NARAINGARH SUGAR MILLS LTD

* JN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 51 0F 2011 ITA 52 0F 2011 rTA s8 0F 2011 Judgntent Reserved On: 12.09.2011 % Judgment Pronouncect On:30.9.2011 (1) rTA sl OF 2011 NARAINGARH SUGAR MILLS LTD. . . . APPELLANT fhroueh : Mr. C.S. Aggarr.val, Sr. Advocate with Mr. Prakash Kumar. Advocate. VEITSUS COMMISSIONER OF INCOME TAX . .RESPONDENT Throueh: Ms. Suruchi Aggarwal, Sr.Standing Counsel. (2) ITA 52 OF 2011 NARAINGARH SUGAR MILLS LTD. . . . APPEI,LANT Throueh : Mr. C.S. Aggarwal, Sr. Aclvocatc rvith Mr. Prakash Kurnar'. Advocate. VEITSUS COMMISSIONER OF INCOME TAX . . .RESPONDENT Through:. Ms. Suruchi Aggarwal, Sr.Standing Counsel. ITA Nos.51,52, & 58 of 20t 1 Page L of 2 2011:DHC:11993-DB

i (3) rTA s8 OF 2011 NARAINGARH SUGAR MILLS LTD. COMMISSIONER OF INCOME TAX SEPTEMBER 30,2011 skb ITA Nos.51,52, & 58 of zOLL . . . APPELLANT Throush : Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar. Advocate. VERSUS . ..RESPONDENT Aggarwal, Sr.Standing Through: Ms. Suruchi Counsel. CORAM:- HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE SIDDHARTH MRIDUL l- Whether Reporters of Local newspapers may be allorved ' to see the Judgrnent? 2. To be referred to the Reporter or not? 3. Whether the Judgrnent should bc reported in the Digest? A.K. SIKRI. J. 1. For orders, see ITA 57/2011. (SIDDHARTH MRIDUL) JUDGE (A.K.SrKRr) Page 2 oI 2 2011:DHC:11993-DB

C( IN TIIE IIIGII COUITT OF DELFII AT NIIW DIII,X.{T @ + IT'A 57 0F 2011 ITA s1 0F 2011 ITA s2 0F 2011 ITA s8 C)F 2011 Judgment Resen,ed On: 12.09.2011 % Judgment Pron.ourtcecl Ort:30.9.201I (1) ITA 5',7 OF 2011 NARAINGARH SUGAR MILLS LTD. . . . AI'I'trIN,LANT 'I.luough : Mr. C.S. Aggarwal, Sr. Aclvocatc with Mr. Prakash I(umar. Advocatc. VEI].SUS ,f\ COMJWISSIONIII{ OF Ii\COME TAX . . .IItr'SPONDIi,NII Throuqh: Ms. Suruchi Aggaru'al, Sr.Stancling Counscl. (z) IrA s1 oF 2011 NAIIAINGAI{H SUGAIT MILLS LTD. . . . ApI'trtL,t,AI\T 'fhrouqh : Mr. C.S. Aggarwal, Sr'. Acivocatc witli Mr. Prakash Kumar. Advocatc. VI]RSUS COMIYIISSIONIIR OF INCOME TAX . . .ITESI'ONDENT .'I'liloueh: Ms. Suruchi Aggarwal, Sr.Stancling h. Counsel. fTA Nosr5J.,52,57 &.58 of 2oLL Page L of L3 t 2011:DHC:11993-DB

(3) ITA s2 OF 20L1 NARAINGARII SIIGAR MILLS LTD. 4') Through : Mr. C.S. Aggarwal, Sr. Advocale rvith Mr:. - Prakash l(utnar. Advocatc. VERSUS COMMISSIONEIT OF INCOME TAX . . .REST'ONDI'NT ' Throuqh: Ms. Sunrchi Aggarwal, Sr.Stancling Counsel. (4) rTA s8 OF 2011 NARAINGARFI SUGAIT MILLS LTD. . . . APPII],I,ANT' Thrclugh : Mr. C.S. Aggarrval, Sr. Aclvocatc r,vith Mr:. Prakash l(nmar. Advocatc. V]]RSUS COMMISSIONER OF INCOME TAX , . .XTESI'ONDENT Tluough: Ms. Suruciri Agganval, Sr.Standing Counsel. CORAM:- ItrON'BLE MR. JUSTICE A.K. SIKI{tr }TON'BLIT MR. JUSTICE SIDEIIAI{TII MRIDI.]L 1. 'Whether l{eporters of Local newspapers lray be allorvccl to see the Juclgment? 2. To be referred to the Reporter or not? 3. Wrether the Judgmcnt should bc reportcd in thc Digcst? . . . API'EI.I,ANT Page 2 of 13 ITA Nos.51,52,57 &.58 of 2OLL 2011:DHC:11993-DB

