PRANAVADITYA SPINNING MILLS LTD, MUMBAI v. ACIT CIR 3(2), MUMBAI

ITA 6855/MUM/2008 | 2002-2003
Pronouncement Date: 22-03-2010 | Result: Allowed

Appeal Details

RSA Number 685519914 RSA 2008
Assessee PAN AAACP4716B
Bench Mumbai
Appeal Number ITA 6855/MUM/2008
Duration Of Justice 1 year(s) 3 month(s) 21 day(s)
Appellant PRANAVADITYA SPINNING MILLS LTD, MUMBAI
Respondent ACIT CIR 3(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 22-03-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted C
Tribunal Order Date 22-03-2010
Date Of Final Hearing 11-03-2010
Next Hearing Date 11-03-2010
Assessment Year 2002-2003
Appeal Filed On 01-12-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C MUMBAI BEFORE SHRI R V EASWAR SENIOR VICE PRESIDENT AND SHRI P M JAGTAP ACCOUNTANT MEMBER I T A NO: 6855/MUM/2008 (ASSESSMENT YEAR: 2002-03) M/S PRANAVADITYA SPINNING MILLS LTD. MUMBAI APPE LLANT (PAN: AAACP4716B) VS ASSISTANT COMMISSIONER OF INCOME TAX RESPONDENT CIRCLE 3(2) MUMBAI APPELLANT BY: SHRI VIPUL JOSHI RESPONDENT BY: SHRI NAVEEN GUPTA O R D E R R V EASWAR SENIOR VICE PRESIDENT: THIS IS AN APPEAL BY THE ASSESSEE AND IT RELATES T O THE ASSESSMENT YEAR 2002-03. THE ASSESSEE IS A COMPANY MANUFACTURING COTTON YARN AND KNITTED FABRICS. THE APPEAL ARISES OUT OF THE ASSESSMENT MADE UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 ON 19 TH JANUARY 2005. 2. THE FIRST GROUND IS AGAINST THE DISALLOWANCE OF RS.14 02 512/- OUT OF THE DEDUCTION OF RS.15 55 727/- CLAIMED BY T HE ASSESSEE ON ACCOUNT OF PAYMENT OF EMPLOYEES CONTRIBUTION TO PR OVIDENT FUND. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE ASSE SSEE CLAIMED DEDUCTION OF RS.15 55 727/- ON ACCOUNT OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND. THIS CONSISTED OF PAYMENT OF RS.1 55 215/- MADE BEFORE THE DUE DATE RS.5 62 450/- MADE AFTER THE D UE DATE BUT WITHIN THE GRACE PERIOD OF FIVE DAYS AND RS.8 40 062/- MAD E AFTER THE GRACE PERIOD BUT BEFORE THE DUE DATE FOR FILING THE RETUR N OF INCOME. THE ASSESSING OFFICER TOOK THE VIEW THAT THE PAYMENTS M ADE AFTER THE DUE 2 DATE BUT BEFORE THE GRACE PERIOD AND THE PAYMENTS M ADE AFTER THE GRACE PERIOD BUT BEFORE THE DUE DATE FOR FILING THE RETURN CANNOT BE ALLOWED AS A DEDUCTION. HE THEREFORE INVOKED SEC TION 2(24)(X) OF THE ACT AND ADDED THE AFORESAID PAYMENTS AGGREGATING TO RS.14 02 512/- AS INCOME OF THE ASSESSEE. 3. ON APPEAL THE ASSESSEE WOULD APPEAR TO HAVE REL IED ON SEVERAL ORDERS OF THE MUMBAI BENCHES OF THE TRIBUNA L BUT THE CIT(A) OPINED THAT THE EMPLOYEES CONTRIBUTION TO THE PROV IDENT FUND WAS GOVERNED NOT BY SECTION 43B BUT WAS GOVERNED BY SE CTION 36(1)(VA) READ WITH SECTION 2(24)(X) OF THE ACT AND THEREFOR E THE AFORESAID ORDERS WERE NOT APPLICABLE. HE TOOK THE VIEW THAT IN TERMS OF SECTION 2(24)(X) THE CONTRIBUTION OF THE EMPLOYEES AS SO ON AS IT IS DEDUCTED BY THE EMPLOYER IS DEEMED TO BE THE INCOME OF THE ASSESSEE AND WOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 36(1) (VA) ONLY WHEN