THE COMMISSIONER OF INCOME TAX, COCHIN vs. HARRISONS MALAYALAM LTD.

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 03RD DAY OF SEPTEMBER 2018 / 12TH BHADRA, 1940 ITA.No. 716 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 321/2007 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 24-09-2007 APPELLANT/S: THE COMMISSIONER OF INCOME TAX, COCHIN BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH SC FOR INCOME TAX RESPONDENT/S: HARRISONS MALAYALAM LTD. WILLINGDON ISLAND, COCHIN-682003. BY ADVS. SRI.M.GOPIKRISHNAN NAMBIAR SRI.JOSON MANAVALAN SRI.K.JOHN MATHAI SRI.KURYAN THOMAS SRI.PAULOSE C. ABRAHAM SRI.P.GOPINATH THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03.09.2018, ALONG WITH ITA Nos.703/2009, 873/2009, 879/2009, 922/2009, 1060/2009,1084/2009, 1151/2009, 88/2013 & 112/2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

I.T A Nos.88 of 2013 and connected cases :2 :: I.T.A Nos.88/2013, 703/2009,716/2009, 873/2009, 879/2009, 922/2009, 1060/2009, 1084/2009, 1151/2009 & 112/2013 JUDGMENT Vinod Chandran, J. These appeals have been posted together since many of the questions raised are common in certain appeals, but however, there are other independent questions arising in some appeals. As of now, with respect to the dis-allowance of licence fee paid to RPG Enterprises Ltd., the learned Senior Counsel appearing for the Revenue submits that they are not pressing the said issue. Hence, we refuse to answer the question raised and confirm the order of the Tribunal with respect to that issue. The Tribunal's order stands confirmed on that issue, in so far as the assessment years 1995-96 to 1999-2000 and 2001-02 to 2003-04.

I.T A Nos.88 of 2013 and connected cases :3 :: 2. As for the dis-allowance of employees' contribution to provident fund under Section 43B, which arises in the assessment years 2001-02, 2002-03 and 2004-05 (ITA Nos.716/2009, 703/2009 and 112/2013). The issue stands covered in favour of the Revenue by a judgment of this Court reported in Popular Vehicles and Services Pvt.Ltd., v. The Commissioner of Income Tax, Ernakulam [(2018) 406 ITR 150 (Ker)]. The question of law is answered in favour of the Revenue and against the asseseee. The order of the Tribunal is set aside on that count and the dis-allowance made by the Assessing Officer restored. 3. Two other questions arise in the assessment year 1998-99 in I.T.A.No.1060/2009. One of them is the dis-allowance of the premium paid on redemption of debentures under Section 37. The question of law arising from the order is re-framed as follows:- Whether the entire premium paid on redemption of debentures can be treated as allowable expenditure in the assessment year 1998-99 under Section 37 of the I.T.Act ?

I.T A Nos.88 of 2013 and connected cases :4 :: 4. The brief facts to be noticed are that the assessee had availed a secured loan for its working capital requirement by allotting non-convertible debentures to GIC Mutual Fund. The debentures where to carry an interest of 18.75% and were redeemable at a premium of 5% on the face value in three instalments commencing from 16.10.1997. The assessee having made substantial profits in the subject assessment year redeemed debentures in one instalment so as to save the interest payment at the very high rate of 18.75%. The entire premium paid was hence once claimed as a deduction under Section 37 of the I.T.Act. The Assessing Officer declined the same relying on the Madras Industries Investment Corporation Ltd. v. C.I.T., [1997] 225 ITR 802 (SC). The First Appellate Authority confirmed the dis-allowance. The Tribunal, however, found that even going by the decision of the Hon'ble Supreme Court, the claim has to be allowed, especially since the premium though stood deferred for payment in three instalments, was paid in its entirety

I.T A Nos.88 of 2013 and connected cases :5 :: on the first instalment itself, thus redeeming the debentures fully. 5. Madras Industrial Investment Corporation Ltd. was a case in which the company had issued debentures at a discount of 2%; redeemable in twelve years. The total discount for the debentures issued, having a face value of Rs.1.5 crores, was Rs.3 lakhs. In the subject assessment year, as on 30.06.1967, the proportionate discount for six months being Rs.12,500/- was claimed as a business expenditure. The Assessing Officer and the First Appellate Authority disallowed such claim. The assessee before the Tribunal raised a new claim of the entire Rs.3 lakhs, being the total discount allowed for issuance of debentures, should be treated as an expenditure in the subject assessment year, which stood allowed. 6. The Hon'ble Supreme Court considered the various decisions of itself as also different High Courts, found on 'expenditure', in the following manner:-

I.T A Nos.88 of 2013 and connected cases :6 :: 7. Thus “expenditure” is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. XXX XXX XXX 10. Therefore, although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee’s pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro. A contingent liability that may arise in future is, however, not “expenditure”. It would also cover not just a one-time payment but a liability spread out over a number of years. A Paragraph in Batliboi's “Principles and Practice of Auditing”, was also relied on, which is as follows:-

