DCIT, NEW DELHI vs. M/S. SHARP MENTHOL INDIA LTD., NEW DELHI

In our considered opinion, the language of the Circular 17/2019 dated 08.08.2019 clearly shows that it has referred to the earlier Circular 3/2018 and its amendment dated 20.08.2018 vide which monetary limit for filing of Income tax appeals by the department before the ITAT, Hon'ble High Court, SLP/and appeals before the Hon'ble Supreme Court have been specified. It would be pertinent to refer to the Circular No. 17/2019 which reads as under:

As mentioned elsewhere by Circular 17/2019, the CBDT has further enhanced the monetary limit for filing of appeals and the same is amendment to Circular 3/2018. We find that Clause 13 of Circular 3/2018 reads as under:

In light of the above, we are of the considered opinion that Circular No. 17/2019 shall also apply retrospectively to pending appeals. In that view of the matter, the appeals filed by the Revenue stand dismissed.

Coming to the assessee’s appeal in A.Y 2006-07 and cross objection in CO No. 70/DEL/2013 for A.Y 2007-08, facts are that during the assessment proceedings for A.Y 2006-07, the Assessing Officer found that the assessee has received pre-shipment advance against export order from M/s Cargill International Trading Pte Ltd [Singapore] on 09.12.2005. On 31.03.2006, a sum of Rs. 2,25,93,901/- has been credited by way of journal entry, being the amount of discount on funds received from M/s Cargill International

The assessee was asked to explain how the discount has been accounted for in the profit and loss account. The assessee filed detailed reply explaining that it has entered into a trade agreement with M/s Cargill International Trading Pte Ltd on 22.11.2005 and furnished copy of the said agreement. Referring to various clauses of the agreement, the assessee submitted that he was given two options, namely:

The assessee exercised the first option to receive the prepayment amount as reduced by the Trade Discount/prepayment Discount. It was explained that a sum of Rs. 43.61 crores was received from the foreign party and was shown as trade advance. The assessee further explained that it allowed trade discount of Rs. 2.25 crores on the prepayment of trade advance and since it was following the Accrual System of Accounting, credited the same into the account of M/s Cargill International Trading [Singapore]. It was further pointed out that since the trade agreement was for one year, the trade discount of Rs. 2.25 crores was broken into two periods. First period was upto 31.03.2006 and accordingly, Rs. 77,44,651/- was booked as expenses under financial charges and second period which was from 01.04.2006 to 27.11.2006, Rs. 1,48,49,250/- was treated as prepaid expenses as on 31.03.2006. Accordingly, a sum of Rs. 77,44,651/- was shows as expense under the head ‘financial charges’ and balance amount was carried over to the next year under the head ‘prepaid expenses’.

The Assessing Officer further asked the assessee to explain the claim of expenditure of Rs. 77,44,651/- and to explain as to why this should be allowed as business expenditure.

In its reply, the assessee once again explained that it had opted for the first option and there was no provision in the agreement whereby the assessee could cancel the agreement at an early date. It was claimed that the liability arose as per the agreement and, therefore, expenditure should be allowed.

Explanation of the assessee did not find any favour with the Assessing Officer who was of the opinion that the trade discount/cash discount mentioned in the agreement is related to trade transaction mentioned in the agreement and gets crystallised only when trade transaction is completed and since the transaction was to be completed in the previous year relevant to A.Y 2007-08, liability on account of trade account got crystallised in A.Y 2007-08 only. Having stated all that, the Assessing Officer found that no actual sale has taken place and the contract of sale has not finally materialised and has been cancelled and, accordingly, proceeded to treat the trade discount in the nature of finance charges/interest payment and invoking the provisions of section 40(a)(ia) of the Act, the Assessing Officer treated the said claim devoid of any tax deducted at source and added the same to the income of the assessee.

The assessee carried the matter before the CIT(A) but without any success.

Before us, the ld. AR vehemently stated that liability arose pursuant to the agreement with M/s Cargill International Trading Pte Ltd and, therefore, invoking the provisions of section 40(a)(ia) of the Act is bad in law. It is the say of the ld. AR that it is incorrect to hold that cash discount is in the nature of interest and, therefore, it is incorrect to hold that the same has to be considered in the light of section 2(28A) of the Act.

The ld. AR further stated in the cross objection taken in A.Y 2007-08 that since the Assessing Officer himself has observed that the transaction was completed in A.Y 2007-08 and liability on account of trade discount got crystallised in A.Y 2007-08, then the entire amount should be allowed as expenditure in A.Y 2007-08.

In the alternative, the ld. AR claimed that if the said transaction has to be considered as interest u/s 2(28A) of the Act, then the same should be considered under Article 11 of the DTAA with Singapore and accordingly, to be taxed @ 15%.

Per contra, the ld. DR strongly supported the findings of the Assessing Officer. It is the say of the ld. DR that since no sale took place, therefore, no liability crystallised in A.Y 2007-08.

We have given a thoughtful consideration to the orders of the authorities below. It is not in dispute that the trade discount was agreed to by the parties mutually as a percentage of principal amount to be deducted by foreign party at the time of prepayment. It is also true that there is no direct or indirect indication in the trade agreement, which could suggest that the assessee wanted to borrow money from the foreign party. There is no dispute that this was purely a pre-shipment advance out of which cash/trade discount was deducted by foreign party as per written trade agreement. This means that the discount allowed by the assessee to the foreign party is an integral part of sales/purchases.