THE ASSESSEE MAKES PAYMENT WITHIN THE DUE DATE MENT IONED IN THAT SECTION. THE CIT(A) HELD THAT THERE WAS NO QUESTIO N OF IMPORTING THE CONCEPT OF SECTION 43B WHICH DEALT WITH EMPLOYERS CONTRIBUTION AND ACCORDINGLY HELD THAT EVEN THOUGH THE EMPLOYEES CO NTRIBUTION WAS DEPOSITED BY THE ASSESSEE WITHIN THE DUE DATE FOR F ILING THE RETURN OF INCOME AS CONTEMPLATED BY THE PROVISO TO SECTION 43 B IT CANNOT BE ALLOWED AS A DEDUCTION. HE ALSO HELD THAT THE CONC EPT OF GRACE PERIOD CANNOT ALSO BE APPLIED TO ALLOW DEDUCTION IN RESPEC T OF PAYMENTS MADE AFTER THE DUE DATE BUT WITHIN THE GRACE PERIOD. IN THIS VIEW OF THE MATTER HE SUSTAINED THE DISALLOWANCE AGAINST WHICH THE ASSESSEE IS NOW IN APPEAL. 3 4. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON S EVERAL ORDERS OF THE MUMBAI BENCHES OF THE TRIBUNAL IN SUPPORT OF HIS CONTENTION THAT THE EMPLOYEES CONTRIBUTION SHOULD BE ALLOWED UNDER SECTION 43B IF IT IS DEPOSITED WITHIN THE DUE DATE FOR FILING THE RETURN FOR THE ASSESSMENT YEAR IN QUESTION. IN THE CASE OF SIMPLEX ENGINEERI NG & FOUNDRY WORKS P. LTD. VS. JCIT IN ITA NO: 5760/MUM/2006 DATED 29 TH NOVEMBER 2007 (ASSESSMENT YEAR 2003-04) AND CONNECTED APPEAL S IT HAS BEEN OPINED BY THE TRIBUNAL IN PARA 16 THAT SINCE THE CO NTRIBUTION OF THE EMPLOYEES IS WITHHELD BY THE EMPLOYER BY DEDUCTING THE SAME FROM THE WAGES AND SALARIES THE DUES OF THE EMPLOYEES MERGED WITH THE FUNDS OF THE EMPLOYER AND THE EMPLOYEES CONTRIBUTI ON THUS BECOMES SIMILAR TO THE EMPLOYERS OWN CONTRIBUTION. IT HAS BEEN OBSERVED THAT THE NATURE OF THE SOURCE OF BOTH EMPLOYERS AS WELL AS EMPLOYEES CONTRIBUTION IS THE SAME NAMELY THE FUNDS OF THE EMPLOYER. IN THIS VIEW OF THE MATTER IT HAS BEEN HELD THAT THE CONTRI BUTION OF THE EMPLOYEES PAID WITHIN THE DUE DATE FOR FILING THE RETURN OF INCOME IS ALLOWABLE UNDER SECTION 43B. THIS ORDER OF THE TRI BUNAL HAS NOT BEEN REFERRED TO IN THE SUBSEQUENT ORDER OF THE TRIBUNAL DATED 28 TH JANUARY 2010 IN THE CASE OF THE SAME ASSESSEE NAMELY SIMP LEX ENGINEERING & FOUNDRY WORKS FOR THE ASSESSMENT YEAR 2004-05 IN ITA NO: 378/MUM/2009 AND WITHOUT REFERENCE TO THE EARLIER O RDER THE DISALLOWANCE OF THE EMPLOYEES CONTRIBUTION WAS UPH ELD BY THE TRIBUNAL. IN ANOTHER ORDER PASSED ON 28 TH JANUARY 2010 IN ITA NO: 6847/MUM/2008 (ASSESSMENT YEAR 2005-06) IN THE CASE OF PIK PEN PRIVATE LIMITED VS. ITO THE TRIBUNAL WAS DEALING W ITH THE EMPLOYEES 4 CONTRIBUTION TO PROVIDENT FUND AND ESIC WHICH WAS PAID EVEN BEYOND THE GRACE PERIOD. THE ASSESSING OFFICER HAD DISALLOWED THE PAYMENT UNDER SECTION 36(1)(VA) HOLDING THAT THE C ONTRIBUTION WAS NOT COVERED BY SECTION 43B. THE TRIBUNAL WAS OF THE OP INION THAT THE CASE WAS COVERED BY THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD. (2009) 319 ITR 306 (SC) AN D ACCORDINGLY HELD THAT THE CONTRIBUTION OF THE EMPLOYEES IF PAID BE FORE THE DUE DATE FOR FILING THE RETURN OF INCOME AS CONTEMPLATED BY THE PROVISO TO SECTION 43B IS TO BE ALLOWED AS A DEDUCTION. IN THE CASE OF RADHAKRISHNA