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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri P.M. Jagtap & Shri A. T. Varkey, JM]
ORDER Per Shri A.T.Varkey, JM Both these cross appeals preferred by the assessee and the Revenue are against the order of Ld. CIT(A)-15, Kolkata dated 22.12.2015 for AY 2006-07.
First of all we will deal with the appeal preferred by the assessee. The assessee’s ground no. 1 is against the action of the Ld. CIT(A) in upholding the addition of Rs.79,45,426/- on account of bad debt written off.
Brief facts of the case are that the assessee is in the business of manufacture and sale of industrial gas and it had claimed debit balance written off of Rs.79,45,426/-. The AO asked the assessee to explain as to its claim for the debit balance written off for which the assessee replied vide letter dated 09.12.2008 that these are pertaining to old accounts and existing for more than eight years. When the AO asked for proof, the assessee replied that since these amounts were given to the parties over a long period of time and which were mostly in the form of advance made in the ordinary course of business for supply of materials, which the parties could not implement or failed to fulfill, no sale bill is available with it. Further, it was explained by the assessee, the material was not supplied; and the amount was lying in the name of the respective parties which were subsequently written off as bad during the year under review. The AO did not agree with the contention of the assessee for the following reasons:
“3.2 The reply of assessee is considered but it is not found acceptable for following ` reasons:- (i) The basic condition that the amount in question should have passed through Profit & Loss account, should be satisfied before allowing any claim of Debit balance written off. (ii) The assessee has not given copy of any sale bill, copy of communication with parties which can even indirectly prove that amount in question is revenue in nature in nature. This is important because any debit balance for example an advance unrelated with business, cannot be allowed as deduction. (iii) The assessee has stated in general sense that the amount in question is given in the form of advance for supply of materials. Without copies of bills & other related document, the claim of assessee remains unverifiable. For above reasons claim of debit balance written off of Rs.79,45,426/- in not allowed and added to the total income of the assessee.” And, therefore, added the aforesaid amount to the income of the assessee. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who was pleased to dismiss the same. Aggrieved, the assessee is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. The facts aforesaid noted by the AO are not repeated for the sake of brevity. We note that the assessee is in the business of manufacture and sale of industrial gases and it had to buy raw materials and consumables from different suppliers. According to the assessee, in the normal course of business it had paid advance to few of the suppliers and since neither they supplied the materials nor they returned the money, even though the assessee tried its level best to realize it could not materialize, so in this year, the assessee wrote off the same. The details of the amount advanced to the parties are given below:
Name of the suppliers Amount (Rs) 1. Swastika Industries 2,50,000 2. Dharam Steel Tubes Pvt. Ltd. 55,311 3. B.K. Enterprises 2,50,000 4. Arunodaya Industries 5,00,000 5. Growtrer Enterprises Pvt. Ltd. 10,00,000 6. International Panacea Ltd. 10,00,000 7. Pratibha Malhotra 15,00,000 8. Tanvin Enterprises 12,00,000 9. Vimal Distributors 16,00,000 10. J.P. Gadia 73,045 11. Security -with Haryana State Electricity Board 3,000 12. Suraj Prakash 5,00,000 13. Gadia Sales 14,070 Total: 79,45,426
During appeal, it was pleaded before the Ld. CIT(A) that the assessee had complied with the provisions of writing off of the outstanding amount and that the Ld AR of assessee had infact drew the attention of Ld. CIT(A) to the P&L Account under the head ‘Administrative & other expenses’ in Schedule 15 of the audited accounts for the year ended 31.03.2006. However, the Ld. CIT(A) was not convinced with the submissions of the assessee that the said claim is allowable u/s. 36(1)(vii) read with section 36(2) of the Act or as a deduction as a trading loss u/s. 28 of the Act. Even though the assessee relied on several judgments of the Hon’ble Apex Court as well as the Hon’ble High Court the Ld. CIT(A) did not allow the claim of the assessee by observing as under:
“5.1.14 Decision: I have carefully perused the reply of the assessee and the contents of the assessment order. One thing is very clear from the assessment order that the assessee never proved before the AO or during the appellate proceedings as to what is the nature of the “advances” given to these parties by submitting any documentary evidence. What are these parties actually supposed to give to the assessee in lieu of these advances has also not been revealed by the assessee. It is clear from the submission of the assessee that these parties had not supplied any material to the assessee as they could not produce any bills issued by those parties. Even the addresses have not been given. What was the need for giving such advances to unknown parties is also not clear. In general commercial world it is quite common to give advances. It can also happen that those parties can supply part of the material as agreed upon and subsequently they are not in a position to honour their commitment and part of the advances could not be recovered from those parties. However, the facts in the present case is quite contrary. The assessee could not submit any bills pertaining to these parties during the assessment proceedings or the appellate proceedings, which meant that there was no transaction with these parties after the "advance" given by the assessee to them. This makes the transactions very doubtful. Hon'ble S.C have held in the case of CIT Vs. Mysore Sugar Co Ltd. 46 ITR 649 that it is very important to find out the nature of transaction, whether it is on capital account or on revenue. Not all losses can be held to be revenue loss. The assessee has to show the purpose for which money was advanced. Was it to acquire an asset of an enduring nature for the benefit of the business or was it an outgoing in the doing of the business. If the money is lost in the first instance then it is a loss of capital but if it is lost in the second circumstances then it is revenue loss. Looking against this background, it is crystal clear that the assessee had never bothered to prove the nature and purpose of the advances, the same cannot be allowed as business loss. All the case laws relied upon by the assessee clearly record the fact that the advances were given in the normal course of the business and they were trading advance. Since the assess failed to give any clue regarding the nature of advance, the write-off of same cannot be allowed as business loss. Hence, the disallowance of Rs. 79,45,426 is confirmed.”
Before us it has been contended by the Ld. AR that the AO has erred in not allowing the claim and according to him, it was for an erroneous reason that he has not allowed it by stating that the said amount (written off amount) had to pass through the P&L Account. According to Ld. AR, the amount written off by assessee was trade advances given over past several years which got accumulated over a period of time. And this fact the AO failed to appreciate that trade advances written off is incidental to the business and was a business loss which could be allowed u/s. 28 of the Act. Therefore, according to Ld. AR, there was no need for this amount to pass through P&L Account. According to the Ld. AR, the AO got confused with this claim of assessee with bad debt written off. The Ld. AR also assailed the reason attributed by the AO to deny the claim by pointing out that copies of bills exist only when there is debt written off but in this case these are trade advances given over past several years which got accumulated over a period of time which has been written-off, so it needs to be allowed. According to the Ld. AR, in the case of trade advances, there is no question of bill being issued. He pointed out that the bill will be only issued on supply of material and if the bill was issued, it would logically flow that the said amount was not a trade advance but would be transferred to purchase account. Hence, the AO was not justified to reject the claim. According to Ld. AR, even the Ld. CIT(A) has not accepted the claim only on the reason that there was failure on the part of assessee to adduce documentary evidence to substantiate the nature of the advance given to the parties. According to Ld. AR, in the audited accounts at Schedule 15 the auditor has wrote off the amount after taking note of these facts and since the assessee has submitted before the Ld. CIT(A) the chart wise details of the advances written off, the assessee’s claim ought to have been upheld. However, we are not in agreement with the assess’s claim raised on this issue. We note that the assessee’s claim is in respect of trade advances which according to it, are irrecoverable and so written off. So, therefore, the assessee’s claim even if allowable it is only u/s. 28 of the Act as business loss and not u/s. 36(1)(vii) read with section 36(2) of the Act. In such an event, the assessee has to first of all prove that the trade advances which the assessee has given to the parties were in the ordinary course of business and, therefore, the nature of the advance given by the assessee to the parties is to be ascertained. Therefore, in order to successfully claim the trade advance which is written off as irrecoverable and so to be treated as a business loss, the assessee has to first prove that the advances were paid during the ordinary course of business, secondly, if it succeeds in proving the same, then the assessee has to prove that he took all steps to recover the advanced amount and since it failed to recover the amount then only assessee will be eligible to claim the amount as business loss. In this case, the assessee neither during the assessment proceedings nor before the first appellate authority could prove the nature of the advances given to the thirteen parties. Since the assessee could not produce any evidence to prove the nature of the advances given to the thirteen parties by producing some materials either by way of purchase order or a money receipt it failed to pass the first stage we discussed above. So, the view taken by the Ld. CIT(A) cannot be held to be erroneous. Therefore, we confirm the order of Ld. CIT(A) and dismiss this ground of appeal of assessee.