However, we find that the sale transaction did not materialise and was cancelled. However, at the same time, we do not find any merit in treating the said discount as interest u/s 2(28) of the Act thereby invoking the provisions of section 40(a)(ia) of the Act. We find that in A.Y 2007-08, the CIT(A) accepted the contention of the assessee that it is not payment of interest within the meaning of section 2(28A) of the Act, and, therefore, the assessee was not under an obligation to deduct tax at source under chapter XVIIB of the Act.

Since the assessee by way of its cross objection for A.Y 2007-08 has asked for allowance for entire shipment discount of Rs. 2,25,93,901/-, we are of the considered opinion that since the CIT(A) has allowed part of the said discount in A.Y 2007-08, the same should be allowed in full. We, accordingly, dismiss the claim in A.Y 2006-07 and allow the cross objection in A.Y 2007-08. The Assessing Officer is directed to allow the cash discount of Rs. 2,25,93,901/- in A.Y 2007-

Coming to Ground No. 2 in A.Y 2006-07, the grievance of the assessee is that the CIT(A) erred in confirming the action of the Assessing Officer by sustaining the disallowance of depreciation on plant and machinery purchased out of surrendered amount of Rs. 3.5 crores.

Facts on record show that while scrutinising the return of income, the Assessing Officer found that the assessee has claimed depreciation of Rs. 31,87,500/- is as under:

The assessee was asked to show cause why the depreciation of Rs. 31,87,500/- on the plant and machinery capitalised at Rs. 4.25 crores should not disallowed. The assessee filed a detailed reply vide letter dated 30.11.2007 and contended that it has disclosed a sum of Rs. 3.50 crores as its additional income for the A.Y 2002-03 to 2004-25.

The submission of the assessee did not find any favour with the Assessing Officer who was of the opinion that the assessee has arbitrarily prepared a list of plant and machinery which has no basis.

The Assessing Officer further observed that the assessee has not submitted any fixed assets register which it was required to maintain and failed to submit proof of purchase, installation and use of the plant and machineries. The Assessing Officer was of the firm belief that the claim of the assessee is not in accordance with law and hence liable to be rejected. Accordingly, the Assessing Officer disallowed claim of depreciation of Rs. 31,87,500/-.

The assessee carried the matter before the CIT(A) and once again explained the facts.

After considering the facts and detailed submissions, the ld. CIT(A) observed that in so far as the claim of deprecation on amount disclosed as additional income amounting to Rs. 75 lakhs, which was claimed as revenue expenditure in earlier A.Ys but were disallowed, now the same is treated as capital expenditure. The assessee is entitled for depreciation because the genuineness of the expenditure claimed as repair and maintenance were never doubted. The CIT(A) further observed that the surrender made by the assessee has also been accepted by the department. Accordingly, the CIT(A) directed the Assessing Officer to allow depreciation on the addition of plant and machinery in the respective A.Ys i.e. A.Y 2000-01 to 2005-06 and on the written down value in the year under A.Y 2006-07.

As regards claim of depreciation on account of Rs. 3.50 crores, the CIT(A) confirmed the action of the Assessing Officer.

Before us, the ld. AR stated that during the course of two search and seizure proceedings – one by the Income tax department and the other by the Excise department, plant and machinery were found installed at the premises of the assessee. It is the say of the ld. AR that list of inventories were prepared by the two revenue departments. Therefore, it cannot be said that the plant and machinery were not in existence or were not used in the business of the assessee. The ld. AR stated that the decision in the case of Sheth & Sura Engineering [P] Ltd 110 ITD 39, relied upon by the revenue authorities, is misplaced and prayed for allowance of depreciation.

Per contra, the ld. DR strongly supported the findings of the Assessing Officer and once again relied upon the decision of the Tribunal in the case of Sheth & Sura Engineering [P] Ltd [supra].

We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that the plant and machinery were found installed at the premises of the assessee. This fact is apparent from the list of inventories prepared by the Income tax department as well as by the Central Excise Department. We find that the lower authorities have dismissed the claim of depreciation on the ground that there is no evidence and it is not possible to ascertain the value of plant and machinery claimed to be installed during the year under consideration. The surrendered amount of Rs. 3.50 crores on this account has been accepted by the department. Therefore, the revenue cannot blow hot and cold in the same breath.

The decision of the co-ordinate bench in the case of Sheth & Sura Engineering [P] Ltd [supra] relied upon by the revenue authorities is misplaced because in that case the assessee had specifically stated that he is unable to furnish inventories in respect of plant and machinery and furniture and fixtures declared at the time of search action u/s 132 of the Act. Whereas, the facts of the case in hand show that the inventories of plant and machinery have been prepared by the Income tax department itself and has accepted the surrendered amount of Rs. 3.50 crores.

Considering the facts in totality, we are of the considered opinion that the assessee has satisfactorily established its claim of depreciation on Rs. 3.50 crores. We, accordingly, direct the Assessing Officer to allow the claim of depreciation on plant and machinery of Rs. 3.50 crores.

In so far as the claim of depreciation of Rs. 75 lakhs is concerned, we do not find any error or infirmity in the directions of the CIT(A). We, accordingly direct the Assessing Officer to compute the depreciation as per the rates applicable on the WDV of the block of assets as directed by the CIT(A). Ground No. 2 is, accordingly, allowed.

In the result, the appeals filed by the Revenue in ITA Nos.