FOODLAND PVT. LTD. VS. ACIT IN ITA NO: 4211/MUM/20 06 (ASSESSMENT YEAR 2003-04) THE TRIBUNAL BY ORDER DATED 11 TH FEBRUARY 2008 HELD FOLLOWING THE VIEW TAKEN BY THE SUPREME COURT IN TH E CASE OF CIT VS. VINAY CEMENT LTD. (2007) 213 CTR 268 (SC) THAT THE EMPLOYEES CONTRIBUTION PAID BEFORE THE DUE DATE FOR FILING TH E RETURN OF INCOME IS ALLOWABLE AS A DEDUCTION. THERE IS THUS A SERIES O F ORDERS OF THE MUMBAI BENCHES OF THE TRIBUNAL ON THE ISSUE AND RES PECTFULLY FOLLOWING THEM WE DELETE THE DISALLOWANCE OF 14 02 512/- OUT OF WHICH RS.5 62 450/- WAS PAID AFTER THE DUE DATE BUT BEFOR E THE GRACE PERIOD AND RS.8 40 062/- WAS PAID AFTER THE GRACE PERIOD B UT BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME. THE FIRST GR OUND IS ACCORDINGLY ALLOWED. 5. THE SECOND GROUND IS DIRECTED AGAINST THE DISALL OWANCE OF THE EXPENSES OF RS.24 34 266/- ON COMMISSION AND BROKER AGE. THE BRIEF FACTS IN THIS CONNECTION ARE THAT WHILE COMPLETING THE ASSESSMENT THE ASSESSING OFFICER NOTICED FROM THE TAX AUDIT REPORT THAT THE ASSESSEE 5 HAS DEBITED THE AFORESAID EXPENSES AS PRIOR PERIOD EXPENSES IN THE ACCOUNTS. THE ASSESSEE WAS CALLED UPON TO EXPLAIN WHY THE EXPENSES CANNOT BE DISALLOWED AS THEY RELA TED TO THE EARLIER PERIOD. THE ASSESSEE REPLIED STATING THAT THE COMM ISSION WAS PAYABLE ON SALE OF YARN AND THAT THE INCOME BY WAY OF SALE OF YARN HAS BEEN TAKEN NOTE OF ONLY DURING THE YEAR UNDER APPEAL ON REALIZATION OF THE DEBIT NOTES AND AS PER THE COMPANYS POLICY THE COM MISSION AND BROKERAGE PAYABLE ON THOSE SALES WAS PAID TO THE CO MMISSION AGENTS ONLY AFTER REALIZATION OF THE SALE PROCEEDS FROM WH OM THE GOODS WERE SOLD THROUGH THE COMMISSION AGENTS. IT WAS THUS CO NTENDED THAT THOUGH THE COMMISSION RELATES TO SALES MADE IN THE EARLIER YEARS THE CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY THE ASS ESSEE MUST BE GIVEN EFFECT TO. IT WAS ALSO POINTED OUT THAT THE LIABILITY TO PAY THE COMMISSION AND BROKERAGE CAN BE SAID TO HAVE ACCRUE D TO THE ASSESSEE ONLY IN THE RELEVANT YEAR WHEN THE SALE PR OCEEDS WERE REALIZED. THE ASSESSING OFFICER ON VERIFICATION FO UND THAT THE ASSESSEES CLAIM THAT THE DEBIT NOTES FOR COMMISSIO N PAYABLE TO THE COMMISSION AGENTS WERE RAISED AND RECEIVED ONLY DUR ING THE RELEVANT YEAR WAS NOT CORRECT. HE FOUND THAT THE ASSESSEE R ECEIVED DEBIT NOTES WHICH CONTAINED THE CALCULATION OF THE COMMISSION I N THE EARLIER YEAR AND NOT A SINGLE DEBIT NOTE WAS RECEIVED DURING THE YEAR UNDER APPEAL. HE THEREFORE HELD THAT THE LIABILITY TO PAY COMMI SSION AND BROKERAGE CANNOT BE SAID TO HAVE CRYSTALLIZED IN THE YEAR UND ER APPEAL. HE THEREFORE DISALLOWED THE AMOUNT OF RS.24 34 266/-. 