALAJI ENTERPRISES NEW DELHI AND SATHE AGENCIES G AZIABAD WERE THE AMOUNT OF CST WHICH ON THE REQUEST OF THE ABOVE PAR TIES MANAGING DIRECTOR OF ASSESSEE COMPANY AGREED NOT TO RECOVER THE SAID AMOUNT FROM THESE PARTIES IN VIEW OF THE COMPETITION IN THE MAR KET. THUS THESE AMOUNTS WERE CONCESSION GIVEN BY THE ASSESSEE COMPA NY TO THE SAID TWO DISTRIBUTORS AND THEREFORE ARE NOT BAD DEBTS. FURTH ER IN VIEW OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) AS THE CONCESSION WAS GIVEN ONLY TO THE TWO DISTRIBUTORS AND SIMILAR CONC ESSION WAS NOT GIVEN TO THE OTHER DISTRIBUTORS SUCH CONCESSION CANNOT BE TR EATED AS GIVEN FOR BUSINESS EXPEDIENCY AND THEREFORE CANNOT BE ALLOWE D AS DEDUCTION TO THE ASSESSEE. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE EXPLAINED BEFORE US THAT THE AMOUNT RELATING TO BAL AJI ENTERPRISES NEW DELHI AND SATHE AGENCIES GAZIABAD TOTALING TO RS. 2 65 824/- ARE PART OF SALE PRICE. HE EXPLAINED THAT DURING THE PREVIOUS YEAR RELATING TO ASSESSMENT YEAR 1997-98 ON SALE MADE TO THESE PARTI ES CST WAS MISTAKENLY NOT CHARGED IN THE INVOICES. THE ABOVE M ISTAKE CAME TO THE LIGHT AT THE TIME OF SALES TAX AUDIT. THEN THE COM PANY RAISED DEBIT NOTE IN RESPECT OF THE ABOVE AMOUNT AND DEBITED THE PART IES ACCOUNT. HOWEVER ON REPRESENTATION FROM THE SAID PARTIES THE MANAGI NG DIRECTOR OF THE ASSESSEE COMPANY DECIDED TO NOT TO RECOVER THESE AM OUNT OUT OF BUSINESS - 14 - CONSIDERATION FROM THE PARTIES AND THEREFORE AMOUN TS WERE CREDITED IN THE PARTIES ACCOUNT AND DEBITED UNDER THE HEAD SALES PR OMOTION ACCOUNT. THE AMOUNT BEING FOREGONE FOR BUSINESS CONSIDERATION ON LY AND THEREFORE THE SAME OUGHT TO HAVE BEEN ALLOWED AS BUSINESS DEDUCTI ON TO THE ASSESSEE. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPRESE NTATIVE RELIED UPON THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS). WE FIND THAT THE ASSESSEE HAS RAISED GROUND OF APPEAL RELAT ING TO RS.2 68 498/- WHICH INCLUDED RS.2 674/- IN RESPECT OF A.K.TRADERS FIROZABAD. WE FIND THAT NO DETAILS ABOUT THIS PARTY WAS FILED EITHER B EFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OR BEFORE US. T HUS WE FIND NO REASON TO INTERFERE WITH THE ORDERS OF THE LOWER AU THORITIES IN RESPECT OF THIS AMOUNT OF RS.2 674/-. IN RESPECT OF BALANCE AM OUNT OF RS.2 65 824/- RELATING TO BALAJI ENTERPRISE NEW DELHI AND SATHE AGENCIES GAZIABAD WE FIND THAT THE CLAIM OF THE ASSESSEE IS THAT THE ABOVE AMOUNT REPRESENTS CST ON SALES MADE TO THE PARTIES IN EARLIER YEARS W HICH WAS MISTAKENLY NOT INCLUDED IN THE BILLS RAISED ON THEM AND SUBS EQUENTLY WHEN THIS MISTAKE CAME TO THE LIGHT DURING THE COURSE OF SALE TAX AUDIT DEBIT NOTES WERE RAISED ON THESE PARTIES AND WHEN THESE PARTIES EXPRESSED THEIR HARDSHIPS THE COMPANY TO MAINTAIN GOOD BUSINESS R ELATION AGREED TO ALLOW THE SAME AS CONCESSION TO THESE PARTIES. THUS WE FIND THAT THE ABOVE AMOUNT WAS NOT CLAIMED AS SALES TAX EXPENDITU RE BY THE ASSESSEE COMPANY AND THEREFORE THE LEARNED ASSESSING OFFICE R WAS NOT JUSTIFIED IN INVOKING PROVISIONS OF SECTION 43B IN RESPECT OF TH E SAME. FURTHER WE AGREE WITH THE FINDING OF THE LOWER AUTHORITIES THA T THIS AMOUNT ALSO DOES NOT REPRESENT BAD DEBT OF THE ASSESSEE COMPANY BUT THE TRUE NATURE OF THIS AMOUNT IS DISCOUNT ALLOWED BY THE ASSESSEE COMPANY TO THE SAID TWO PARTIES. THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS) DISALLOWED THE ABOVE AMOUNT OF DISCOUNT ON THE GROUND THAT SIM ILAR DISCOUNT WAS NOT ALLOWED TO OTHER PARTIES. IN OUR CONSIDERED OPINIO N TO ALLOW DEDUCTION FOR - 15 - DISCOUNT IT IS NOT A CONDITION PRECEDENT THAT SIMI LAR AMOUNT OF DISCOUNT SHOULD BE ALLOWED BY A BUSINESSMAN TO ALL HIS CUSTO MERS. THUS THE REASON GIVEN BY THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS) FOR CONFIRMING THE DISALLOWANCE IS FOUND TO BE UNTENABL E. WE FIND THAT IT IS NOT DISPUTED BY THE REVENUE THAT THE AMOUNT OF RS.2 65 824/- WAS NOT ALLOWED AS DISCOUNT BY THE ASSESSEE TO THE AFORESAI D TWO PARTIES OR THE DISCOUNT WAS ALLOWED FOR ANY OTHER CONSIDERATION EX CEPT BUSINESS CONSIDERATION. THUS IN OUR CONSIDERED OPINION IF THE DISCOUNT IS ALLOWED DURING THE YEAR UNDER CONSIDERATION THEN THE SAME I S ALLOWABLE AS BUSINESS DEDUCTION TO THE ASSESSEE. HOWEVER WE FIND THAT BO TH THE PARTIES AND BOTH THE AUTHORITIES HAVE BROUGHT NO MATERIAL ON RECORD TO SHOW THAT WHEN THE AMOUNT IN QUESTION WAS ALLOWED AS DISCOUNT OR CONCE SSION I.E. THE