“When debentures are issued at discount, an

I.T A Nos.88 of 2013 and connected cases :7 :: account styled ‘Discount on Debentures Account’, will be debited with the discount allowed on the issue. The debentures account will be credited in the books at their normal value and will appear at that value as a liability in the balance-sheet. The loss thus arising need not be completely written off in the year in which the debentures are issued, since the benefit to be derived from the amount borrowed will continue till the debentures are redeemed. Where the debentures are redeemable at the end of a fixed period, a proportionate amount of discount should be written off out of the revenue every year during which the debentures are outstanding.” 7. The Hon'ble Supreme Court found that the appellant had rightly claimed a deduction in respect of the proportionate part of discount being Rs.12,500/- in the relevant accounting period. This was on the premise that though the liability was incurred on issuance of debentures on a discount, the liability to pay the amount in excess of that received on issuance, is at a later date; in that case after 12 years. There is hence a continuing benefit for the assessee spread over a period of twelve years and the

I.T A Nos.88 of 2013 and connected cases :8 :: liability too has to be spread over the period of the debentures, was the finding. 8. In the present case, however, the facts are distinctly different. The assessee in the present case though had a benefit of deferred payment of the premium in three instalments, as a prudent measure, to save interest, especially in the context of profit earned in the subject assessment year; paid up the entire premium in one instalment, thus redeeming the debenture, which expenditure was incurred in the subject assessment year. Even going by the cited decision of the Supreme Court, as has been held by the Tribunal, the deduction has to be allowed. The Supreme Court in Madras Industrial Investment Corporation Ltd. held that the discounted amount over and above the amounts received on issuance of debentures, is a liability incurred for the purpose of its business and is in the nature of expenditure. Dilating upon whether it be a capital or revenue expenditure India Cements Ltd. Vs CIT [1966] 60 ITR 52 (SC) was relied on to find that any liability incurred for the purpose of obtaining loan would be

I.T A Nos.88 of 2013 and connected cases :9 :: revenue expenditure. Here the issuance of debentures was also for the purpose of working capital requirements. We hence answer the question in favour of the assessee and against the Revenue; upholding the deduction as expenditure, as permitted by the Tribunal. 9.The next question arising in the year 1998- 99 in ITA No.1060/2009 is the dis-allowance of bad- debts written off relating to Bio-tech Division. The assessee claimed that its Bio-tech Division had advanced amounts to various suppliers at various locations for procuring seeds in connection with the seed business of the assessee. The advances made were to the agriculturists which was to be adjusted against the supplies made by them. Due to crop failure, the supply did not materialise and hence the advances made were written off as bad-debts and a claim was raised of Rs.41,63,375/- under Section 36. The Assessing Officer declined the same finding that the condition under Section 36(2)(i) that such debt or part thereof, having to be taken into account in computing the income of the assessee of the previous year in which the amounts were

I.T A Nos.88 of 2013 and connected cases :10 :: written off, had not been complied with. The Tribunal agreed with the finding of the Assessing Officer insofar as the dis-allowance under Section 36, but however found the same to be an expenditure under Section 37 and hence allowable as a deduction. The question of law framed from the order of the Tribunal is re-framed as follows: “Has not the Tribunal erred in permitting the claim under Section 37 especially in the light of the judgment of the Honourable Supreme Court in 2010 (320) ITR 577 (SC) [Southern Technologies Ltd. v. Joint Commissioner of Income Tax]?” 10. In Southern Technologies Ltd. (supra), the Honourable Supreme Court was concerned with a provision for bad-debts made by the assessee-company, which was not entitled to deduction after April 1, 1989. The provision was made in accordance with the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998; which stipulated disclosure of income after deducting provision against non-performing assets (NPA). This provision was held to be not constituting

I.T A Nos.88 of 2013 and connected cases :11 :: 'expenses' on the basis of which deduction could be claimed under Section 36(1)(vii). On and from 01.04.1989 by insertion of an Explanation under Section 36(1)(vii), clarifying that any bad debt written off as irrecoverable will not include any provision made for bad and doubtful debts; the provision stood excluded for deduction under Section 36. In this context, it was held that Section 37 applies only to items which do not fall under Sections 30 to 36 and a provision for doubtful debts being expressly excluded from Section 36(1)(vii) cannot be applied for deduction under Section 37 even on the basis of the 'real income theory'. The provision made for compliance of the Reserve Bank Directions of 1998 was held to be a notional expense which had to be added back for computation of total income under the Income Tax Act. 11. In the present case, there is no specific exclusion of the expenditure incurred by the assessee and the dis-allowance was on the ground that the deduction cannot be claimed under Section 36 for reasons of non-compliance under sub-Section (i) of