A.Ii SIKITI, J. 1. 'l'liough thc Assessing Officer while fiarning the asscssmcrlt l.or the assessltlent year 2003-04, had rnade tluee additions we ate conceruecl in tltcse appeals with only one item namely disallowance of claim of clcl-erred rcvetrue expcnditure which :uiscs in these four appeals ancl pcrtains to assessureut ycar 2003-04 to 2006-07. 'l-he question has initially arisen in the assesslncrlt year 2003- 04 font of which l'I'A 5712011 arises] and in other years it is spill over of that very issuc and, thcreforc, we rvould like to tarke note of thc facts zrppearing o1'I'LA 57DAn. We rnay also clarify that tlie fhcts pertaining to the aforesaicl issr-rc ouly J are recapitulated by us. 2. I'he appellant is a public lirnited colltpzlrly rvhich was incorlroratccl nnclcr the Companies Act in the ycar 1991. fhe appeliant is cngaged in proclucittg sttgat', nrolasses ancl bagasse. For the instant asscssmellt ycar 2003-04, thc appcllant cornpally filed its return of income declaring total loss of { 9,58,51,0J61-. flie tctuln oI incorne was processecl on 3''d Iiebrurary,2004 rurclcr Scction 143 (1) (a) ol' tlic Act at the leturnccl loss. 'Ihelealler, the case rvas selectcd for scrutiny and ngtice nnder Section I43 (2) of the Act lvas issued. Tlie Assessing Officer ltatncd an assesslrlert under Section 143 (3) of the Act detennining thc lclss at - ,, {6,81 ,51,7 501-. The Assessing Officer, inter alia rnacle tlie fblloiving clisallowiulcc:- ITA Nos.5L,52,57 &.58 of 2oLL Page 3 of 13 2011:DHC:11993-DB

(i). clisallowaltce of claim of cleferred levcuuc cxpcudittttc of T 1,08,43,8721-. We may point out in this bchalf that the asscssec hacl takcn loaus tou'arcls working capital as rvcll as temr loans from various banks. On thesc loittts, cluriug tlre ycar in question, the assessce paid a total inlerest of < 6,23,73,947l-. I{ou'cvel', eltire interest paicl was not shorvn as reverluc expenditure in this year. Insteacl the assessee booketl a surlt of T 1,06,68,2471- to profit ancl loss iiccount as l'cvclltle exponcliture adopting the formula of 26 clays : 150 days.. 'fhe balanoe amor.tut o1- { 5,16,99,7001- was transferred by the assessee'to defcrrecl revenuc cxpeuclitttre. The aforesaicl apploach of tleating the intercst paid as clclblrccl rcvcnne cxpctlclitttre r clict not gel r.vith the Asscssing Officer'. IIe askecl the alssessec to substantiatc accuracy ancl gcmrilleness of the claim supportecl by docr.rmeutzrry evidcucc. In reply the assessee liad statecl that the defemed revenue expetlditur:c itlcludccl expcnses of Director foreign travel utd excess of intercst on tertl loatl and rvorking capital taken proportionately to the periocl of operatiott itt currcnt ysiu' as courparecl to the previous year. According to the Assessing Officer, as llo cloctturcutaty evidence was furnishecl, he clisallou'ed the claim of { i,08,43,8721- and acldecl thc satne i1the ilcorne of the assessee The asscssee prcfcrred .rppeal against this ordor . raisilg a grievalce that no aclequate opportunitl' rvas givcn to the assessec fot furlishing thc eviclcnce in support of the clairn. The asscsscc gavc thc clctails r, before the CII (A). fTA Nos.5L,52, 57 &.58 of 2011 Page 4 of 13 2011:DHC:11993-DB

