THE COMMISSIONER OF INCOME TAX vs. M/S BHARAT FRITZ WERNER LTD

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 9TH DAY OF FEBRUARY 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE NATARAJ RANGASWAMY I.T.A. NO.266 OF 2013 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX

C.R. BUILDING, QUEENS ROAD

BANGALORE. 2. THE JT. COMMISSIONER OF INCOME-TAX (OSD)

CIRCLE-11(2), RASHTROTHANA BHAVAN

NRUPATHUNGA ROAD, BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: M/S. BHARAT FRITZ WERNER LTD., OFF: TUMUKUR ROAD YESHWANTHPUR P.O. BANGALORE-560022. ... RESPONDENT (BY SRI. T. SURYANARAYANA, ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 21.12.2012 PASSED IN ITA NO.1185/BANG/2011 AND 1123/BANG/2011 FOR THE ASSESSMENT YEAR 2008-09, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO.1185/BANG/2011

2 AND 1123/BANG/2011 DATED 21.12.2012 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(2), BANGALORE AND SET ASIDE ORDER IN ITA NO.1123/BANG/2011 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSESSING OFFICER, BANGALORE. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the revenue. The subject matter of the appeal pertains to the Assessment Year 2008-09. The appeal was admitted by a Bench of this Court vide order dated 24.03.2014 on the following substantial questions of law: "(i) Whether the Tribunal was correct in holding that the write off of expenditure on purchase of tools has to be allowed as revenue expenditure, when the expenditure was towards purchase of tools constituting capital and recorded a perverse finding?

3 (ii) Whether the Tribunal was correct in holding that there is no nexus between the interest bearing funds and the interest free advances, the presumption to be drawn is that the advances are out of non-interest bearing funds without taking into consideration that the assessee is paying huge financial charges on the loan borrowals and recorded a perverse finding? (iii) Whether the Tribunal on the facts and circumstances of the case was correct in directing the Assessing Officer to allow the salaries as an allowable expenditure without appreciating the fact that the salaries to the employees are towards R & D for creating own design and therefore it is not in the nature of revenue expenses? (iv) Whether the Appellate Authorities were correct in holding that the deposit of property tax amounts to crystallized liability without appreciating the difference between the taxes actually paid under Section 43B of the Act and

4 taxes deposited as per the directions of the Court, when the liability to tax is disputed by the assessee and recorded a perverse finding?". 2. Facts leading to filing of this appeal briefly stated are that the assessee is a company which is engaged in the business of manufacture and sale of machine tools. For the Assessment Year 2008-09, the assessee filed its return of income declaring the income of Rs.27,56,74,120/-. The return was selected for scrutiny and Assessing Officer, by an order dated 10.12.2010 inter alia disallowed the claims made by the assessee with regard to the write off of expenditure relating to loose tools, disallowance of interest on the loans given to sister concerns, disallowance of expenditure debited under the head 'design charges' and disallowance of expenditure claimed under Section 43B of the Act. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals), who

5 by an order dated 10.12.2010, allowed the expenditure as claimed by the assessee under Section 43B of the Act and partly allowed the appeal. Being aggrieved by the aforesaid order, the assessee as well as the revenue preferred the appeals before the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). The Tribunal, by an order dated 21.12.2012, partly allowed the appeal preferred by the assessee and dismissed the appeal preferred by the revenue. In the aforesaid factual background, the revenue has preferred this appeal. 3. Learned counsel for the revenue submitted that the assessee had failed to establish that tools which were purchased by it were used in the activity of manufacture and therefore, the Assessing Officer had rightly disallowed the claim. However, the Tribunal has allowed the claim of the assessee with regard to write off of expenditure relating to loose tools only on the

6 ground that it is not revenue in nature but is capital in nature which is factually incorrect as it is not the reason recorded by the Assessing Officer. It is further submitted that the burden was on the assessee to prove that the amount was expended for the business which the assessee in the facts of the case, has failed to discharge. Learned counsel for the revenue has further submitted that the burden is on the assessee to prove the fact that the interest free loan which was given to the sister concerns was from the assessee's own funds. However, the assessee has failed to discharge the aforesaid burden and the aforesaid aspect of the matter has not been appreciated by the Tribunal. It is also urged that the salaries were paid by the assessee to its employees who were involved in research and development and therefore, the commercial rights were acquired by the assessee and the amount of salaries which were paid to its employees towards research and development activities was for the purpose of acquiring