7. Though we took up the assessee’s appeal first, we note that Ground no. 2 of the appeal of the assessee and ground no. 2 of the appeal of the revenue are in respect of part relief granted by the Ld. CIT(A) in respect of the claim made by the assessee in respect of expenditure on account of replacement of certain parts of machinery which the assessee has claim under the head ‘Repairs and Maintenance’ wherein the Ld. CIT(A) has restricted the disallowance to Rs.2,67,672/- in place of Rs.32,44,478/-. Since the cross appeal of both parties are for the same issue, we adjudicate the issue together.
Brief facts of the case are that the assessee has claimed repair and maintenance expenditure of Rs.58,27,419/- for which it has submitted copies of bills asked for by the AO. The AO has reproduced the chart in the assessment order, which is as under:
The AO has disallowed the claim of the assessee by observing as under:
“4.2 The assessee has claimed above purchase of items as revenue expenditure. The cylinder purchased from Dresser Rand is not a normal cylinder it is a specialized one requiring higher engineering and technical skill. In itself it is an asset so it cannot be treated as revenue expenditure. PVC cable in small quantity can be treated as part of repair and maintenance but in present instant the assessee has purchased more than 3,500 meter. Such a large quantity of purchase of PVC cable does not justify inclusion of corresponding cost in revenue expenditure. Similarly, purchase of 900 pieces of sprinkler pipe (total length is 5.4 kilometer) also show that these pipes were used for construction of network of pipes for sprinkling. Such large scale purchase of pipe cannot be termed as part of regular repair and maintenance. Further, Oxygen Trace Analyser, Heat Exchanger and Oxygen in Hydrogen Analyser specific instruments which are used to know purity of gases. These items are instrument in itself which are used in manufacturing industries. These are not spare part of any big machineries so question of these being under the head ‘repair & maintenance’ does not arise. The assessee was asked to give explanation with respect to above but no specific reply could be given instead reply of general nature was submitted. So, the reply of assessee is not acceptable. In view of above, revenue expenditure claim of Rs.32,44,478/- on above items are disallowed. Depreciation of Rs.4,00,868/- is allowed at the rate of 15%.”
Thus the AO disallowed the claim of Rs.32,44,478/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to give partial relief to the assessee by holding as under:
“6.11 Decision: I have gone through the submission made by the assessee and the assessment order. I am inclined to accept the explanation given by the assessee incorporating the facts and the various legal pronouncements narrated above except for an amount of Rs. 2,67,662/- incurred for purchase of cylinders. As per assessee's own submission, this was purchased to replace an item which was in use since December 1993. It shows that this gave the assessee an enduring benefit by creating a long term asset which is entitled for depreciation @15%. Hence, the addition of Rs. 32,44,478 (-) Rs .2,67,662 = Rs. 29,76,816/- is deleted and the A.O. is directed to allow depreciation @15% on the balance amount of Rs. 2,67,662/-.” Aggrieved by the aforesaid action of the Ld. CIT(A) the revenue is in appeal in restricting the disallowance to only Rs.2,67,662/- in place of Rs.32,44,478/- as made by the AO and the assessee is in appeal for not allowing the claim of Rs.2,67,662/- and allowing only the depreciation on it @ 15%.
We have heard rival submissions and gone through the facts and circumstances of the case. We are not repeating the facts as noted by the AO as well as by the Ld. CIT(A) for the sake of brevity. Before us, the assessee has contended that this expenditure is a revenue expenditure considering the nature of use and has drawn our attention to the chart as given below:
From a perusal of the items given from 2 to 8, supra, we note that these items are nothing but replacements of the already existing assets and thus does not bring into existence any new asset or the assessee acquire any new advantage of enduring benefit. Item nos. 2 to 8 the Ld. CIT(A) also notes that the expenditure was necessary since in the absence of replacement of the said parts, the machines would not be operational. Therefore, it is essential that for the smooth functioning of the business operations of the assessee, the replacement of the spare parts was a necessity. Even if by such replacement, some advantage has been derived by the assessee due to improvement in technology, it may at the most reduce the operating cost. Therefore, the action of the Ld. CIT(A) in giving relief to the assessee taking note of item nos. 2 to 8 is confirmed. So, Revenue appeal of this ground is dismissed. Coming to the item no. 1 which the Ld. CIT(A) has not allowed and assessee is in appeal, we note that it pertains to expenditure incurred on replacement of cylinder. According to Ld. CIT(A), this expenditure incurred by assessee on cylinder has given the assessee an enduring benefit by creating a long term asset which cannot be countenanced. We note that the cylinder represents a component part of the Argon Compressor originally purchased by the assessee in December 1993. This cylinder was a replacement of the worn out existing cylinder fitted with the compressor and cannot be said to be a new asset or any new advantage of enduring benefit. Thus, by changing the worn out cylinder, the assessee has effected to preserve and maintain the asset, in this case the compressor. For doing so, we rely on the ration decidendi laid by the Hon’ble jurisdictional High Court decision in CIT Vs. Tea Estate Pvt. Ltd. 198 ITR 535 (Cal) wherein the Hon’ble High Court has held as under:
“We now refer to a landmark judgment of Hon’ble Supreme Court in the context of classification of expenditure as revenue or capital. In the case of CIT Vs. Saravana Spg. Mills (P) Ltd. 293 ITR 201/163 Taxman 201, the Court held that the expression "current repairs" denotes repairs which are attended to when the need for them arises from the viewpoint of a businessman. The words used in section 31 (1) are "current repairs". The object behind section 31 (1) is to preserve and maintain the asset and not to bring in a new asset. Citing examples of compressor in a A/C machine or picture tube in a TV set, the Court held that these are all deductible under current repairs: "To give an example, a Compressor is an important part of an Air- condition Machine. Repair of the Compressor will come in the connotation of the word "current repairs" in section 31(i) of the said Act because the assessee does not replace the Air- condition Machine. At the highest, he replaces a part of the Air-condition Machine. So is in the case of the picture tube in a Television Set, when the picture tube is replaced the Television Set is not replaced, therefore, such repairs alone can come within the connotation of the word "current repairs" in section 31(i) of the said Act as it stood at the material time. They are effected to preserve and maintain the asset, viz , air- conditioner or carding machine."
Considering the nature of expenses as explained and considering the ratio of judgment of the Apex Court as cited above, we submit that the expenditure of Rs.32,44,478 were revenue expenditures and deductible u/s 37(1) of the IT Act. The assessee replaced cylinder & heat exchanger tubes which are fitted in the compressor; The assessee replaced worn-out pvc pipes & sprinkler pipes which happened to cover under routine periodical maintenance. The analyser systems fitted in the process line of the oxygen plant were getting consumed at regular intervals and requires replacement. The AO failed to appreciate the nature of use of all these items and disallowed the respective expenses as capital which however is not sustainable. Accordingly, the AO be directed to delete the addition of Rs.32,44,478.”
Therefore, we allow the ground of appeal of the assessee in respect of item no. 1 of chart above on this ground and dismiss the ground of appeal of the Revenue in respect of item nos. 2 to 8. (chart supra).
13. Coming to the revenue’s appeal ground no. 1, which is against the action of the Ld. CIT(A) in deleting the disallowance of interest expenses claimed by the assessee wherein the AO noted that assessee has obtained loan at a higher rate and advanced the loan at a lower rate.
Brief facts of the case are that the assessee had taken loan at varying interest rate from 11.75% to 15%. The AO noted that the assessee has also advanced loan to M/s. Universal Cylinder Ltd. @ 9%. Thus, according to AO, the loan at the higher interest rate was given to this party at lower rate and, therefore, AO was of the opinion that the average lending rate should be at 12% and considering the differential rate of 3% was disallowed. Thus, an amount of Rs.1,95,000/- was added to the income of the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to allow the claim of the assessee. Aggrieved, the revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee had made payment of Rs.65 lacs to M/s. Universal Cylinder Ltd. on account of security deposit towards supply of gas cylinders. The payment was made towards security deposit in the ordinary course of business. It was brought to our notice by Ld. AR that the security deposit was for the sole purpose to get uninterrupted supply of the gas cylinders and not to earn interest income therefrom. The rate of interest was fixed at 9% since the assessee had to make the security deposit for uninterrupted supply of cylinders for smooth functioning of assessee’s business and the earning of interest was not the business of the assessee. The Ld. CIT(A) for taking note that the borrowed money was used for the purpose of business, he was of the opinion that the interest expenditure was deductible u/s. 36(1)(iii) of the Act. Further, it was brought to our notice that the assessee company has substantial interest free own funds out of which payment in question was made. It was brought to our notice that as on 31.03.2005 out of the total funds of Rs.36.79 cr. only Rs.10.63 cr. related to loan funds. And the position was almost same even as on 31.03.2016. The security deposit since was only to the extent of Rs. 65 lacs it cannot be said that interest bearing borrowed fund has been diverted to third parties for the purpose other than the business. Since the assessee had mixed fund which includes its own fund in sufficient quantity, a presumption can be drawn that its own funds were utilized for the security deposit in question. For this proposition of law, we rely on the decision of Hon’ble Bombay High Court in CIT-vs.- Reliance Utilities & Power Ltd. reported in 313 ITR 340 (Bom.), and looking from both angles, we confirm the order of the Ld. CIT(A) and dismiss this ground of appeal of the assessee.