DATE ON WHICH THE ASSESSEE COMPANY AGREED TO ABSORB THIS AM OUNT AND NOT RECOVERED THIS AMOUNT FROM THE SAID TWO PARTIES. I N THE CIRCUMSTANCES IT SHALL BE IN THE INTEREST OF JUSTICE TO RESTORE THIS PART OF THE GROUND OF APPEAL BACK TO THE FILE OF THE LEARNED ASSESSING OFFICER F OR VERIFICATION IN LIGHT OF THE OBSERVATION MADE HEREINABOVE AND THEN TO DEC IDE THE ISSUE AFRESH AS PER LAW. NEEDLESS TO MENTION THAT THE LEARNED ASSES SING OFFICER SHALL ALLOW REASONABLE OPPORTUNITY OF HEARING TO THE ASSE SSEE BEFORE DECIDING THE ISSUE AFRESH . THUS THE DISALLOWANCE OF RS.2 6 74/- IS CONFIRMED AND ISSUE RELATING TO DISALLOWANCE OF BALANCE AMOUNT OF RS.2 65 824/- IS RESTORED TO THE FILE OF THE LEARNED ASSESSING OFFIC ER FOR ADJUDICATING AFRESH IN LIGHT OF THE OBSERVATION MADE ABOVE. THER EFORE THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATIS TICAL PURPOSES. 14. GROUND NO.3 OF THE APPEAL OF THE ASSESSEE IN AS SESSMENT YEAR 1998-99 READS AS UNDER:- 3. THE HONORABLE COMMISSIONER OF INCOME TAX (APPEA LS)- 1 HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE BY LEARNED - 16 - ASSESSING OFFICER ON ACCOUNT OF FOREX RATE FLUCTUA TION AMOUNTING TO RS 59 11 715/-. GROUND NO.2 OF THE APPEAL OF THE REVENUE IN ASSESSM ENT YEAR 1998-99 READS AS UNDER:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LEARNED CIT (APPEALS) ERRED IN ALLOWING DELETION TO THE EXTENT OF RS.2.64 637/- OUT OF TOTAL ADDITIO N OF RS.61 76 352/- RELATING TO THE DISALLOWANCE OF FLUC TUATION RATE DIFFERENCE IN RESPECT OF PAYMENT OF INTEREST ON FOR EIGN LOAN TAKEN FOR THE PURPOSE OF PURCHASE OF MACHINERY TREA TING THE SAME AS REVENUE EXPENDITURE ACTUALLY PAID INSTEAD O F CAPITAL EXPENDITURE AS CONSIDERED BY THE AO IN VIEW OF SECT ION 43-A OF THE ACT. 15. THE BRIEF FACTS OF THE CASE ARE THAT GROUND OF APPEAL IS REGARDING DISALLOWANCE OF FLUCTUATION RATE DIFFERENCE OF RS.6 1 76 352/-. THE ASSESSING OFFICER HAS STATED IN THE ORDER THAT THIS SUM IS ON ACCOUNT OF EXCESS PAYMENT OF INTEREST ON FOREIGN LOANS TAKEN F OR THE PURPOSE OF PURCHASE OF MACHINERY BEFORE COMMENCEMENT OF OPERAT IONS. AS PER SECTION 43A WHERE THE ASSESSEE HAS ACQUIRED ANY AS SETS FROM OUTSIDE INDIA AND IN CONSEQUENCE OF CHANGE IN THE RATE OF E XCHANGE AFTER THE ACQUISITION OF SUCH ASSETS THERE IS AN INCREASE OR DECREASE IN THE LIABILITY AS EXPRESSED IN THE INDIAN CURRENCY FOR THE REPAYME NT OF THE FOREIGN CURRENCY THE AMOUNT BY WHICH THE LIABILITY IS SO I NCREASED SHALL BE ADDED TO THE ACTUAL COST OF ASSET. IN VIEW OF THE ABOVE S ECTION THE ASSESSING OFFICER'S REPRESENTATIVE AGREED BEFORE THE ASSESSIN G OFFICER THAT THE DISALLOWANCE MAY BE MADE. THE ASSESSING OFFICER HOW EVER FURTHER STATED THAT THE SUM WAS NOT ADDED TO THE COST OF PLANT AND MACHINERY AS THE AMOUNT CLAIMED WAS A MERE PROVISION AND HAD NOT ACT UALLY BEEN PAID IN THIS YEAR. IT WOULD THEREFORE BE ADDED TO THE CO ST OF ASSET IN THE YEAR OF ACTUAL PAYMENT. - 17 - 16. BEFORE THE LEARNED COMMISSIONER OF INCOME TAX(A PPEALS) THE ASSESSEE HAS STATED THAT DURING ASSESSMENT PROCEEDI NGS IT WAS CLEARLY POINTED OUT THAT THIS EXCHANGE FLUCTUATION IS AS A RESULT OF PAYMENT ON INTEREST PROVIDED DURING THE YEAR 1996-97 OF RS.90 75 112.94. AT THE TIME OF ACTUAL REMITTANCE THE EXCESS AMOUNT OVER AND AB OVE THE RATE OF THE PROVISION FOR INTEREST ON THE TERM LOAN HAS BEEN D EBITED TO THE REVENUE ACCOUNT. THE REMITTANCE HAS BEEN MADE ON 23RD JUNE 1997. THE REMITTANCE HAS THEREFORE BEEN MADE DURING THE CURR ENT FINANCIAL YEAR AND THE PROVISION WAS MADE IN THE PREVIOUS YEAR AND FU RTHER THE PAYMENT IS FOR THE INTEREST AMOUNT AND NOT FOR REPAYMENT OF TH E PRINCIPAL AMOUNT. INTEREST LIABILITY IS THE CURRENT LIABILITY AND ANY INCREASE IN THE LIABILITY IS REQUIRED TO BE WRITTEN OFF IN THE PROFIT & LOSS A/C ONLY AS PER ACCOUNTING STANDARDS. 17. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) FROM THE RECORD FOUND THAT VIDE LETTER DATED 13TH FEBRUARY 2002 ADDRESSED TO THE CIT(A)-I IT HAS BEEN STATED THAT THERE IS ONE COMP ONENTS OF RS.2 64 637/- WHICH ACCOUNTED FOR THE DIFFERENCE BETWEEN THE PROV ISION AND ACTUAL PAYMENT AND HENCE ONLY THIS EXCESS PAYMENT WAS RIGH TLY DEBITED TO FOREIGN EXCHANGE FLUCTUATION RESERVE. THE OTHER ELE MENT DEBITED TO REVENUE SHALL BE CAPITALISED AND DEPRECIATION SHALL BE CLAIMED AGAINST THE SAME AND THEY PLACED NO ARGUMENTS IN THIS MATTER. THEY SUBMITTED A COPY OF THE PAYMENT MADE ON 23RD JUNE 1997 WHICH SHOWE D ACTUAL PAYMENT OF RS. 93 41 150/- AS AGAINST PROVISION OF RS.90 75 112/-. IN VIEW OF THE SUBMISSIONS GIVEN BY THE APPELLANT THE AMOUNT OF R S.2 64 637/- IS ALLOWED ON REVENUE ACCOUNT AND THE BALANCE IS DISAL LOWED KEEPING IN LINE WITH THE ARGUMENTS OF THE ASSESSING OFFICER IN RESP ECT OF SECTION.43 A. HENCE THE APPELLANT GETS RELIEF ON ONLY RS.2 64 637 /-. - 18 - 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED EXCHANGE FLUCTUATION LOSS OF R S.61 76 352/-. ACCORDING TO THE LEARNED ASSESSING OFFICER THE SAM E RELATES TO EXCESS PAYMENT OF INTEREST ON FOREIGN LOANS TAKEN FOR THE PURPOSE OF PURCHASE OF MACHINERY BEFORE OPERATION OF THE COMPANY STARTED. ACCORDING TO THE LEARNED ASSESSING OFFICER IN VIEW OF THE PROVISION S OF SECTION 43A SUCH LOSS IS REQUIRED TO BE ADDED WITH THE COST OF THE A SSETS AND THEREFORE NOT ALLOWABLE AS REVENUE EXPENDITURE TO THE ASSESSEE. FURTHER THE LEARNED ASSESSING OFFICER HAS ALSO NOT ADDED THE SAID AMOUN T TO THE COST OF THE ASSETS AS IN HIS OPINION THE LOSS WAS ONLY A NOTIO NAL LOSS AND ACTUAL LOSS WILL ARISE ONLY IN THE YEAR OF PAYMENT AND IN THAT YEAR ONLY SUCH LOSS CAN BE ADDED TO THE COST OF THE ASSETS. IN VIEW OF THI S THE LEARNED ASSESSING OFFICER DISALLOWED ENTIRE CLAIM OF RS.61 76 352/-. ON APPEAL THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OBSERVED THAT O UT OF RS.61 76 352/- RS.2 64 637/- RELATES TO THE INTERE ST LIABILITY OF THE ASSESSEE. THE LEARNED COMMISSIONER OF INCOME TAX(AP PEALS) OBSERVED THAT THE ASSESSEE MADE A PROVISION OF RS.90 75 112/ - ON ACCOUNT OF INTEREST LIABILITY IN THE IMMEDIATELY PRECEDING YEAR AND THE SAID LIABILITY WHEN ACTUALLY PAID BY THE ASSESSEE ON 23.06.2007 THE A SSESSEE HAD TO PAY RS.93 41 150/-. THUS THE LOSS OF RS.2 64 637/- WAS ON REVENUE ACCOUNT AND ALLOWABLE AS A REVENUE DEDUCTION TO THE ASSESSE E. IN RESPECT OF BALANCE AMOUNT OF RS.59 11 715/- THE LEARNED COMMI SSIONER OF INCOME TAX(APPEALS) AGREED WITH THE FINDING OF THE LEARNED ASSESSING OFFICER. BEFORE US LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWO RD GOVERNOR INDIA (P) LTD. (2009) 312 ITR 254 (SC). WE FIND THAT IN T HE INSTANT CASE THE FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX(A PPEALS) IS THAT - 19 - EXCHANGE FLUCTUATION LOSS OF RS.59 11 715/- IS BECA USE OF INCREASE OF LOAN LIABILITY ON ACCOUNT OF EXCHANGE FLUCTUATION AND TH EREFORE THE SAME WAS IN THE NATURE OF CAPITAL EXPENDITURE. FURTHER LEARNED COMMISSIONER OF INCOME TAX(APPEALS) AGREED WITH THE VIEW OF THE LEA RNED ASSESSING OFFICER THAT AS THE LOAN WAS NOT ACTUALLY REPAID DU RING THE YEAR UNDER CONSIDERATION THE LIABILITY ON ACCOUNT OF EXCHANGE FLUCTUATION WAS ONLY A NOTIONAL LIABILITY AND ACTUAL LIABILITY WILL ONLY B E ASCERTAINED IN THE YEAR OF ACTUAL PAYMENT AND ONLY IN THAT YEAR SUCH LIABILITY CAN BE ADDED TO THE COST OF THE ASSETS FOR ALLOWING DEPRECIATION. WE FIND T HAT THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE COULD NOT BRING ANY MATERIAL BEFORE US TO SHOW THAT THE EXCHANGE FLUCTUATION LOS S RS.59 11 715/- WAS NOT ON ACCOUNT OF INCREASE IN LOAN LIABILITY ALONE BECAUSE OF DIFFERENCE IN EXCHANGE RATE. THUS WE FIND THAT ASSESSEE HAS NOT DISPUTED THAT EXCHANGE LOSS OF RS.59 11 715/- WAS IN RESPECT OF A LOAN LIA BILITY I.E. A CAPITAL LIABILITY. WE FIND THAT SUPREME COURT IN THE CASE OF WOODWORD GOVERNOR INDIA (P) LTD. (SUPRA) HAS HELD THAT LOSS SUFFERED BY THE ASSESSEE IN RESPECT OF A REVENUE LIABILITY ON ACCOUNT OF EXCHANGE DIFFE RENCE AS ON THE DATE OF BALANCE SHEET IS AN ITEM OF EXPENDITURE ALLOWABLE U NDER SECTION 37 IN THE YEAR OF ACCRUAL. FURTHER THE HON'BLE SUPREME COUR T HAS IN THE AFORESAID DECISION ALSO HELD THAT AS PER UNAMENDED SECTION 43 A INCREASE OR DECREASE IN LIABILITY FOR REPAYMENT OF FOREIGN LOAN IN RESPECT OF ACQUISITION OF AN ASSET HAS TO BE TAKEN INTO ACCOUNT TO MODIFY THE FIGURE OF ACTUAL COST IN THE YEAR IN WHICH THE INCREASE OR DECREASE IN LI ABILITY ARISES ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE IRRESPECTIV E OF THE DATE OF ACTUAL PAYMENT IN FOREIGN CURRENCY. THE SUPREME COURT ALS O HELD THAT AMENDMENT OF SECTION 43A BY THE FINANCE ACT 2002 W ITH EFFECT FROM 1.04.2003 IS MANDATORY AND NOT CLARIFICATORY. KEEPI NG IN VIEW THE ABOVE AND THE FACT THAT THE ASSESSMENT YEAR INVOLVED IN T HE PRESENT APPEAL IS ASSESSMENT YEAR 1998-99 IN OUR CONSIDERED OPINION THE LOWER - 20 - AUTHORITIES