'I'[ese cletails of the interest paicl to variclns bauks on r.vorkitrg capital a:j rvcll as tcr-n loa1 ancl cletails of thc expcnditure in thc manncr statccl abovo is reflcctecl in the folloi.ving chart:- Details of the Intercst for tlie pcliod 01.-04-02 to 3 1-0 Intcrest on Working CaPital (SBI, SBOP, OBC and Canara Banks) _ Interest ou'fertl Loan: IDBI bank <4,15,14,312 <95,60,352 FISIDC <30,48,267 ICICI IJank T66,67,384 SBI bank <r5,77 ,632 Total Interest ffi R"tt* expenditurc to PeI- Alc (261152).She. 'M' Balance Trausferrcd to Dcferrecl lteveune llxpenditure <6,23,67 ,947 =- 1,06 ,68 ,247 trro,g9J00 3. As per the assessee that interest transfcrrecl to clefcrrecl rcvcunc cxpcucliture was to be amoflize<l for a period of hve years starting fi'om thc assesslncnt ycilr 2003-04 itself and, lherefore, 1/5tl' of the afolesaicl figure u4rich catnc to { 1,08,4.3,872 was clcbitecl to profit ancl loss acconnt in this vcl'y ycar aud tlre , calculations submittecl in lhis behalf has submitted by the elsscssec wcrc iis rtndct':- l.' Details of Deferled l{eveuue Ilxpenditure for ITA Nos.5L,52,57 &.58 of 2oLl Fage 5 of 13 .t 2011:DHC:11993-DB

tlre A.Y. 2003-04: Particulars Gross Amount Amortiscd ( a) Opening balauce {4,42,000 T3,56,000 b) Interest including Interest on term loan aud rvorkiug capital of current F.Y. T5,16,99,700 Rs 03 <, r,47 ,93 3 c) Iioreign travel of Directors {7,39,660 Total amoullt arnortized and debited to P &L A/c as delbrred revelllle expenclitnre -She. 'L' i/iil\-- 87 2. t- IJalance rvas taken to the capital account atrd oir that atrrount thc ilsscsscc clairnecl depreciation. 4. . fhe asssssce further submittecl that the aforesaid atnoutlt rryas trcatccl ns , cleferred revelue expelditure ancl written o.[f over a peliocl of fivc yoals i.c' l/stl' in each year on the basis of decision of thc colnpany which have bccu approved by thc Directors as it was an act of business pruclence, in order to avail credit lacility front the banks. Accorcling to the assessce, thus, it was clonc for thc comtucrcial of thc . busi'ess. The course of action taken lbr arnortising the said exPcnditure over a periocl of five years sought to be iustilied on the grouncl that in the case of sr-tgzrr A. ind.stry the wor.k capital funcls are usecl in building of stock, bcnefit $'hcreol- lTA Nos.5L,52,57 &.58 of 2011 Page 6 of 13 2011:DHC:11993-DB

.J irccrues in lirture. Juclgrnenl of the Sttpretne Court in the casc sf Modros Industriatr Investnrcnt Corporution Ys. CIT 225 ITI?,802 was relied upotl in support oL the colteltiol that concept o1'deferrccl revenue expenditnrc has bccn duly approvccl by the Apex Court. The contention of the assessee founcl firvour rvith thc Ci'f (4.) who lllorved the clairn as cleferred revenue expenditurc theteby delcting thc addition of {1,08,43,872/-. 5. The department felt aggrievecl of the afolesaid order of the CIf (A) and hence preferred the appeal before the ITAT. In the tncantitne for othcr asscsstnettt /ycars also, the expencliture was allorvecl @ IlsLh by the CIT (A),.thc Itcvenuc filcd four appeals in respect of all these assessment ycars. All thesc eppeals r,verc colsoliclated and have been deciclecl by the learnecl'Iiiburial vicle cotnrlou clecisiotl daled 8tl'January 2010. Aftertaking into accottut the facts, narratiou rvhcrcof has alreacly given above, as rvell as tlic suburissiori of thc parties, thc Tribunal got 1:erslraclecl by the argurnent of the Ileveuue aud thns set aside the orclcr of the CII' (A) alcl restore that of the Assessing Officer, supportccl by thc follorving discnssiou:- "We have heard botli the pelrties aud gone thror-rgh thc rnaterial placed olt record. Tliere is no dispute that thc assessee is following lllercantile systctl of accouutitrg' 'I'helefore, the liability incurred on eicccluut of intcrcst payable on term loan aucl rvot'king capital as rvell as othcr expenciiture by way of directors foreign travcl expcllscs are allowablc as decluction in the ycar iu which such ITA Nos.51,52,57 &.58 of 2OLl- Page 7 of 13 2011:DHC:11993-DB