I.T A Nos.88 of 2013 and connected cases :12 :: Section 36(2). Obviously, there was a mistaken claim made by the assessee and if it had been claimed as a revenue expenditure under Section 37, it could have been allowed was the finding of the Tribunal. We find sufficient support, as found by the Tribunal, from the decision of the Honourable Supreme Court reported in AIR 1967 SC 723 [Commissioner of Income Tax v. Mysoor Sugar Company Ltd.]. 12. The facts in Mysoor Sugar Company Ltd. are identical and the issue considered was whether the advances to sugar-cane growers, liable for set off against the consideration of its supply, could be treated as an expenditure, on such supplies not materialising for reason of crop failure. The Tribunal in that case found that the expenditure if at all can be treated only as a capital expenditure. The Honourable Supreme Court on facts held that the expenditure is clearly a revenue expenditure eligible for deduction under the then existing Income Tax Act, We extract here-under para 11 of the judgment:

I.T A Nos.88 of 2013 and connected cases :13 :: 11. These cases illustrate the distinction between an expenditure by way of investment and an expenditure in the course of business, which we have described as current expenditure. The first may truly be regarded as on the capital side but not the second. Applying this test to this simple case, it is quite obvious which it is. The amount was an advance against price of one crop. The Oppigedars were to get the assistance not as an investment by the assessee Company in its agriculture, but only as an advance payment of price. The amount, so far as the assessee Company was concerned, represented the current expenditure towards the purchase of sugar cane, and it makes no difference that the sugar cane thus purchased was grown by the Oppigedars with the seedlings, fertiliser and money taken on account from the assessee Company. Insofar as the assessee Company was concerned, it was doing no more than making a forward arrangement for the next year’s crop and paying an amount in advance out of the price, so that the growing of the crop may not suffer due to

I.T A Nos.88 of 2013 and connected cases :14 :: want of funds in the hands of the growers. There was hardly any element of investment which contemplates more than payment of advance price. The resulting loss to the assessee Company was just as much a loss on the revenue side as would have been, if it had paid for the ready crop which was not delivered. We respectfully follow the aforesaid judgment of the Honourable Supreme Court, on identical facts and law and answer the question in favour of the assessee and against the Revenue confirming the order of the Tribunal with respect to the deduction for the year 1998-99. 13. A common question arising from the assessment years 1995-96 to 1999-2000 {ITA Nos: 922, 873, 1084 and 1060 and 879 of 2009} is with respect to dis-allowance of expenditure incurred for earning income from tax free bonds under Section 14A. The question of law framed is re-framed as follows: Whether the Tribunal was correct in deleting the dis-allowance of interest earned on

I.T A Nos.88 of 2013 and connected cases :15 :: expenditure incurred for income from tax free bonds and was not the dis-allowance properly made by the Assessing Officer? 14. The Revenue has relied on a decision of the Division Bench of this Court in Commissioner of Income Tax v. Dhanalakshmi Bank Ltd., [2012]344 ITR 259 (Ker) wherein it was held that the dis-allowance could be permitted only from the year 2001-02. Even this applies in favour of the assessee in the present cases, since all the years are prior to 2001-02. Further the learned Counsel for the assessee has pointed out a decision of the Hon'ble Supreme Court finding the provision under Section 14A applicable only from the assessment year 2007-08 onwards, in Commissioner of Income Tax v. Essar Teleholdings Ltd., [(2018) 101 CCH 0021 I SCC((2018) 401 ITR 445 (SC))] . We need only refer to Paragraph 30, 31 and 32 of the judgment which reads as under:- “30. It is also relevant to know as to how the statutory provisions of Section 14A sub-

I.T A Nos.88 of 2013 and connected cases :16 :: section (2) and sub-section (3), Rule 8D was understood by the Income Tax department itself. After insertion of sub-section (2) and sub-section (3) in Section 14A by Finance Bill, 2006, circular dated 28.12.2006 was issued by the Department wherein paragraph 11.3, following was stated: “11.3. Applicability - from assessment year 2007- 2008 onwards” 31. The methodology for determining amount of the expenditure in addition to income not includable in total income was for the first time prescribed by Rule 8D as was envisaged in Section 14A sub-section (2) and sub- section (3). It is also relevant to notice that Constitution Bench in the Commissioner of Income Tax v. Vatika Township Pvt. Ltd., has also referred to and relied the CBDT circular to find out the understanding of the Central Board of Direct Tax itself in

I.T A Nos.88 of 2013 and connected cases :17 :: context of Provision which was in issue in the above case. 32. Explanatory memorandum issued with the Finance Bill, 2006 and the CBDT circular dated 28.12.2006, thus, clearly indicates that department understood that sub- section(2) and sub-section (3) was to be implemented with effect from assessment year 2007-2008. The Rule 8D prescribing the method was brought into statute book with effect from 24.03.2008 to implement sub- section (2) and sub-section (3) with effect from assessment year 2007-2008, is clear indicator of the fact that a new method for computing the expenditure was brought in by the rules which was to be utilized for computing expenditure for the assessment year 2007-2008 and onwards. 15. In the context of the binding precedent, the question for the subject assessment years will have to be answered in favour of the assessee and against the revenue. The order of the Tribunal to that extent is upheld.