WERE JUSTIFIED IN HOLDING THAT THE EXCH ANGE FLUCTUATION LOSS OF RS.59 11 715/- IS NOT ALLOWABLE AS REVENUE EXPENDIT URE AS THE SAME RELATES TO FOREIGN LOAN IN RESPECT OF ACQUISITION OF AN ASS ETS AND DOES NOT RELATE TO REVENUE EXPENDITURE. HOWEVER THE LOWER AUTHORITIE S WERE NOT JUSTIFIED IN NOT ADDING THE SAME TO THE COST OF THE ASSETS FOR T HE PURPOSE OF ALLOWING DEPRECIATION ON THE GROUND THAT THE SAME WAS ONLY A NOTIONAL LOSS AS THE ACTUAL LOAN WAS NOT REPAID DURING THE YEAR. IN VIE W OF THE ABOVE DECISION OF THE HON'BLE SUPREME COURT SUCH EXCHANGE FLUCTUAT ION LOSS IS TO BE ADDED TO THE COST OF THE ASSETS UNDER UNAMENDED PRO VISIONS OF SECTION 43A AND DEPRECIATION IS ACCORDINGLY TO BE ALLOWED. WE T HEREFORE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES IN RESPECT OF EXCHA NGE FLUCTUATION LOSS OF RS.59 11 715/- AND DIRECT THE LEARNED ASSESSING OFF ICER TO ADD THE SAME TO THE COST OF THE ASSETS AND ACCORDINGLY RECOMPUTE THE DEPRECATION ALLOWABLE TO THE ASSESSEE. THUS THIS GROUND OF APP EAL OF THE ASSESSEE IS ALLOWED AS ABOVE AND THAT OF THE REVENUE IS DISMISS ED. 19. GROUND NO.4 OF THE APPEAL IN ASSESSMENT YEAR 19 98-99 READS AS UNDER:- 4. THE HONORABLE COMMISSIONER OF INCOME TAX (APPEA LS)- 1 HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE LEARNED ASSESSING OFFICER OF SUNDRY BALANCES WRITE OFF OF RS 58 140.00 IN CASE OF M/S LIBRA ENTERPRISES. 20. BRIEF FACTS OF THE CASE ARE THAT THE APPEAL IS REGARDING DISALLOWANCE OF SUNDRY BALANCES WRITTEN OFF OF RS.58 140/-. THE ASSESSING OFFICER HAS STATED IN THE ORDER THAT THE ASSESSEE HAD MADE ADVA NCES TO M/S.LIBRA ENTERPRISE. THE CLAIM OF WRITING OFF IS NOT ALLOWED AS THE AMOUNT HAS NOT BEEN INCLUDED IN THE INCOME OF THIS YEAR OR IN THE PRECEDING YEAR AND THESE ITEMS ARE NOT TRADE DEBTS. - 21 - THE ASSESSEE STATES AS FOLLOWS: 1. PAYMENT OF RS.58 R 140/- TO LIBRA ENTERPRISES THIS PAYMENT WAS MADE TO THE PARTY AS PER THE ORDER PLACED ON THEM AN ADVANCE WAS ALSO MADE TO THE PARTY FOR SAM E AMOUNT VIDE CHEQUE NUMBER 314659 CANARA BANK. SUBSEQUENTLY THE ORDER WAS CANCELLED AND ALL EFFORTS WERE MADE TO TRY AND RECO VER THE AMOUNT BUT THE PARTY WAS NOT FORTHCOMING WITH THE PAYMENT IN THE YEAR END THEREFORE SINCE THERE WAS NO RECOVERY COMING IN TH E AMOUNT WAS WRITTEN OFF AS IRRECOVERABLE YOUR APPELLANT SUBMITS THAT THE ADVANCE IN THE NORM AL COURSE OF TRADE BUSINESS FOR A VALUE OF GOODS/SERVICE TO BE R ECEIVED BUT SINCE THE ORDER WAS CANCELLED DUE TO DELAY IN DELIVERY T HE COMPANY HAD TO PLACE THE ORDER WITH ANOTHER PARTY. IT IS SUBMIT TED THAT THIS AMOUNT BE ALLOWED AS NORMAL BUSINESS EXPENSES. 21. LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS HELD THAT THE PAYMENT CANNOT BE ALLOWED AS THE AMOUNT CONCERNED H AS NEVER FORMED PART OF THE INCOME OF THE APPELLANT. 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED BAD DEBT OF RS.58 140/- WHICH RELATES TO THE ADVANCE GIVEN TO M/S.LIBRA ENTERPRISE. ACCORDING TO THE LEA RNED ASSESSING OFFICER THIS AMOUNT WAS NEVER INCLUDED TO THE INCO ME OF THE ASSESSEE EITHER IN THE YEAR UNDER CONSIDERATION OR IN AN EAR LIER YEAR AND WAS NOT A TRADE DEBT. THEREFORE THE SAME IS NOT ALLOWABLE AS BAD DEBT. ON APPEAL THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) CON FIRMED THE ACTION OF THE LEARNED ASSESSING OFFICER ON THE SAME GROUND . BEFORE US THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE S UBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. ABDUL RAZ AK &CO. (1982) 136 - 22 - ITR 825 (GUJ). THE LEARNED DEPARTMENTAL REPRESENTAT IVE SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. WE FIND THAT IN TH E CASE OF ABDUL RAZAK & CO. (SUPRA) THE HON'BLE GUJARAT HIGH COURT HAS HELD THAT THE DEBT WHICH SPRINGS DIRECTLY FROM THE BUSINESS OF THE ASSESSEE WAS ALLOWABLE AS A BAD DEBT AND CONSEQUENTLY THEREFORE A TRADING LOSS UN DER SECTION 28(1) WE THUS FIND THAT A TRADE DEBT WHICH SPRINGS UP DIREC TLY FROM THE BUSINESS OF THE ASSESSEE EVEN IF NOT ALLOWABLE UNDER SECTION 36 (1)(VII) IN VIEW OF PROVISIONS OF SECTION 36(2) CAN STILL BE HELD AS AL LOWABLE AS A TRADING LOSS UNDER SECTION 28(1) OF THE ACT. IN THE INSTANT CASE THE FACTS BEFORE US SHOW THAT THE MONEY WAS GIVEN AS ADVANCE BY THE ASS ESSEE TO M/S.LIBRA ENTERPRISE FOR PURCHASE. HOWEVER THE DETAILS OF TH E ITEMS FOR WHICH ORDER WAS PLACED ARE NOT AVAILABLE ON RECORD. THUS WE CA NNOT CONCLUDE WHETHER THE ADVANCE WAS GIVEN