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Income Tax Appellate Tribunal, DELHI BENCH: C : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
ORDER PER R.K. PANDA, AM: These are cross appeals. The first one is filed by the assessee and the second one is filed by the Revenue and are directed against the order dated 25th October, 2006 of the CIT(A)-15, New Delhi, relating to assessment year 2003-04. (By Assessee – 2003-04) 2. The grounds raised by the assessee are as under:- “1 The CIT(A) erred in holding that the amount of 48,34,13,706 claimed on account of “non-compete“ fees was capital expenditure in nature and in not allowing deduction of the said expenditure.
2. CIT(A) erred in holding that appellant had acquired an asset of enduring nature and in failing to appreciate that the said expenditure did not result in any asset of enduring nature in the hands of the Appellant.
3. The CIT(A) failed to appreciate that the scope of the agreement was limited to a particular territory and that the bottlers were free to carry on business, and were in fact carrying on business in other territories.
4. The CIT(A) erred in disallowing the expenditure ignoring that settled legal position that the nomenclature used by the assessee in books of accounts or other documents is not decisive of the fact that expenditure is capital or revenue in nature.
5. Without prejudice to the above, the CIT-(A) failed to consider that deprecation was allowable on the expenditure held to be “capital expenditure”. Addition of Rs. 9,27,19,720 on account of l/5th of processing charges and service charges
6. CIT(A) erred in confirming the disallowance of Rs. 9,27,19,720 being l/5th of service charges and processing charges debited to profit and loss account failing to appreciate that these were genuine business expenditure of the appellant company incurred wholly and exclusively for the purpose of its business.
7 The CIT(A) erred in upholding the disallowance of 1/5th of service charges on the grounds that no details were provided at the time of assessment proceedings failing to appreciate that sufficient opportunity was not provided to the appellant to submit the said details before assessing officer. 8 The CIT(A) erred in not admitting the so-called additional evidences relating to deductibility of processing charges paid and service charges submitted by the appellant during the appellate proceedings and in failing to appreciate that no proper opportunity was allowed to the appellant to submit these details during the assessment proceedings. 9 The CIT(A) failed to take cognizance of the material and evidences produced before him regarding deductibility of service charges and processing charges. 10 Without prejudice to the contention that the service charges paid to CCI, Inc.. are not covered under the transfer pricing provisions, the CIT(A) failed to appreciate that payment of these service charges by the appellant company to the CCII was referred to the transfer pricing officer by the assessing officer himself and Transfer Pricing Officer after a due verification of the service charges had found the same to be satisfactory. 11 The CIT(A) erred in relying on the certain third party confirmations received by the assessing officer for processing charges without providing a copy of the said confirmations to the appellant company to explain the reasons for differences, if any. 12 The CIT(A) erred in not considering the fact that similar expenditure was being incurred and allowed in earlier years also and there is on change of operations except that in the assessment proceedings sufficient opportunity was not given Addition on account of Excise Duty exemption in case of Burnihat Unit. 13 The CIT(A) failed in not appreciating the fact that the appellant had already offered that the said benefit of excise exemption in the form of higher sales price and by not claiming deduction of excise duty to that extent. 14 The CIT(A) erred in upholding the action of assessing officer in not deleting the wrongful addition made by assessing officer and failed to appreciate that this would amount to taxing the same amount twice; 15 The CIT(A) erred in not taking cognizance of the complete accounts and specific notes given by the appellant in the notes to computation.
16 The CIT (A) erred in upholding the addition even while noting that the appellants have not claimed deduction for the said amount as part of the Excise duty expenditure. 17 Without prejudice to the direction of CIT(A) to allow deduction of the amounts paid under section 43 B , the CIT(A) erred in failing to appreciate that the very basis of the scheme under which the claim is made by appellants with the excise authorities viz., that it permits lodging of a claim only for the amounts already paid. 18 The Appellant craves leave to add to, alter, amend or delete all or any of the aforesaid grounds of appeal.”