) liability is incurred. Therc is nci couccpt of dcfcrrccl revellue expenclilure in Income-tax Act. 'I'hc asscsscc had takcn a dccision to clairn 1/5thof such cxpenditure iu the year i1 r.vhich the expen<liture is incurred a1d tho balancc expencliture has been claimed in fottr subsecpteut years equally. The expenditure which had bcel claimccl in subsequent ycars constitutes the part of previous ycar's expenditure, which is not alloivable as cleduotion. It is not n iur" rvhere the expenclittire was'incnrrecl in relatior-r to certain investments, the effect of whicli woulcl be spreacl over i[ t1o[e than oue year. Therefore, thc aSScSScc cannot be allowed clecluctiou uuder Sectiotl 3l in rcspcct of expelditure, r.vhich was incnrred i1 earlier yeeys on thc principal of cleferrecl revemre expenditurc, as clerimecl by ih. uir"s".. 'fhe incorue of the .ssessce has to bc cleterminecl on the basis of tlie lacts of each ycar. If tlic contentiou of the aSScSSee is acceptecl that expeuditurc shoulcl be allowed on the basis of decision taken by the assessee, it r.vill open floo<l gates for litigatious ttucler which the assessee can defef any expellditurc the wrLy thcy like and claim the saure in the year in which its bccotlcs rnore convenieril ancl beneficial to thctl. Therefore, wc do 1ot approve the coltention of the assessee that 1et'cttttc expcnditure which has bceu ilcurred in a parlicnlar ycatl should be deferrecl to subscquent years. Thercforc, uo decluction out of clcfeited rcvellue cxpendittlrc, r'vhich has colne fiom earlier years, can be allorved as deduction iu the years nncler consicleration as thc satnc will colstitutc the prior per.iocl expcncliture. "fhe decision reliecl rpon by thc Lcl. Ctf (nppeals) in the case of Maclras Inclustrial Investment Corporation (supra) is not applicable to thc facts as pointecl out by the Ld. Sr' DR. Acoordingly, in ollf considered opinion, the Ld. cI I' (Appcals) wzrs uot justiliecl in allowing the clairn of asscssee iu respect of cleferred revenue expelditure. we, thercfore, set asicle tlie orcler of the Lci. CIT (Appeals) atlcl restore that of tlic ass€ssilg officer. [hc ground relatilg to cleferrccl revellue expenditure in all the years is allowed in tirvour of the Revenue." '{- fTA Nos.5L,52, 57 &.58 of 2011 Page 8 of 13 2011:DHC:11993-DB

@ 8. Thc 'fribunal is riglit in holding that in the instaut casc thc judgmcnt of Suprenre courL n il[adras trndustrial Investment Corporotion (supr"a) woulcl uot bc applicable. 9. Insofar as juclgment of this Court in Comntissioner of Inconre Tax Y:i. Irtclustriol Finance Corporotiort of lrtdia Ltcl. 185 TAXMAN 296 it is not applicable in tlie present case. In that case, this Court held that the iisscssee hirnsclf lvanted to spread the exirenses over a periocl of ensuiug ycar it shoulcl bc allorved. I-Iowever, there was no sllch proposition laicl clown in iibsolute tcrtn. It was clearll, g;tatecl that such a course of action woulcl be adrnissiblc only if thc principlc of rnatching conoept is satisfiecl rvhich rvas restricted to the cases o1'clebcntttres. 'I-his Court categoriczrlly observed that Llie gcneral principlc statecl cvcti in Mttl'as Intlustrial Investnterd Corporstiort (supra) rvas that ordinariiy lcvcllllc iucttrred wholly ol cxclusively for thc purpose of business cau bc allowcd in thc year itl whicli it is incurrecl. There may be solre cxceptional cases justifying spreacling tlie expencliture and claiming it over a certain uumber of years, that too, rryhcn thc asscssee chose to do so. The discussion was surlmed rtp in thc following mallllcl:- "Thus, the first thing which is to be noticed is thart though the entire expencliture uras incurred in that year, it r,vas the asscssee who wautcd the spread over. 'I-he Court was coltscions of the principlc tliat normally revenue expenditulc is to be allowed in the sal1le ycelr in rvhich it is incurred, bnt zrt the instance of the assessee, who wauted sprcading ovel', thc Court agreed fTA Nos.5L,52,57 &.58 of 20L1 Page 1O of 13 .( l 2011:DHC:11993-DB