I.T A Nos.88 of 2013 and connected cases :18 :: 16. With respect to Section 14A, there also arises a question insofar as the dis-allowance of replanting expenses made by the Assessing Officer and allowed by the first appellate Authority and the Tribunal. The assessment years in which such question arises are 2002-03 to 2004-05 (ITA Nos.703/2009, 1151/2009 and 88/2013). The issue is no longer res integra and is covered by the decision of the Honourable Supreme Court in CIT v. Essar Teleholdings Ltd.(supra). The question is hence answered against the Revenue and in favour of the assessee.

I.T A Nos.88 of 2013 and connected cases :19 :: effectively carry out its activities for the common benefit of its members for which a contribution was made. The contribution was made to the Building Fund constituted by the General Body of the Tea Trade Association, which according to the assessee was made out of business expediency. The learned counsel for the assessee has also relied on 1996(6) SCC 611 [Sree Venkita Satyanarayana Rice Mill Contractors Company v. Commissioner of Income Tax]. 18. We do not find any assistance to the assessee from the aforesaid decision which was on quite distinct facts. There, a District Welfare Fund was established under a scheme evolved by the Rice Millers' Association in consultation with the District Collector. Export of rice from the State otherwise than under a permit from the District Collector was prohibited. There was a condition that a permit would be issued only on a contribution being made to the District Welfare Fund at a specified rate. It was held the test to determine whether such contribution was allowable, is of commercial expediency and not of

I.T A Nos.88 of 2013 and connected cases :20 :: compulsion to contribute. Though there is no compulsion to contribute; an expert permit would not be issued unless the contribution was made. This made it necessary that a contribution be made at the specified rate for obtaining an export permit making the contribution imperative to carry on the business of export, thus making it one on account of commercial expediency. In the present case, there is absolutely no commercial expediency as projected by the assessee. But for the association, ventilating the grievance of its members before the authorities, requiring a building for its operation, there cannot be any commercial expediency ferreted out from the above facts to make it a claim of business expenditure. We hence answer the question against the assessee and in favour of the revenue. We set aside the order of the Tribunal to that extent for the year 1999-2000 and uphold the dis-allowance of the claim made by the Assessing Officer. 19. I.T.A Nos. 922 of 2009(A.Y. 1995-96), 873 of 2009(A.Y. 1996-97), 1084 of 2009(A.Y. 1997-98), 1060

I.T A Nos.88 of 2013 and connected cases :21 :: of 2009(A.Y. 1998-99), 1151 of 2009(A.Y. 2002-03) and 88 of 2013(A.Y. 2003-04) are rejected. I.T.A No:'s 879 of 2009(A.Y. 1999-00), 716 of 2009(A.Y. 2001-02) and 703 of 2009(A.Y. 2002-03) stand partly allowed, the first sustaining the dis-allowance made by the A.O on the contribution paid to Tea Trade Association and the two others sustaining the dis-allowance under Section 43B. I.T.A No: 112 of 2013(A.Y. 2004-05) stands allowed sustaining the dis-allowance under Section 43B. Parties left to suffer their respective costs throughout. Sd/- K.VINOD CHANDRAN Judge

Sd/- ASHOK MENON Judge jma

I.T A Nos.88 of 2013 and connected cases :22 :: APPENDIX (IN ITA NO.716/2009) PETITIONER'S/S EXHIBITS: ANNEXURE A COPY OF ORDER U/S. 143(3) DATED 24/02/2004 FOR THE ASST. YEAR 2001-02. ANNEXURE B COPY OF ORDER DATED 18/01/2007 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE C COPY OF THE ORDER DATED 24/09/2007 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.321/COCH/2007. ANNEXURE D COPY OF THE ORDER U/S. 263 OF THE COMMISSIONER OF INCOME TAX, COCHIN FOR THE ASSESSMENT YEAR 1998-99. ANNEXURE E1, E2, E3 & E4 COPY OF ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) FOR THE ASST. YEARS 95-96 TO 97-98 AND 99-2000. ANNEXURE F COPY OF ORDER DATED 30/11/2001 OF THE DCIT, CIRCLE-5(6), MUMBAI IN THE CASE OF RPG ENTERPRISES FOR THE AY.1998-99. ANNEXURE G COPY OF THE ORDER OF THE SUPREME COURT. RESPONDENTS ANNEXURES: NIL //TRUE COPY//