The assessee has also taken an additional ground which reads as under:- “That on the facts and circumstances of the case, entire amount of Rs. 109.73 crores, being payments made by the appellant to bottlers under various “non- compete” agreements during the relevant previous year, should be held to be revenue expenditure and allowable as deduction in computing income for assessment year 2003-04.”
After hearing both the sides and considering the fact that no fresh facts are required to be investigated, therefore, following the decisions of the Hon’ble Supreme Court in the case of NTPC Ltd. vs. CIT, 229 ITR 383 and Jute Corporation of India vs. CIT, 187 ITR 688, the additional ground raised by the assessee is admitted.
Grounds of appeal Nos.1-5 of the assessee as well as the additional ground relate to the order of the CIT(A) in upholding the action of the AO in disallowing the non-compete fee of Rs.48,34,13,706/-.
5. After hearing both the sides, we find, the assessee is a private limited company engaged in the business of manufacture and sale of aerated soft drinks under the brand name “Coca Cola,, Fanta, Limka and manufacture and sale of packaged drinking water under the brand name Kinley. It filed its return of income for the relevant assessment year declaring loss of Rs.282,90,29,838/- while its liability as determined in Form No.29B for the purpose of levy of MAT was nil. During the course of assessment proceedings, the AO noted that the assessee has claimed amortization of non-compete fee of Rs.48.34 crores. Following his order for A.Y. 2002-03 wherein such payment of non-compete fee was held to be capital expenditure, the AO disallowed the claim of Rs.48,34,13,706/- as non-compete fee which was claimed by the assessee as revenue expenditure. The alternate claim of the assessee that depreciation should be allowed was also rejected by the AO.
6. In appeal, the ld. CIT(A) upheld the action of the AO.
7. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
The ld. counsel for the assessee fairly conceded that the above issue stands decided against the assessee by the Tribunal in assessee’s own case for A.Y. 2002- 03 vide order dated 01.09.2014 by following the decision of Hon’ble Delhi High Court in the case of Sharp Defence Systems, 211 Taxman 576 (Del). Further, the Tribunal again, in assessee’s own case for A.Y. 2001-02, vide ITA No.2699/Del/2015, has decided the issue regarding disallowance of non- compete fee against the assessee by following the decision of the Tribunal in assessee’s own case for A.Y. 2002-03. In view of the consistent decision of the Tribunal in assessee’s own case, the grounds raised by the assessee have to be decided against the assessee. Therefore, ground Nos.1-5 including the additional ground are dismissed.
Ground Nos.6-12 by the assessee relate to the order of the CIT(A) in confirming the action of the AO in disallowing Rs.9,27,19,720/- being 1/5th of service charge and processing charges debited to the Profit & Loss Account.
Facts of the case, in brief, are that the AO, during the course of assessment proceedings, asked the assessee to give details and justify the processing as well as service charges. Despite adequate opportunity granted to the assessee, the assessee did not submit any details or justification for the same. Therefore, in absence of filing of such details, the AO disallowed 1/5th of processing charges (Rs.28,08,64,615/-) and service charge (Rs.18,27,33,985/-) and added back the same to the total income of the assessee.
Before the CIT(A), the assessee submitted that adequate opportunity was not granted by the AO for furnishing details of the processing and service charges since the AO required such details within a period of four days. It was argued that the assessee had to compile data required by the AO from various sources and locations and had sought time, vide letter dated 17th March, 2006 to furnish the details whereas the AO, without giving any opportunity to the assessee, passed the order on 20th March, 2006. The assessee also filed certain additional evidences in respect of the following based on which the ld.CIT(A) called for a remand report from the AO:- a) Break-up of processing charges; b) Sample agreement in respect of outsourcing of processing activities; c) Details of service charges incurred; d) Copy of service agreement entered into with CCI Inc.; e) Sample copy of debit notes/invoices in respect of services rendered by CCI Inc.; and f) RBI approval in respect of service agreement with CCI Inc.