16. Ground no. 3 of the revenue’s appeal is against the action of the Ld. CIT(A) in deleting the addition regarding PF on account of employees’ contribution.
Brief facts of the case are that the AO added back an amount of Rs.81,556/- towards employees’ contribution to PF on the ground that the same was deposited after the due date. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to delete the addition made by the AO. Aggrieved, revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the employees’ contribution to PF ought not to have been disallowed u/s. 36(1)(v) of the Act even though the payment was made after the due date prescribed under the PF Act. According to us, so long as the payment was made before the due date of filing of the return of income u/s. 139 of the Act it should be allowed. We note that the Ld. CIT(A) has allowed the ground of appeal of the assessee by noting that assessee has remitted the employee’s contribution of PF before the due date of filing of Return of Income u/s. 139 of the Act. Since in the ground of appeal of the revenue, the revenue has not assailed the decision of the Ld. CIT(A) that any payment made by the assessee in the PF account was after the due date of filing of return u/s. 139 of the Act, so the factual finding of Ld CIT(A) is crystallized. Thus by relying on the decision of the CIT Vs. Vijayshree ltd. (2014) 43 taxmann.com 396 (Cal), we confirm the order of Ld. CIT(A) and dismiss this ground of appeal of the revenue.
19. Ground no. 4 of the revenue is against the action of the Ld. CIT(A), which reads as under:
4. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has not determined the fair rental value of the property and in the absence of the same, the fair rental value claimed by the assessee cannot be considered as reasonable.
Brief facts of the case are that the AO disallowed 50% of the expenditure incurred for rent amounting to Rs.36,00,000/- by invoking section 40A(2)(b) of the Act. According to AO, the land lady is holding 6.5% of the share of the assessee company, and the fact that the details of the area of the premises taken on lease was not provided by assessee, the AO could not be ascertain the market rent of the property in question by comparing it with the rent payments made on identical properties, therefore, he estimated that 50% of the claim of expenditure made by the assessee can only be allowed and, therefore, the balance 50% was disallowed. On appeal, the Ld. CIT(A) allowed the appeal of the assessee. Aggrieved, the revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that a lease deed was executed between the company with the landlady Smt. Sachi Bhardwaj on 30.12.2004 to take on lease the entire single storied built up property at a monthly rent of Rs.6,00,000/-. During the year under consideration, the assessee paid a sum of Rs.72,00,000/- as rent for the premises hired for office purpose at S-492, Greater Kailash-1, New Delhi-110 048. The AO observed that Smt. Shachi Bhardwaj is holding 6.5% of the equity shares of the company and her relative Shri Rakesh S. Bhardwaj is one of the directors of the company and the transaction would be covered u/s. 40A(2)(b) of the Act. However in the absence of details of the area of the premises, the AO could not compare the rent with the market rate and allowed only 50% of the rental expenditure on estimated basis and thus disallowed Rs.36,00,000/-. The Ld. AR drew our attention to Section 40A of the Act (the relevant extract) is reproduced as follows::
"(1) . ……
2(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. " b) The person referred to in clause a) would be the following, namely: i. . …. ii. Where the assessee is a company, firm, association of persons or Hindu Undivided Family- any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member"
Thus, according to Ld. AR, for an amount to be disallowed under this section, following conditions have to be fulfilled:
a) The payment is in respect of expenditure; b) The payment has been made to a specified person (i.e., relative or close associates of the assessee) in respect of such expenditure; c) The AO is of the opinion that such an expenditure is excessive or unreasonable having regard to: i. The fair market value of the goods, services or facilities for which payment is made; or ii. The legitimate business needs of the assessee's business or profession, or iii. The benefit derived by or accruing to the assessee from the payment. d) The AO has to assess the payment with the market rate and quantify the amount considered by him as excessive or unreasonable.
