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

PER BENCH

The above two appeals by the Revenue are preferred against two

separate orders of the Commissioner of Income Tax [Appeals] - 3, New

Delhi dated 20.01.2009 and 30.08.2011 pertaining to assessment years

2006-07 and 2007-08. The assessee has filed cross appeal for A.Y 2006-

07 and cross objection for A.Y 2007-08. Since all these appeals and

cross objection pertain to same assessee and were heard together,

they are being disposed off by this common order for the sake of

convenience and brevity.

depreciation on the surrendered income of Rs. 75 lakhs and in A.Y

2007-08, the Revenue is aggrieved by the deletion of disallowance of

Rs. 1,20,52,213/- made by the Assessing Officer u/s 40(a)(ia) of the

Income-tax Act, 1961 [hereinafter referred to as 'the Act'].

effect would be less than Rs. 50 lakhs and hence both the appeals have

to be dismissed in the light of the CBDT Circular No. 17/2019 dated

08.08.2019.

to the existing appeals as it is prospective in nature.

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:

“Circular No. 17/2019

New Delhi. 8th August 2019

Subject: - Further Enhancement of Monetary limits for filing of appeals by the Department before Income Tax Appellate Tribunal, High Courts and SLPs/appeals before Supreme Court - Amendment to Circular 3 of 2018 - Measures for reducing litigation.-

Reference is invited to the Circular No.3 of2018 dated 11.07.2018 (the Circular) of Central Board of Direct Taxes (the Board) and its amendment dated 20th August. 2018 vide which monetary limits for filing of income tax appeals by the Department before Income Tax Appellate Tribunal. High Courts and SLPs/appeals before Supreme Court have been specified. Representation has also been received that an anomaly in the said circular at para 5 may be removed.

S.No. Appeals/SLPs in IT matters Monetary Limit (Rs.)

order for more than one assessment years is passed. para 5 of the circular is substituted by the following para:

"5. The Assessing Officer shall calculate the tax effect separately for every assessment year in respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the monetary limit specified in para 3. No appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3. Further, even in the case of composite order of any High Court or appellate authority which involves more than one assessment year and common issues in more than one assessment year, no appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In case where a composite order/ judgement involves more than one assessee. each assessee shall be dealt with separately."

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:

“The Circular will apply to SLPs/appeals/cross objections /references to be filed henceforth in Hon'ble Supreme Court/Tribunal and it shall also apply retrospectively to pending SLPs/appeals/cross objections/references. Pending appeals below the specified tax limits in para 3 above may be withdrawn/not pressed.”

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.

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

Trading (I)(P) Ltd.

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:

(i) To receive the prepayment amount at a trade discount/

prepayment discount before the shipment against a bank

guarantee, or

(ii) to receive the payment in cash via electronic transfer of

fund within 3 business days of the receipt of documents,

through banking channel.

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’.

claim of expenditure of Rs. 77,44,651/- and to explain as to why this

should be allowed as business expenditure.

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.

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.

any success.

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.

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.

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%.

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.

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.

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.

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-

while cross objection on this issue in CO No. 70/DEL/2013 is allowed.

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.

income, the Assessing Officer found that the assessee has claimed

depreciation of Rs. 31,87,500/- is as under:

A.Y Agro Profits Repairs to P & M 2000-01 5,00,000 2001-02 20,00,000 2002-03 25,00,000 7,50,000 2003-04 2,50,00,000 10,00,000 2004-05 75,00,000 17,50,000 2005-06 15,00,000 Total 3,50,00,000 75,00,000

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.

It was further explained that a sum of Rs. 75 lakhs was further

disclosed as additional income over a period of six years on account of

capital expenditure debited to the repairs and maintenance. It was

explained that the assessee had utilised the said income towards the

installation of certain new machinery which were put to use during the

A.Y 2006-07. The assessee furnished complete list of plant and

machinery alongwith its value. It was further brought to the notice of

the Assessing Officer that the Income tax department itself had

prepared the inventory of plant and machinery during the course of

search on 17.01.2006. It was also brought to the notice of the

Assessing Officer that the Excise Department had also prepared

inventory of plant and machinery during the course of their search on

25.01.2006.

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 in the list of inventory

prepared by the Income tax department on 17.02.2006 and again by

the Excise department on 25.01.2006, there is a difference in the

inventory of plant and machinery and various new assets appeared in

the list prepared by the Excise department. The Assessing Officer

dismissed the theory which suggests that the plant and machinery

worth Rs. 4.25 crores have been installed within short period between

17.01.2006 and 25.01.2006.

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/-.

explained the facts.

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.

the CIT(A) confirmed the action of the Assessing Officer.

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.

Assessing Officer and once again relied upon the decision of the

Tribunal in the case of Sheth & Sura Engineering [P] Ltd [supra].

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.

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.

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.

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.

1291/DEL/2009 and 379/DEL/2012 stand dismissed. The appeal of the

assessee in ITA No. 1195/DEL/2009 is partly allowed. Cross Objection

in CO No. 70/DEL/2013 is allowed.

The order is pronounced in the open court on 28.08.2019.

Sd/- Sd/- [A.D. JAIN] [N.K. BILLAIYA] VICE PRESIDENT ACCOUNTANT MEMBER

Dated: 28 August, 2019

VL/