After considering the remand report of the AO, the CIT(A) rejected the additional evidences filed by the assessee before him. He noted that the assessee also did not furnish any evidence before him to demonstrate that the payment of service charges to CCI Inc. in respect of which disallowance has been made by the AO was the identical transaction which had been referred to by the TPO and on which the TPO had not imposed any additional tax burden. So far as the processing charges of Rs.28.08 crores is concerned, he noted that the AO had found certain discrepancies in the reconciliation of certain parties and the assessee was not able to reconcile the said discrepancies in the details submitted before him. In view of the above, the ld.CIT(A) confirmed the action of the AO.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
The ld. Counsel for the assessee strongly challenged the order of the CIT(A). He submitted that the ld. CIT(A) has not admitted the additional evidences filed before him which have crucial bearing on the outcome of the claim of the assessee and, therefore, those additional evidences should have been admitted. For the above proposition, he relied on the various decisions including the decision of the Hon’ble Delhi High Court in the case of CIT vs. Virgin Securities & Credit (P) Ltd., 332 ITR 396 and CIT vs. Text Hundred India (P) Ltd., 351 ITR 57 (Del). He submitted that once the CIT(A) sought a remand report from the AO qua the additional evidence, the same should have been admitted. For the above proposition, he relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Inderpal Chawla, and the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT vs. M/s Om Overseas, 334 ITR 202 and various other decisions.
14.1 He submitted that no adverse inference can be drawn on the basis of ex parte statement of any third party unless an opportunity to cross-examine is granted to the assessee. He submitted that in the remand report given by the AO with regard to processing charges, the AO had stated that Kothari Beverages Pvt. Ltd., had confirmed receipt of Rs.1.07 crores from the assessee whereas the assessee had claimed making payment of Rs.1.24 crores. Similarly, the AO has stated that there were discrepancies in reporting of processing charges in respect of M/s Esjay Plastomer Pvt. Ltd., wherein the assessee had claimed payment of Rs.28.98 lakhs whereas the counter party had confirmed receipt of Rs.29.75 lakhs. He submitted that the AO had never confronted the assessee with third party confirmation received by the Revenue authorities and no opportunities were provided to the assessee to verify the aforesaid confirmations. Relying on various decisions, he submitted that the CIT(A) should not have upheld the disallowance made by the AO by relying on ex parte statements and documents mentioned in the remand report.
14.2 Referring to the discrepancies so mentioned by the AO, he submitted that the same are very negligible whereas the AO has disallowed 1/5th of the total expenses which amounts to Rs.9.27 crores which, by any standard, is extremely on the higher side. He submitted that in the subsequent years, i.e., A.Y. 2006-07 to A.Y. 2009-10, similar disallowance made by the AO in an arbitrary manner by relying on the assessment order passed by the AO for the year under consideration has been deleted by the CIT(A) holding the same to be arbitrary ad hoc disallowance not supported by any adverse evidence. Similarly, during A.Y. 2010- 11 also no such disallowance on account of payment of processing charge has been made by the subsequent AO. He accordingly submitted that the ad hoc disallowance made by the AO and sustained by the CIT(A) should be deleted.
The ld. DR, on the other hand, strongly relied on the order of the AO and CIT(A). She submitted that the assessee neither furnished requisite details before the AO nor before the CIT(A). She submitted that it is the duty of the assessee to reconcile the difference between its accounts with that of third parties. Unless these are reconciled the assessee cannot claim that the accounts are correct. So far as the discrepancies pointed out by the AO is concerned, she submitted that the AO had given the difference in respect of two parties and there could be more parties where such reconciliation is required, but, since the assessee did not appear before the AO, he has confined his decision only to two parties in respect of which the details were called for. She accordingly submitted that unless and until such discrepancies are reconciled to the satisfaction of the AO, the addition should be sustained.