We note that in this case, the AO asked for the details of the lease and the assessee duly complied with the same along with site plan and from a perusal of the site plan, it reveals the gross area as well as the built-up area which were 4572 sq. ft & 2286 sq. ft, respectively. So, the AO’s observations that in the absence of area details, he was unable to compare the rent with the market rate are wrong and thereby the disallowance on an estimated basis of 50% of the rental expenses cannot be countenanced.
In order to invoke the applicability of sec. 40A(2)(b) is concerned, the Act prescribed that where an assessee incur any expenditure in respect of which payment has been made to any of a person referred therein, then in the opinion of the Assessing Officer such expenditure is excessive or unreasonable, having regard to the fair market value of the goods or services or facilities for which the payment is made, then so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable shall not be allowed as a deduction. On careful readings of the Section, it is worth to mention that before applying the provision it is required that the Assessing Officer should form an opinion having regard to fair market value of the facility rendered. In the present case this exercise is found lacking and we note that the AO did not make any attempt to find from the market to compare the prevalent market rate of the facility given by Smt. Sachi Bhardwaj. The AO has not arrived at an exact figure of disallowance merely on ad-hoc estimate basis, which is an arbitrary exercise of power. Since no comparable instance was cited from the side of Revenue and this primary onus was not discharged, therefore in the totality of the circumstances discussed above warrants upholding the view of the Ld. CIT(A). We confirm the Ld. CIT(A)’s order and dismiss the ground of appeal of revenue.
25. Ground no. 5 of the revenue’s appeal is against the action of the Ld. CIT(A) in allowing the brought forward depreciation loss claimed by the assessee for AY 1997-98 of Rs.4,78,987/-.
Brief facts of the case are that the AO disallowed the set off for brought forward depreciation loss for AY 1997-98 of Rs.4,78,987/- on the ground that as per the applicable provisions of Act during AY 1997-98, the brought forward depreciation loss was permitted to be carried forward for 8 years only i. e. till AY 2005-06. Hence, assessee’s claim for adjustment of brought forward depreciation loss in the current year i.e. 2006-07 was disallowed by AO. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who decided this ground in favour of the assessee by observing as under:
“I have gone through the submission of the assessee and the assessment order. This issue has been decided by Hon’ble Gujarat High Court in the case of General Motors (supra). Following the decision, other benches of ITAT have also rendered decision in favour of the assessee. In view of this the ground is decided in favour of the assessee.” Aggrieved by the aforesaid action of the Ld. CIT(A) the revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We have also gone through the decision of the Hon'ble Gujarat High Court in the case of General Motors India Pvt. Vs. DCIT, dated 23.8.2012 in Special Civil Application No. 1773 of 2012 wherein their Lordships have stated that the amendment made by Finance (No. 1) Act was clarified by CBDT vide circular No.14 of 2001 which said that the said amendment is applicable from assessment year 2002-03 and subsequent years and that unabsorbed depreciation available to an assessee on first day of April 2002 (assessment year 2002-03), will be dealt with in accordance with the provisions of section 32(2) of the Act as amended by Finance (No.0l) Act, 2001 and not by provisions of section 32(2) as it stood before the said amendment. Their Lordships have stated that had the intention of the legislature being to allow unabsorbed depreciation allowance worked out in assessment year 1997-98 only for 8 subsequent assessment years even after the amendment to section 32(2) by Finance (No.1) Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Their Lordships have held that the provisions of section 32(2) as amended by Finance (No.1) Act, 2001 would allow the unabsorbed depreciation allowance available in the assessment years 1997-98, 1999- 2000, 2000-01 and 2001-02 to be carried forward to the succeeding years and if any unabsorbed depreciation or part thereof could not set off till the assessment year 2002-03, then it would be carried forward till the time it is set off against the profits and gains of subsequent years without any limit whatsoever. In view of above decision of the Hon'ble Gujarat High Court and also considering the decision of ITAT, Mumbai Bench in the case of Arch Fine Chemicals Pvt. Ltd. Vs. ACIT (ITA Nos. 2414 & 2415 of AY 2005-06 & 2006-07), we hold that Ld. CIT(A) was justified in allowing set off of unabsorbed depreciation for the assessment year 1997-98 against the profit for the assessment year 2006-07.
Ground no. 6 of revenue’s appeal is against the action of Ld. CIT(A) in deleting the disallowance u/s. 40(a)(ia) of the Act for interest payment.