7 the intangible asset and therefore, the same was rightly treated as capital in nature by the Assessing Officer. However, the Tribunal, without assigning any reasons, has held that the salaries of the employees of the assessee engaged in research and development are revenue in nature. It is also submitted that the purpose of expenditure has to be looked into and purpose of payment of money was to clear an intangible asset and any expenditure incurred for intangible asset is capital in nature. 4. It is also urged that the benefit of deduction under Section 43B of the Act is available to an assessee on actual payment. In this connection, our attention has been invited to paragraph 8 of the order passed by the Assessing Officer as well as paragraph 29 of the order passed by the Tribunal. It is submitted that the Tribunal ought to have appreciated that the liability in the instant case is not crystalised as the assessee itself

8 was disputing the liability. It is further submitted that the amount of Rs.37,50,000/- which was deposited by the assessee, was subject to decisions of this Court and an amount would crystalise when the litigation ends and the payment is made. In support of aforesaid submission, reliance has been placed on the decisions of the 'BHARATH BEEDI WORKS (P) LTD. Vs. ADDITIONAL COMMISSIONER OF INCOME-TAX, RANGE-2, MANGALORE' (2016) 74 TAXMANN.COM 95 (KAR), 'CHALLAPALLI SUGARS LTD. Vs. COMMISSIONER OF INCOME-TAX' (1975) 98 ITR 167 (SC), 'TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. Vs. COMMISSIONER OF INCOME-TAX' (1997) 93 TAXMAN 502 (SC), 'COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE, BANGALORE Vs. L.SAMBASHIVA REDDY' (2015) 62 TAXMANN.COM 174 (KAR) AND 'COMMISSIONER OF INCOME-TAX-II Vs. MODIPON LTD.' (2017) 87 TAXMANN.COM 275 (SC).

9 5. On the other hand, learned counsel for the assessee submitted that the revenue did not dispute the expenditure incurred by the assessee and the claim of the assessee for deduction was not under Section 32 and therefore, it was not necessary for the assessee to prove that the tools which were purchased by the assessee were used in the manufacturing activity. It is further submitted that the claim for deduction of the assessee was under Section 32 and the assessee had proved that it had expended the amount for the purpose of business which fact was not disputed by the revenue. Our attention has also been invited to paragraph 11 of the order of the Tribunal where the submission of the assessee has been recorded that the assessee had furnished the CD containing the details at the time of hearing to the Assessing Officer. It is also submitted that for the past 14 years, the claim of the assessee for write off of expenditure relating to tools was followed

10 with consistency and therefore, bearing in mind the principle of consistency, the same ought to have been allowed for the relevant Assessment Year in question. It is further submitted that whether the assessee is able to establish that it has its own funds and interest free loans are given to the sister concerns, then the burden shifts on the revenue to show that advances were given from the borrowed funds. In this connection, our attention has been invited to ground 3(ii) of the grounds taken before the Commissioner and it has been pointed out that the assessee has its own funds to the tune of Rs.125 crores whereas it had advanced only a sum of Rs.64,00,000/- as advances to interest free loans to its sister concerns. It is also pointed out that similar submissions were made before the Tribunal which is recorded in paragraph 16 of the order and the aforesaid fact was not disputed by the departmental representative before the Tribunal. It is also pointed out that in case the assessee has its own funds, the legal

11 presumption arises that the assessee has advanced interest free loans to its sister concerns from its own funds and therefore, the question of discharging the onus does not arise. It is further submitted that the nature of expenditure has to be determined in order to decide whether the same is revenue or capital in nature. In this connection, our attention has been invited to paragraph 22.1 of the memorandum of appeal which was filed before the Commissioner of Income Tax (Appeals) in which it is pointed out that a sum of Rs.1,31,05,337/- was paid by the assessee on account of salaries due to the employees and only a sum of Rs.40,00,000/- was paid to a Singapore Company which was its subsidiary concern. 6. While referring to the third substantial question of law, it is pointed out that the revenue has only questioned the claim of the assessee in respect of an amount of Rs.1,31,05,337/- and not on account of