We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, in absence of details furnished by the assessee to the satisfaction of the AO justifying the processing and service charges, the AO disallowed an amount of Rs.9,27,19,720/- being 1/5th of such charges. We find, the ld.CIT(A) upheld the action of the AO on the ground that the assessee failed to demonstrate before him with any evidence to substantiate such service charges and processing charges. While doing so, he also rejected the additional evidences filed before him. It is the submission of the ld. Counsel that such additional evidences were crucial for deciding the issue before the CIT(A) which he should have admitted. Further, once he has called for a remand report from the AO, he should have admitted those additional evidences. It is also his alternate submission that in subsequent assessment years, i.e., from A.Y. 2006-07 to 2009-10, such disallowances made by the AO were deleted by the CIT(A) and in A.Y. 2010-11, no such disallowance has been made by the AO. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the AO with a direction to grant one final opportunity to the assessee to file the requisite details and reconcile the differences between outstanding appearing in its books of account and the balance appearing in the accounts of the third parties. The assessee is directed to file the requisite details and necessary evidences to substantiate the claim of such service charges and processing charges and the AO shall decide the issue as per fact and law, after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds of appeal Nos.6 to 12 are accordingly allowed for statistical purposes.
Ground of appeal
Nos.13 to 17 were not pressed by the assessee for which the ld. DR has no objection. Accordingly, these grounds are dismissed as not pressed.
18. Ground No.18 being general in nature is dismissed as such. (by the Revenue – A.Y. 2003-04)
19. The only effective ground raised by the Revenue reads as under:-
On the facts and in the circumstances of the case and in law, the CIT (A) erred in directing the Assessing Officer to exclude the share premium amount of Rs.2,086.14 crores from the book profit calculated for the purposes of Section 115JB, ignoring the fact that this amount was utilized by the assessee company on revenue account i.e. to write off its accumulated brought forward losses of earlier years which was not a purpose specified in the Section 78 of the Companies Act, 1956, and thereby it partook the character of a revenue receipt and as such it was required to be routed through the profit and loss account.
Facts of the case, in brief, are that the AO, during the course of assessment proceedings, observed that the assessee has used security premium account of Rs.2086.14 crores to set off brought forward losses without taking this amount to the Profit & Loss Account for the year. He observed that the assessee has given notes to accounts/return giving accounting treatment of the same. On being confronted by the AO, it was submitted that the details so called for has no relevance for tax purposes. According to the AO, as per Company Law, share premium can only be used for capital account transactions. Therefore, the treatment given by the assessee is not in conformity with Company Law provisions. He noted that despite specific requirement to submit his defence, the assessee deliberately not availed of that opportunity. He, therefore, held that the amount of Rs.2086.14 crore has to be taken as Profit & Loss transaction which will ultimately affect tax on MAT account.
In appeal, the ld.CIT(A) deleted the addition made by the AO by observing as under:-
“6.3 I have examined the point of view of assessing officer and also the submissions of the appellant. My findings are as under:- (a) Although not specifically mentioned in assessment order, the adjustment of securities premium amount could not have been other than after invoking clause (b) in Explanation below the second proviso of Section 115JB(2). The clause states that the book profit for the purposes of Section 115JB should be increased by “the amounts carried to any reserves, by whatever name called other than a reserve specified u/s 33AC”. In other words, the A.O. could be justified in making such adjustments, only if the account of the appellant so adjusted, bore a character of “reserve” as understood in accountancy and under the Company Law. In the book by Frank H. Jones , Guide to Company Balance sheet and Profit & Loss account, sixth edition , the author has defined reserves as “that portion of a company’s profits (often an appreciable portion) which is retained for future use. It consists of appropriation from profits and other surpluses which are earned in the past i.e. amounts which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist as at the date of the balance sheet”. The fact that reserves are created out of profits of the company can also be seen in Regulation 87(1) of Table A of Schedule I to the Companies Act stating inter alia that “the Board may, before recommending any dividend, set aside out of the profits of the company such amounts, as it thinks proper, as a reserve or reserves which shall , at the discretion of the Board , be applicable for any purpose to which the profits of the company may be properly applied , including provision for