DURING THE COURSE OF THE NORM AL BUSINESS FOR PURCHASE OF TRADING GOODS OR OTHERWISE. IN THE CIRC UMSTANCES IN OUR CONSIDERED VIEW IT SHALL BE IN THE INTEREST OF THE JUSTICE TO RESTORE THE ISSUE BACK TO THE FILE OF THE LEARNED ASSESSING OFFICER F OR PROPER VERIFICATION AND THEREAFTER TO DECIDE THE ISSUE IN VIEW OF THE ABOVE CITED DECISION OF THE HON'BLE GUJARAT HIGH COURT AND AFTER ALLOWING R EASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. WE ORDER ACCORDINGLY. THUS THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSES. 23. GROUND NO.5 OF THE APPEAL IN ASSESSMENT YEAR 1 998-99 READS AS UNDER:- 5. THE HONORABLE COMMISSIONER OF INCOME TAX (APPEA LS)- 1 HAS ERRED IN CONFIRMING THE ADDITION OF RS.1 30 700.00 IN RESPECT OF PROFESSIONAL FEES. 24 THE BRIEF FACTS OF THE CASE ARE THAT THE GROUND OF APPEAL IS REGARDING DISALLOWANCE OF PROFESSIONAL FEES OF RS.1 30 700/-. THE ASSESSING OFFICER - 23 - HAS STATED IN THE ORDER THAT SOME OF THE ITEMS PERT AIN TO EARLIER YEARS. AS THE WORK WAS DONE IN EARLIER YEARS AND THE BILLS WE RE ALSO ISSUED IN EARLIER YEARS AS PER MERCANTILE METHOD THE AMOUNT IS DISAL LOWABLE. EARLIER YEARS PROFESSIONAL FEES IS NOT SHOWN IN EARLIER YEAR'S EX PENSES BY THE TAX AUDITORS FOR WHICH A SEPARATE ADDITION IS MADE. 25. IN APPEAL BEFORE THE LEARNED COMMISSIONER OF IN COME TAX(APPEALS) THE ASSESSEE HAS STATED THAT ALL THE BILLS ARE FOR BUSINESS PURPOSE ONLY AND UNFORTUNATELY ONLY BECAUSE OF THE DELAY IN SUBMISSION OF THE BILLS OR IN PROCESSING THE BILLS THEY HAVE BEEN INADVERTENTLY BOOKED IN THE SUBSEQUENT YEARS. THEY HAVE ALSO DRAWN ATTENTIO N TO THE CASE OF EICHER CONSULTANCY LTD. WHICH HAS BEEN DISALLOWED SEPARATE LY BY THE ASSESSING OFFICER UNDER THE HEADING PRIOR PERIOD EXPENSES. 26. ON GOING THROUGH THE DETAILS LEARNED COMMISSIO NER OF INCOME TAX(APPEALS) FOUND THAT THE ASSESSING OFFICER OBSER VATION IS CORRECT AND ALL THE EXPENSES HAVE BILLS RAISED DURING THE PREVI OUS YEARS. THEREFORE AS PER MERCANTILE SYSTEM OF ACCOUNTING THE SAME SHOUL D HAVE BEEN CONSIDERED IN THE PREVIOUS YEAR'S ACCOUNT. HOWEVER AS REGARDS BILL NO.100254 BOOKED ON 16-06-1997 IT SHOULD NOT BE TH E SUBJECT OF DOUBLE DISALLOWANCE. HENCE THE ASSESSING OFFICER IS DIRECT ED TO REDUCE THE AMOUNT UNDER THE HEADING PRIOR PERIOD EXPENSES. T HE BALANCE ADDITION HERE IS THEREFORE CONFIRMED. 27. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE AMOUNT OF RS.1 30 700/- W AS DISALLOWED BY THE LEARNED ASSESSING OFFICER ON THE GROUND THAT THIS R ELATES TO THE EARLIER YEAR. THE LEARNED COMMISSIONER OF INCOME TAX(APPEA LS) OBSERVED THAT - 24 - THIS EXPENSE WAS INCURRED IN RESPONSE TO SERVICES R ECEIVED IN THE EARLIER YEAR AND BILLS WERE ALSO RAISED IN EARLIER YEAR. T HE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT IT IS THE CONSISTENTLY FOLLOWED SYSTEM OF ACCOUNTING OF THE ASSESSEE COMPA NY TO ACCOUNT FOR THE BILLS WHEN IT IS RECEIVED BY THEM. HE EXPLAINED THA T BILLS FOR SERVICES RECEIVED IN MARCH THOUGH WERE RAISED IN MARCH BUT R ECEIVED BY THE ASSESSEE COMPANY ON A LATER DATE. THEREFORE IT WAS ACCOUNTED FOR IN THE YEAR UNDER CONSIDERATION AND THIS BEING A CONSISTEN T SYSTEM FOLLOWED BY THE ASSESSEE THE SAME SHOULD BE ALLOWED DURING THE YEAR UNDER CONSIDERATION. WE FIND THAT IT IS NOT IN DISPUTE TH AT THE SYSTEM OF ACCOUNT FOLLOWED BY THE ASSESSEE IS MERCANTILE SYSTEM OF AC COUNTING. UNDER MERCANTILE SYSTEM OF ACCOUNTING THE LIABILITY IS A LLOWABLE IN THE YEAR IN WHICH SUCH LIABILITIES ACCRUES. IF THE ASSESSEE HAS RECEIVED THE SERVICES IN EARLIER YEAR THE LIABILITY TO MAKE PAYMENT ACCRUED IN EARLIER YEAR AND THEREFORE THE SAME CANNOT BE ALLOWED AS A DEDUCTIO N IN THE SUBSEQUENT YEAR UNLESS IT IS SHOWN THAT DUE TO SOME DISPUTE T HE AMOUNT OF LIABILITY WAS CRYSTALLIZED ONLY DURING THE YEAR UNDER CONSIDE RATION. WE DO NOT FIND ANY MATERIAL ON RECORD TO SHOW THAT THE LIABILITY I N RESPECT OF THE AMOUNT IN QUESTION WAS CRYSTALLIZED ONLY DURING THE YEAR U NDER CONSIDERATION. THE ASSESSEES SUBMISSION THAT BILLS WERE RECEIVED ON A SUBSEQUENT DATE AND THEREFORE IT WAS ACCOUNTED FOR IN SUBSEQUENT Y EAR HAS NO FORCE BECAUSE FIRSTLY THE ASSESSEE KNEW THAT IT WAS FOLLO WING MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE IT SHOULD HAVE EITHER A CCOUNTED FOR ALL THE LIABILITY WHICH ACCRUED DURING THE RELEVANT PREVIOU S YEAR EVEN WHEN THE BILLS WERE RECEIVED AT A LATER DATE OR SECONDLY HE SHOULD