to allow the assessee that bcnelit wheu it rryas founcl that there was ur contiuuing bencfit to the bttsiness of the cornpany over the entire period. What follows liorl the above is that nonnally thc orclinary lule. is to bc applied, natnely, reveltuc expenditure incurred in a particulal' year is to bc allor,ved in that year. Thus, if the assessee claims that expenditure in that year, the Iucotne Tax depalttlent cannot deny the salne. Flowever, in thosc cascs whcrc the assessee hirnself wants to spreaci the cxpenditure over a pelioci of ensuing years, it can be allorved only if tlre plinciple of matching concept is satisfied, whiclt upto now has been restricted to the cases of debentures." fi0. Even wheu rvc apply the irforesaici test in the prcscnt casc, thc asscssee wgulcl not be entitlcd to dcfcr the expencliture over a pcriocl of fivc ycars. For this rcason, wc dismiss the ITA 5112011,5212011 and 58l20IL I 1. In fact, Mr. Aggarrval, at the timc of arguilg thcse irppeals, altcr ptrtting a fteble attempt in questioning the wisdom of thc TribLural adopting the alclrcsaicl approacli, laid ernphasis on altogether clifferent aspcct ancl thc efJ'cct thcrcof r.vor.rld be only on ITA 5712011. I{is plea was that if the course of actiou aclopLccl by the revenue authorities is to be acceptccl, that woulcl lrean thal it rryas ttot open lor the assesseg to spread over the saicl exirencliture in thc fortn of intcrcst ctc. ovct a periocl of five years r,vhich would mealt that the assessee coulcl havc clainiccl thc crrtire expencliturc in the year in question i.e. in the asscsstlent ycars 2003-04. On ITA Nos.5L,52,57 &.58 of 2OLI Page LL of L3 2011:DHC:11993-DB

this prernise, his subrnission was that in that eventr-rality, r,vhcn therc wits llo clispt(c tliat thc cxpcndittuc was in lact incurrccl in the saicl asscsstlctlt ycar, thc cntirc expcnrliture of T 6,23,73,947l- shoulcl be allowed to the assesscc in thc asscssurcnl year 2003-04. 12. Ms. Suruchi Aggarwal, leamecl connsel appcaling for thc ltcvcttttc, ou thc other ha1cl, subnittecl that rvhen no such claim was evcr tlade by the asscsscc in the year in cluestion, it shoulcl not be allorved. Slie furthcr submittccl that for the l]r'st tiure this plea was raised in the instant appeal and even beforc the 'fribunal no such Qar" was set up. She arguccl that unless the claim is macle cither in thc Lctttttt or itt least i1the revised return, the assessee will uot pertnittecl to push that clairn. 13. Techlically , Ms. Suruchi Aggarwal rnay be correct in her snbtnissions. ,/\t thc same tirne, that worilcl arnount to not allowing the appellaut/assesscc the clair1l tlrc expencliture incurrecl on intelest etc. cven itt the assesslllellt year' 2003-04 tholgh the assessee was achnittedly cntitlecl to claim the same in tliat ycar, wc tnake this observatiol having rcgarcl to the fact that thelc is uo clisputc zibout the geluincless of the said expcncliture incurrecl in the assesslllent ycarr in qucstion. I 14. In these circutnstances, we penlit the assessec year in tluestiott by approaohing the Assessing Officcr, fTA Nos.5L,52, 57 &.58 of 2O1l- to raise such a claitl in tlie in accoldamcc rvith lanv. Page 1-2 of L3 2011:DHC:11993-DB