Briefly stated facts are that according to AO, for delayed payment of the electricity bills, the assessee incurred an expenditure of Rs.7,78,825/- which was booked under the head ‘Interest Others’. The AO held that such payments were subjected to TDS and as TDS was not deducted, the payment was disallowed u/s. 40(a)(ia) of the Act. During the assessment proceedings, the assessee explained that such expenditures were incurred due to late payment of electricity bills and, therefore, the payments were not in the nature of interest. However, according to assessee, the payments were wrongly booked under the head ‘Interest Others’. The AO did not accept the assessee’s contention and disallowed the payment. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who after going through the detailed submission of the assessee and appreciating the fact that the interest payment was not really interest payment but the late payment charges of the electricity bill held that the assessee was not liable to deduct TDS on this amount. Hence, the disallowance of Rs.7,48,825/- was deleted by the Ld. CIT(A). Aggrieved, revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee’s electricity supply was connected to the grid of Rajasthan State Electricity Board (name changed to Ajmer Vidyut Vitran Nigam Ltd). As per the terms and conditions, the supplier will raise the bill at quarterly intervals which shall be paid by the assessee as per the due date mentioned thereon. However if there are delay in payment, the assessee shall be liable to pay (‘Late Payment Surcharge’ (LPS) along with the next bill. According to assessee due to delayed receipt of bills, the assessee could not pay the bills within the stipulated time and paid the (‘Late Payment Surcharge)’. To substantiate the nature of payment, the assessee filed few bill copies from which it is discernable that the Electricity Board had charged the 'Late Payment Surcharge' and not interest. Thus this payment was of surcharge and not interest per se. It was brought to our notice that the accountant of the company wrongly booked the expenditure as “Interest Others”. However, the payment was made towards late surcharge. Such late surcharge cannot be held to be interest liable for TDS deduction. Mere classification in the accounts or recording entries in the books cannot determine the true nature of transaction. The Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 held:
Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter ....
The provisions of Sec. 40(a)(ia) of the Act only applies where the assessee was liable to deduct tax and failed to deduct or deposit the tax. In the case of the assessee, the payment being in the nature of late surcharge, the same was not covered under the TDS provisions of Act and accordingly no disallowance can be made u/s. 40(a)(ia) of the Act. Without prejudice to the above submission and as an alternative, the assessee also submitted that in the light of the recent amendments of TDS provisions and judicial rulings thereon the issue can be sent for verification to AO:
We note that the Finance Act 2012 made an amendment of section 201 & 40(a)(ia) of the Act. In accordance with this amendment, the payer assessee would not be deemed to be in default if the recipient of income, has taken into account the amount received from the payer in computing income as declared in the return and has paid due tax on the returned income. We note that the Tribunal has held that the insertion of second proviso to sec. 40(a)(ia) of the Act is curative and it has retrospective effect w.e.f. 1st April, 2005, being a date from which Sec. 40(a)(ia) of the Act was inserted by the Finance (No. 2) Act, 2004. In view of this, we are of the view that matter needs fresh adjudication in the light of the fact that the AO will carry out necessary verification. In CIT v. Ansal Land Mark Township Pvt. Limited [ITA 160/2015 & 161/2015, dated 26/08/2015], High the Hon'ble Delhi High Court held that the 2nd proviso to section 40(a)(ia) has retrospective effect from 01/04/2005:
“14. The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance.
15. In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Bench, ITAT in Rajiv Kumar Agarwal v. ACIT." The assessee made payment to Ajmer Vidyut Vitran Nigam Ltd, which is a State Government Undertaking. Considering the judicial decisions as cited above, we set aside the impugned order of Ld CIT(A) and remand the issue back to AO and the AO is directed to verify the fact regarding the payment of the tax by the recipient and if the AO finds that the recipient has included the amount in the total income in its return of income and paid taxes thereon, then the disallowance made by the AO by invoking the provisions of section 40(a)(ia) of the Act be deleted. We confirm the order of Ld. CIT(A) and dismiss this ground of appeal of revenue. For the aforesaid decision of ourselves, we rely on the decision of the Hon’ble Calcutta High Court in the case of Pr. CIT Vs. M/s. Tirupati Construction in GA 2146 of 2016 in ITAT No.287 of 2016 passed on 23.08.2016.
33. Ground no. 7 of Revenue’s appeal is general in nature so dismissed.
In the result, the appeal of assessee is partly allowed and appeal of revenue is allowed for statistical purpose.
Order is pronounced in the open court on 11th April, 2019