HAVE MADE PROVISION IN RESPECT OF ALL KNOWN LIABILITY. IN VIE W OF THE ABOVE WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE ASSE SSEE THEREFORE THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. - 25 - ITA NO.4326/AHD/2003 28. GROUND NO.1 OF THE APPEAL OF THE REVENUE IN ASS ESSMENT YEAR 1998- 99 READS AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(APPEALS) ERRED IN DELETING THE DISALLOWANCE OF RS.17 50 277/- THE CLAIM OF MODVAT CREDIT ON CAPITAL GOODS SINCE THERE IS NO PROVISIO N UNDER THE EXCISE RULES WHICH STATES THAT MODVAT ON CAPITAL GOODS CANNOT BE SET OFF AGAINST EXCISE DUTY ON REVENUE ACCOUNT SO LONG AS NO DEPRECIATION IS BEING CLAIMED ON THE ITEM. 29. THE BRIEF FACTS OF THE CASE ARE THAT THE GROUND OF APPEAL IS REGARDING ADDITION OF RS.17 50 277/- TOWARDS MODVAT ON CAPITA L GOODS. THE LEARNED ASSESSING OFFICER HAS STATED IN THE ORDER THAT THE ASSESSEE HAS MADE EXCISE PAYMENT AS ALSO MODVAT ON RAW MATERIAL AND ON CAPIT AL GOODS. AS FAR AS MODVAT ON CAPITAL GOODS IS CONCERNED HE HELD IT TO BE NOT ALLOWABLE AS REVENUE EXPENDITURE AS IT IS NOT ACTUALLY PAID NOR IT REDUCES THE COST OF ANY OF THE ITEMS APPEARING IN THE PROFIT & LOSS ACC OUNT. 30. IN APPEAL THE LEARNED COMMISSIONER OF INCOME T AX(APPEALS) OBSERVED THAT THE ARGUMENTS OF THE ASSESSEE ALSO RE MAIN THE SAME. THE GIST OF THE ARGUMENT IS THAT AS REGARD MODVAT ON CAPITAL GOODS IT DOES NOT REDUCE THE COST OF ANY ITEM DEBITED TO PROFIT & LOS S ACCOUNT AS THE MODVAT ON CAPITAL GOODS ACCOUNT IS DEBITED AND THE SUPPLIER/BANK IS CREDITED. THEREAFTER AT THE TIME OF SALE OF GOODS THE MODVAT CREDIT AVAILABLE IS SET OFF. THE PROCEDURE FOLLOWED BY THE ASSESSEE ENSURES THAT DEPRECIATION ON CAPITAL GOODS MODVAT ACCOUNT IS NOT BEING CLAIMED. IT WAS HELD IN FAVOUR OF THE APPELLANT THAT THERE WAS NO P ROVISION UNDER THE EXCISE RULES WHICH STATES THAT MODVAT ON CAPITAL GO ODS CANNOT BE SET OFF - 26 - AGAINST EXCISE DUTY ON REVENUE ACCOUNT SO LONG AS N O DEPRECIATION IS BEING CLAIMED ON THE ITEM. HENCE THE ADDITION MADE WAS DELETED. FOLLOWING THE SAME RATIO IN THIS YEAR ALSO THE ADDITION MADE IS DELETED. 31. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE UNDISPUTED FACT OF THE CA SE ARE THAT THE ASSESSEE COMPANY HAS CLAIMED DEDUCTION OF EXCISE DUTY LIABIL ITY INCURRED ON MANUFACTURING OF GOODS OF RS.5 74 71 385/- IN ITS P ROFIT & LOSS ACCOUNT. THE LEARNED ASSESSING OFFICER OBSERVED THAT OUT OF THE ABOVE EXCISE DUTY LIABILITY OF RS.17 50 277/- WAS ADJUSTED AGAINST TH E MODVAT CREDIT AVAILABLE TO THE ASSESSEE ON CAPITAL GOODS. THUS IN THE OPINION OF THE LEARNED ASSESSING OFFICER EXCISE DUTY LIABILITY OF RS.17 50 277/- WAS NEITHER ACTUALLY PAID BY THE ASSESSEE NOR SUCH LIAB ILITY WENT ON TO REDUCE ANY REVENUE EXPENDITURE DEBITED IN PROFIT & LOSS AC COUNT. THEREFORE IN VIEW OF THE LEARNED ASSESSING OFFICER SUCH ADJUSTME NT OF RS.17 50 277/- IS NOT ALLOWABLE AND THEREFORE HE ADDED RS.17 50 27 7/- TO THE INCOME OF THE ASSESSEE. ON APPEAL LEARNED COMMISSIONER OF IN COME TAX(APPEALS) OBSERVED THAT SIMILAR DISALLOWANCE MADE IN EARLIER YEAR WAS DELETED IN APPEAL AND THEREFORE HE DELETED THE DISALLOWANCE OF RS.17 50 277/-. WE FIND THAT IT IS NOT IN DISPUTE THAT RS.17 50 277/- WAS THE PART OF EXCISE DUTY EXPENDITURE OF THE ASSESSEE INCURRED FOR MANUFACTUR ING OF GOODS. FURTHER THIS LIABILITY WAS DULY DISCHARGED BY THE ASSESSEE IN TERMS OF PROVISIONS OF EXCISE ACT BY ADJUSTING THE MODVAT CREDIT WHICH WAS AVAILABLE TO THE ASSESSEE ON PURCHASE OF CAPITAL ASSETS. THUS IN OU R CONSIDERED VIEW THE EXCISE DUTY LIABILITY OF RS.17 50 277/- WAS DULY PA ID BY THE ASSESSEE AS PER THE PROVISIONS OF EXCISE ACT. THUS THE LEARNED ASSESSING OFFICER WAS NOT JUSTIFIED IN HOLDING THAT THE EXCISE DUTY OF RS .17 50 277/- WAS NOT ACTUALLY PAID. FURTHER IT IS NOT IN DISPUTE THAT E XCISE DUTY OF - 27 - RS.17 50 277/- PAID BY THE ASSESSEE AT THE TIME OF PURCHASE OF CAPITAL ASSETS WERE NOT DEBITED IN THE COST OF THE ASSETS A ND DEPRECIATION IN RESPECT OF THE SAME WAS NOT CLAIMED BY THE ASSESSEE. THUS IN OUR CONSIDERED VIEW THE ASSESSEE WAS LEGALLY ENTITLED TO SET OFF THIS RS.17 50 277/- PAID ON PURCHASE OF CAPITAL ASSETS AGAINST THE EXCISE DU TY WHICH WAS INCURRED BY IT ON MANUFACTURING OF GOODS. FURTHER IT IS NOT THE CASE OF THE REVENUE THAT ANY EXCISE DUTY REALIZED BY THE ASSESSEE ON SA LE OF MANUFACTURED GOODS WAS NOT ACCOUNTED FOR AS INCOME BY THE ASSESS EE. IN THE CIRCUMSTANCES WE DO NOT FIND ANY MERIT IN THIS GRO UND OF APPEAL OF THE REVENUE AND ACCORDINGLY THE SAME IS DISMISSED. 