meeting contingencies or for equalizing dividends; and pending such application, may, at the like discretion , either be employed in a business of the company or be invested in such investments (other than shares of the company) as the Board may from time to time think fit”. Section 211 of the Companies Act, 1956 provides for the form and contents of balance sheet and profit and loss account. The said form of balance sheet is given in Part-I of Schedule-VI and the form of profit and loss account is given in Part-ll of Schedule-VI. As far as Part-I dealing with the balance sheet is concerned, there is an express heading as “reserves and Surplus”. Under that heading, several sub-headings are given such as (1) Capital Reserve (2) Capital Redemption Reserve (3) Share Premium Account (4) Other reserves specifying the nature of each reserve and the amount in respect thereof (less) debit balance in profit and loss account (5) Surplus i.e. balance in profit and loss account after providing for proposed allocations namely dividends, bonus or reserves (6) Proposed additions to reserves (7) Sinking funds.” It is noticeable that share premium account has been separately identifiable and is distinguishable from reserves even in the schedule to the Companies Act. The above narrations on the nature of “reserve” as understood while interpreting Section 211 of the Company’s Act read with Regulation 87(1) of Schedule-I, and also Schedule-VI unequivocally lead to a conclusion that securities premium account is not in the nature of reserve. Moreover, Section 217 of the Company’s Act discussing the modalities of the Board’s report also states that the Board of Directors should present the balance sheet of the company and also a report with respect to (a) The state of company’s affairs (b) The amounts, if any, which it proposes to carry to any reserves in such balance sheet (c) The amount, if any, which it recommends should be paid by way of dividend. Thus, it will be seen that any sum out of the profits of the company which is to be made as a reserve or reserves must be set aside before the Directors recommend any dividend. The short point is that securities premium account falls under a separate heading in Part-I of Schedule-VI and also in view of Regulation 87(1) of Schedule -I , Section 211 and 217 of the Company’s Act, securities premium account, not in the nature of reserves, cannot be a subject matter of adjustment u/s 115JB of the I.T Act. (b) The AO has stated that the P & L account of the company does not confirm to the requirements of the Company’s Act and hence cannot be taken as a bench mark for determining income for the purposes of S 115JB of the Income Tax Act. It would be essential to refer to the Company’s Act in order to examine whether there were deviations in the appellant’s accounts vis-a-vis the requirements of the Company s Act. Paragraph (3) of Part-I I of Schedule- VI states “the profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and in particular, shall disclose the following information in respect of the period covered by the account. (viii) (a) The aggregate, if material , of any amounts set aside or proposed to be set aside, to reserves , but not including provisions made to meet any specific liability, contingency, or commitment known to exist at the date as at which the balance sheet is made up. (b) The aggregate, if material of any amounts withdrawn from such reserves”. It is correct as stated by the appellant that there is no stipulation under the Company’s Act Act to incorporate the entries relating to reversal of share premium account while drawing up the P&L account of the Company. Share premium account is not in the nature of an entry bearing the character of income. It has not been created by debiting the P & L account of the Company and hence as a corollary its reversal in any subsequent year can not be construed to mean that the reversal would have to be reflected in the P & L account. (c) It could also be a case that the AO was referring to clause (c) of the Explanation to S 115JB in order to enforce the addition of share premium account to the book profit. The clause refers to the amounts set aside to provisions made for meeting unascertained liabilities. The term “ provision “ has been defined in cl 7 of Part III of Sch VI to the Company’s Act as under;
“ (a) The expression “ provision “ shall, subject to clause (2) of this clause mean any amount written off or retained by way of providing for depreciation, renewals, diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy “ Thus the definition of ‘provision “ under the Company’s Act are known to be made against anticipated losses and contingencies and are charges against profits. These are taken into account against gross receipts in the P &L account. The definition in cl 7 of Part III is quite significant in preparing the P &L account in accordance with part II and III of Sch VI. Any amount written off or retained by way of providing for depreciation, renewals etc is included in the definition of provision. In that view of the matter, since share premium account has not been created by debiting any such amount to the P &L account, neither under the rules of accountancy nor under the Company’s Act, can the share premium account be categorized as a provision. As a corrolary, the share premium account can not