6 6. ON APPEAL THE CIT(A) HELD THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE OUG HT TO HAVE MADE PROVISION FOR THE COMMISSION AND THE BROKERAGE IN T HE ACCOUNTS OF THE EARLIER YEARS AS AND WHEN THE SALES TOOK PLACE AND NOT HAVING DONE SO IT WAS NOT OPEN TO THE ASSESSEE TO CLAIM THAT T HESE EXPENSES WERE ALLOWABLE IN THE YEAR IN WHICH THE CORRESPONDING SA LES PROCEEDS WERE REALIZED. HE ACCORDINGLY UPHELD THE DISALLOWANCE AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE CONSIDERED THE FACTS AND THE RIVAL CONTE NTIONS. THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCO UNTING. IT IS ALSO TRUE THAT THE SALES AS WELL AS THE COMMISSION AND B ROKERAGE RELATED TO THE EARLIER YEARS. THE ASSESSEES CLAIM IS FOUNDED ON THE CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY IT UNDER WHICH THE COMMISSION IS PAID TO THE BROKERS ONLY IN THE YEAR IN WHICH THE C ORRESPONDING SALE PROCEEDS ARE REALIZED BY THE ASSESSEE EVEN THOUGH THE DEBIT NOTES FOR THE COMMISSION PAYABLE AND THE INVOICES FOR THE SAL ES WERE ALL RAISED IN THE EARLIER YEARS. A CONSISTENT METHOD HAS BEEN FOLLOWED BY THE ASSESSEE AND THE SAME HAS NOT BEEN DISTURBED BY THE ASSESSING OFFICER IN ALL THE EARLIER YEARS. THE ASSESSEE HAS DEBITED ITS ACCOUNTS FOR COMMISSION AND BROKERAGE IN THE YEAR IN WHICH I T IS ACTUALLY PAID TO THE BROKERS FOR THE REASON THAT THE SALE PROCEEDS OF THE CORRESPONDING SALES WERE RECEIVED IN THAT YEAR. IN OTHER WORDS THE RECEIPT OF THE SALE PROCEEDS AS WELL AS THE PAYMENT OF THE BROKERAGE AN D COMMISSION ARE IN THE SAME YEAR. IT NEEDS TO BE CLARIFIED THAT TH E SALES IN RESPECT OF WHICH THE COMMISSION HAS BEEN PAID WERE TAKEN CRED IT IN THE PROFIT 7 AND LOSS ACCOUNT IN THE YEARS IN WHICH THE INVOICES WERE RAISED I.E. IN THE EARLIER YEARS. THE DEPARTMENTS CLAIM IS TH AT THE ASSESSEE SHOULD HAVE MADE A PROVISION FOR COMMISSION AND BRO KERAGE PAYABLE IN THE EARLIER YEARS AND CLAIM THE PROVISION AS A D EDUCTION. WHAT THE ASSESSEE HAS DONE IS TO CLAIM THE DEDUCTION FOR COM MISSION AND BROKERAGE NOT IN THE YEAR IN WHICH THE SALES TOOK PLACE BUT IN THE YEAR IN WHICH THE SALE PROCEEDS WERE REALIZED. THIS IS STATED TO BE IN ACCORDANCE WITH THE COMPANYS POLICY OF PAYING COMM ISSION ONLY WHEN THE SALE PROCEEDS ARE REALIZED. IT SEEMS TO US THA T THE LIABILITY TO PAY COMMISSION OR BROKERAGE WOULD ARISE HAVING REGARD TO THE PRACTICE ADOPTED BY THE ASSESSEE AND ITS BROKERS AND AGENTS ONLY IN THE YEAR IN WHICH THE SALE PROCEEDS ARE REALIZED AND EVEN ON THIS BASIS IT MAY BE STATED THAT THE LIABILITY AROSE ONLY IN THE YEAR UNDER CONSIDERATION. THIS IS ONE WAY IN WHICH THE MATTER CAN BE LOOKED A T. IN ADDITION THIS METHOD HAS BEEN CONSISTENTLY FOLLOWED AND ACCEPTED IN ALL THE EARLIER YEARS. WE ACCORDINGLY DELETE THE DISALLOWANCE AND DIRECT THE ASSESSING OFFICER TO ALLOW THE SAME AS A DEDUCTION. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED WITH NO ORDER AS TO COSTS. ORDER PRONOUNCED ON 22ND MARCH 2010. SD SD (P M JAGTAP) (R V EASWAR) ACCOUNTANT MEMBER SENIOR VICE PRESI DENT MUMBAI DATED 22 ND MARCH 2010 SALDANHA 8 COPY TO: 1. M/S PRANAVADITYA SPINNING MILLS LTD. 301 ARCADIA 3 RD FLOOR NARIMAN POINT MUMBAI 400 021 2. ACIT CIRCLE 3(2) 3. CIT-3 4. CIT(A)-III 5. DR C BENCH TRUE COPY BY ORDER ASSTT. 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