32. GROUND NO.3 AND 4 OF THE APPEAL OF THE REVENUE READS ASUNDER:- 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT (APPEALS) ERRED IN DELETING THE ADDITION OF RS.16 96 000/- ON ACCOUNT OF NON-INCLUSION OF EXCISE DUTY IN VALUATION OF CLOSING STOCK RELYIN G ON THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN TH E CASE OF ENGLISH ELECTRIC CO. LTD V/S CIT 243 ITR 72 9 AND HON'BLE BOMBAY HIGH COURT DECISION IN THE CASE OF INDO NIPPON CHEMICALS LTD 245 ITR 384. 4. IN VIEW OF C.B.D.T 'S INSTRUCTION NO.1389 DTD. 24.03.1981 THE EXCISE DUTY SHOULD BE INCLUDED IN VALUATION OF THE CLOSING STOCK. 33. BRIEF FACTS OF THE CASE ARE THAT THE GROUND OF APPEAL IS REGARDING UNDER VALUATION OF CLOSING STOCK BY EXCISE' DUTY OF RS. 16 96 000/- WHICH HAS NOT BEEN ADDED TO THE CLOSING STOCK. 34 IN VIEW OF THE LEARNED COMMISSIONER OF INCOME TA X(APPEALS) THIS ISSUE WAS COVERED BY THE MADRAS HIGH COURT DECISION IN THE CASE OF ENGLISH ELECTRIC CO. LTD. VS CIT 243 ITR 729 AND TH E BOMBAY HIGH - 28 - COURT DECISION IN THE CASE OF INDO NIPPON CHEMICAL CO. LTD. 245 ITR 384. THE EXCISE DUTY LIABILITY IS INCURRED ON COMPL ETION OF MANUFACTURING OF EXCISABLE GOODS BUT IT IS NOT LEVIED UNLESS IT H AS BEEN CLEARED AND DISPATCHED WITH EXCISE DUTY CLEARANCE. AS THE QUEST ION OF PAYMENT OF EXCISE DUTY DOES NOT ARISE WITHIN THE YEAR AS THE S TOCK IS STILL THERE THE QUESTION OF DEBITING THE SAME TO PROFIT & LOSS A/C ALSO DOES NOT ARISE. AS HELD IN THE ABOVE MENTIONED DECISIONS THE ELEMENT OF EXCISE DUTY CANNOT BE CONVERTED INTO AN ASSET BY INCLUDING THE SAME AS PART OF CLOSING STOCK UNLESS A SIMILAR LIABILITY WAS DEDUCTIBLE FOR THE P URPOSE OF ARRIVING AT THE PROFIT FOR THE YEAR. AS NO LIABILITY IS BEING ALLOW ED IN THE PRESENT CASE NO ADDITION ON THIS GROUND SHOULD BE MADE. THE ADDITIO N MADE IS THEREFORE DELETED. 35. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS NOT INCLUDED THE AMOUNT OF EXCISE DUTY IN VALUATION OF CLOSING STOCK AND THEREFORE ADDED RS.16 96 000/- T O THE INCOME OF THE ASSESSEE. ON APPEAL LEARNED COMMISSIONER OF INCOME TAX(APPEALS) DELETED THE ABOVE ADDITION. WE FIND THAT THE DECISI ON OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) FINDS SUPPORTS FROM THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF LA KHANPAL NATIONAL LTD. VS. ITO (1986) 162 ITR 240 (GUJ) WHICH WAS ALSO APP ROVED BY THE HON'BLE SUPREME COURT IN BERGER PAINTS (I) LTD. VS . CIT (2004) 266 ITR 99 (SC). FURTHER WE OBSERVE THAT THE ASSESSMENT YE AR UNDER CONSIDERATION IS ASSESSMENT YEAR 1998-99 WHEREAS TH E PROVISIONS OF SECTION 145A WAS INTRODUCED IN THE STATUTE WITH EFF ECT FROM 1.04.1999. THEREFORE THE PROVISION OF SECTION145A IS NOT APPL ICABLE FOR THE YEAR UNDER CONSIDERATION AND THE ASSESSEES METHOD OF VA LUATION BEING A - 29 - RECOGNIZED METHOD WHICH HAS BEEN CONSISTENTLY FOLLO WED BY THE ASSESSEE IN OUR CONSIDERED OPINION THE SAME CANNOT BE DISTU RBED AND THEREFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) WAS FUL LY JUSTIFIED IN DELETING THE ADDITION OF RS.16 96 000/-. IN VIEW OF THE ABOVE WE CONFIRM THE ORDER OF THE LEARNED COMMISSIONER OF INCOME T AX(APPEALS) AND DISMISS THE GROUND OF APPEAL OF THE REVENUE. 36. GROUND NO.5 OF THE APPEAL OF THE REVENUE READS AS UNDER:- 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT (APPEALS) ERRED IN DELETING THE ADDITION OF RS.2 98 737/- THE EARLIER YEAR'S EXPEND ITURE STATING THAT THE SAID EXPENDITURE WAS NO SERIOUS TA X EFFECT WAS NOT RESULTED IN DOUBLE CLAIM AND IT DOES NOT EFFECT TO THE PROFIT OF COMPANY IGNORING THE FACT T HAT THE SAID AMOUNT OF EARLIER YEAR'S EXPENDITURE WAS DISALLOWED BY THE A.O FOR THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. 37. THE BRIEF FACTS OF THE CASE ARE THAT THIS GROUN D IS REGARDING DISALLOWANCE OF EARLIER YEARS EXPENSES OF RS.2 98 737/-. THE LEARNED ASSESSING OFFICER HAS STATED IN THE ORDER THAT THES E ARE AMOUNTS POINTED OUT BY THE TAX AUDITOR AND DISALLOWED AS THE ASSESS EE IS FOLLOWING MERCANTILE METHOD OF ACCOUNTING. THE APPELLANT ON T HE OTHER HAND STATES THAT THESE CHARGES ARE TOWARDS CONTRACT LABOUR CHAR GES AND THE BILLS WERE RECEIVED DURING THE CURRENT YEAR AND THEREFORE THE RE WAS NO WAY IN WHICH THE PROVISION COULD HAVE BEEN MADE IN THE PREVIOUS YEAR. ON GOING THROUGH THE DETAILS AND BILLS FILED BEFORE ME I FI ND THAT BARRING SOME BILLS ARE OF A SUBSEQUENT PERIOD. THE APPELLANT HAS STATE D THAT ALL WERE ACTUALLY RECEIVED DURING THE FINANCIAL YEAR UNDER CONSIDERAT ION AND HENCE THEY SHOULD BE ALLOWED. - 30 - 38. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS FOUND THAT THE BILLS FOR CONTRACT LABOUR FOR BUILDING CONSTRUC TION ARE NOT OF LARGE SUMS AND COULD WELL HAVE BEEN RECEIVED/PROCESSED DURING THE FINANCIAL YEAR UNDER CONSIDERATION. IN MY VIEW THERE IS NO SERIOUS TAX EFFECT IN RESPECT OF SUCH EXPENSES AS THERE IS NO DOUBLE CLAIM NOR DOES IT AFFECT THE PROFIT OF THE COMPANY. SIMILAR EXPENSES ARE CLAIMED AND ALLOW ED EVERY YEAR AS SOME BILLS ARE ALWAYS LEFT OVER TO BE ACCOUNTED IN THE RELEVANT PERIOD. NO PURPOSE IS TO BE SERVED IN MAKING SUCH REPETITIVE D ISALLOWANCES EVER YEA WHEN THE EXPENDITURE IN ANY CASE IS FULLY ALLOWABLE EITHER IN THIS YEAR OR IN THE PREVIOUS YEAR. HE THEREFORE HELD THAT ALLOWAN CE OF A FEW SMALL EXPENSES OF THIS NATURE DOES NOT MILITATE AGAINST THE MERCANTILE SYSTEM OF ACCOUNTING. THEREFORE THE ADDITION MADE IS DELETED . 39. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT LEARNED ASSESSING OFFICER HAS OBSERVED FROM THE TAX AUDIT REPORT THAT THE ASSESSEE HAS DEB ITED RS.2 98 737/- AS RELATING TO PRIOR PERIOD EXPENSES. THE LEARNED ASSE SSING OFFICER DISALLOWED THE SAME AS THE SYSTEM OF ACCOUNTING FOL LOWED BY THE ASSESSEE WAS MERCANTILE. ON APPEAL LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ALLOWED THE DEDUCTION BY OBSERVING AS UNDER:- I FIND THAT THE BILLS FOR CONTRACT LABOUR FOR BUIL DING CONSTRUCTION ARE NOT OF LARGE SUMS AND COULD WELL H AVE BEEN RECEIVED/PROCESSED DURING THE FINANCIAL YEAR UNDER CONSIDERATION. IN MY VIEW THERE IS NO SERIOUS TAX E FFECT IN RESPECT OF SUCH EXPENSES AS THERE IS NO DOUBLE CLA IM NOR DOES IT AFFECT THE PROFIT OF THE COMPANY. SIMILAR E XPENSES ARE CLAIMED AND ALLOWED EVERY YEAR AS SOME BILLS ARE AL WAYS LEFT OVER TO BE ACCOUNTED IN THE RELEVANT PERIOD. NO PU RPOSE IS TO - 31 - BE SERVED IN MAKING SUCH REPETITIVE DISALLOWANCES E VER YEA WHEN THE EXPENDITURE IN ANY CASE IS FULLY ALLOWABLE EITHER IN THIS YEAR OR IN THE PREVIOUS YEAR. I THEREFORE HO LD THAT ALLOWANCE OF A FEW SMALL EXPENSES OF THIS NATURE D OES NOT MILITATE AGAINST THE MERCANTILE SYSTEM OF ACCOUNTIN G. THEREFORE THE ADDITION MADE IS DELETED. 40. WE FIND THAT IT IS NOT IN DISPUTE THE EXPENSES UNDER CONSIDERATION WERE REVENUE EXPENDITURE WERE DEBITED IN THE PROFIT & LOSS ACCOUNT AND RELATING TO EARLIER YEARS. WE ALSO FIND THAT NO MAT ERIAL WAS BROUGHT ON RECORD TO SHOW THAT SIMILAR EXPENDITURE RELATING T O THE YEAR UNDER CONSIDERATION WAS NOT ACCOUNTED FOR BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. ON THE ABOVE FACT THE ISSUE TO BE A DJUDICATED BY US IS EXACTLY THE SAME WHICH WAS IN GROUND NO.5 OF THE AS SESSEES APPEAL ADJUDICATED HEREINABOVE AT PARA NO.27 . FOR THE SAM E REASON AS STATED IN PARA 27 ABOVE WE SET ASIDE THE ORDER OF THE LEARNE D COMMISSIONER OF INCOME TAX(APPEALS) AND RESTORE BACK THE ORDER OF T HE LEARNED ASSESSING OFFICER. THUS THIS GROUND OF APPEAL OF THE REVENUE IS ALLOWED. 41. IN THE RESULT THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 1997- 98 IS ALLOWED AND THE APPEAL OF THE ASSESSEE FOR AS SESSMENT YEAR 1998-99 AND OF THE REVENUE FOR ASSESSMENT YEAR 1998-99 ARE PARTLY ALLOWED AS ABOVE. ORDER SIGNED DATED AND PRONOUNCED IN THE COURT ON 14 TH DAY OF MAY 2010. SD/- SD/- (BHAVNESH SAINI) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; ON THIS 14 TH DAY OF MAY 2010 PARAS - 32 - COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)- 5. THE DR AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER //TRUE COPY// (DY./ASSTT.REGISTRAR) ITAT AHMEDABAD DATE INITIALS 1. DRAFT DICTATED ON 06.05.2010 -------------- ----- 2. DRAFT PLACED BEFORE AUTHORITY 10.05.2010 ---- --------------- 3. DRAFT PROPOSED & PLACED 11.05.2010 ----------- -------- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED 11.05.2010 ---------- --------- JM BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S 12.05.2010 -------- ------------ 6. KEPT FOR PRONOUNCEMENT ON 14.05.2010 --------- ----------- 7. FILE SENT TO THE BENCH CLERK 14.05.2010 ------ -------------- 8. DATE ON WHICH FILE GOES TO THE ---------------- -------------------- 9. DATE OF DISPATCH OF ORDER ---------------- --- ------------------