be subject to any adjustment under the provisions of S 115JB of the Income Tax Act, since it would be transgressing the rules of interpretation to equate share premium account to an account in the nature of provision. (d) More over, it is statutorily possible to make adjustment by increasing the book profit by any amount mentioned in the clauses to the explanation u/s 115JB, only when the said amounts are debited to the P & L a/c. No such debit to the P & L a/c had ever been made in respect of the share premium account in any earlier year, and in that view of the matter, the adjustment to the book profit by way of reversal of share premium account is not in order. (e) I also agree that the ratio of the citation in the case of Apollo Tyres Ltd. Vs ClT 255 ITR 273 (SC), which states that the AO does not have the jurisdiction to go behind the net profit shown in the P & L a/c except to the extent provided in the Explanation to section 115J, covers the instant issue in appeal.. When the P & L a/c has been certified by the auditors of the company and the accounts have been prepared in accordance with Part-II & III of Schedule-VI of the Company’s Act, the AO does not have statutory sanction for making the impugned adjustment. In fact, the appellant had filed a petition before the High Court of Delhi u/s 78(1) read with Section 100 to 103 of the Company’s Act, 1956 and Rules 46 and 47 of the Companies (Court) Rules, 1959 for reduction of the amount standing in its securities premium account from Rs 2100 crores to Rs 13.85 crores by adjusting brought forward business losses of Rs 2076 crores against the said amount. The Hon’ble Court vide its order dated 20.12.2002 has allowed the company to reduce the amount standing in the securities premium account as prayed for. Since the Hon’ble court has accorded sanction to the company, in terms of Section 78(1) read with Section 100 to 103 of the Company’s Act, 1956, to reduce its securities premium account, it cannot also be said that the said adjustment in accounts of the company pursuant to the court orders, are in violation of the provisions of the Company’s Act and specifically the provisions of Section 78(1), as stated by the A.O. (f) I agree with the appellant that security premium account is part of the capital of the company and the reversal of securities premium account need not be taken to the P & L a/c. The treatment accorded by the appellant to the impact of reversal of securities premium account by writing it off against brought forward business losses below the line (after determining P & L for the year after tax) is in accordance with the provisions of the Company’s Act and does not run contrary to the orders of the Hon’ble High Court of Delhi dated 20.12.2002 and 14.02.2003. It is accordingly held that the AO could not have adjusted the amount of reversal of securities premium account to the book profit of the Company in terms of S 115JB of the Act. The ground is allowed.”
Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
We have heard the rival arguments made by both the sides and perused the orders of the AO and the CIT(A). We find, the ld. CIT(A) while deleting the addition has held that security premium account, being part of capital of the company is not in the nature of an entry bearing the character of income and since it has not been credited by debiting the Profit & Loss Account of the company, its reversal in any subsequent year is not required to be reflected in the profit & loss account. In other words, applicability of clause (b) of Explanation to section 115JB(2) was ruled out. He held that clause (c) of said Explanation has no applicability since securities premium account is not in the nature of provision; In any case, no addition can be made to the book profits since the securities premium account was never debited to the profit & loss account. According to the CIT(A), 16 the assessing officer did not have power to recast the accounts which have been audited, prepared in accordance with Part II & III of Schedule VI of the Companies Act, 1956 and adopted at the AGM. For making any additions to the ‘book profits’ as shown in the profit & loss account, the assessing officer could only invoke Explanation to section 115JB(2). While holding so, he relied on the decisions in the case of Apollo Tyres Ltd vs CIT, 255 ITR 273 (SC), Malayala Manorama Co. Ltd. vs CIT, 216 CTR102 (SC), Kinetic Motor Co Ltd vs DCIT, 262 ITR 330 (Bom) and Sri Hariram Hotels (P) Ltd vs CIT, 237 Taxman 564 (Kar), etc.]
We do not find any infirmity in the order of the CIT(A) who, while deleting the addition, has considered the decision of the Hon’ble Delhi High Court approving the adjustment of security premium account with brought forward losses. Further, the Hon’ble Supreme Court in the case of Apollo Tyres (supra) has held that the AO does not have the jurisdiction to go beyond the net profit shown in the Profit & Loss Account except to the extent provided in the Explanation to section 115J which has been relied on by the CIT(A). In view of the above and in view of the detailed reasoning given by the CIT(A) at para 6.3 of his order, we do not find any infirmity in the same in absence of any contrary material brought to our notice by the ld. DR. Accordingly, the order of the CIT(A) is upheld and the ground raised by the Revenue is dismissed.