12 procuring the design for an extent of Rs.61,00,000/- while making a reference to paragraph 19a and 22 of the order passed by the Tribunal. It is contended that the matter has been remitted to the Assessing Officer to verify the claim of the assessee and thereafter, to decide the entitlement of the assessee to claim deduction. It is also urged that the judgments with regard to third substantial question of law relied on by the revenue do not apply to the fact situation of the case as the aforesaid judgment relate to prior legal expenses whereas the assessee has incurred the expenses after the business commenced. It is contended that the assessee adopted the merchantile system of accounting and expenditure is incurred and then subsequently, it is crystalised. It is further submitted that the dispute in the instant case, is not with regard to liability of the assessee but quantification of the amount. It is further submitted that the assessee is entitled to deduction under Section 43B of the Act as the amount which is

13 deposited is in the nature of the tax and the liability is crystalised as soon as the Bruhat Bengaluru Mahanagara Palike had issued the notice but the amount has not been ascertained. In this connection, our attention has been invited to paragraphs 16 and 19 of the order passed by the Commissioner of Income Tax (Appeals) and the Tribunal. In support of aforesaid submission, reliance has been placed on the decisions of the 'COMMISIONER OF INCOME-TAX, LUDHIANA Vs. METALMAN AUTO (P) LTD.' (2011) 11 TAXMANN.COM 51 (PUNJAB & HARYANA), 'RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX' (1992) 60 TAXMAN 248 (SC), 'THE COMMISSIONER OF INCOME TAX & ANR. Vs. M/s. BRIGADE ENTERPRISES LTD.' IN ITA NO.373/2014 DECIDED ON 22.10.2020, 'COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, BANGALORE Vs. BRINDAVAN BEVERAGES (P) LTD.' (2017) 88 TAXMANN.COM 477 (KAR), 'HINDUSTAN

14 AERONAUTICS LIMITED Vs. ASSISTANT COMMISSIONER OF INCOME TAX & ANR.' IN ITA NO.404/2016 C/W ITA NO.468/2016 DECIDED ON 09.12.2020, 'BHARAT EARTH MOVERS Vs. COMMISSIONER OF INCOME-TAX' (2000) 112 TAXMAN 61 (SC), 'KEDARNATH JUTE MFG. CO. LTD. Vs. COMMISSIONER OF INCOME-TAX (CENTRAL), CALCUTTA' (1971) 82 ITR 363 (SC) AND 'COMMISSIONER OF INCOME-TAX Vs. MODIPON LTD. & ANR. (2018) 400 ITR 1 (SC). 6. We have considered the submissions made on both sides and have perused the record. We may proceed to deal with the substantial questions of law ad seriatum. So far as the claim of the assessee for write off of expenditure relating to loose tools, the Assessing Officer has disallowed the claim for expenditure of the assessee amounting to Rs.4,41,08,588/- on the ground that despite opportunity being given, the assessee has failed to produce the complete details of the materials

15 received including inventory of materials, date, time and delivery of the loose tools. The assessee company has also failed to produce the material receipt register. Though it has been contended by the assessee before the tribunal as recorded in para11 of the order passed by the tribunal that assessee had produced the C.D. containing the details as requested by the Assessing Officer at the time of hearing. However, the tribunal has not recorded any finding with regard to aforesaid contention of the assessee and in para 14 has recorded the finding in favour of the assessee. In view of the reasoning assigned by the Assessing Officer in his order for disallowing the claim and in view of the assertion made by the assessee that it had furnished the details, the tribunal ought to have ascertained whether or not the assessee had furnished the details as contended by him. Therefore, in our opinion the matter requires adjudication afresh by the tribunal so far as first

16 substantial question of law is concerned. Therefore, the first substantial question of law is answered accordingly. 7. So far as second substantial question of law is concerned, the Assessing Officer in his order has held that the assessee has given interest free loan to two of its subsidiaries company and the aforesaid amount was paid from the borrowed funds. The assessee once again has contended before the Commissioner of Income Tax (Appeals) as is evident from para 3(ii) of the order passed by the tribunal that the assessee's own funds were Rs.124 Crores whereas, the loan advanced is to the tune of Rs.64 Crores. However, in this regard also, we find that the tribunal has not recorded the any finding whether or not the interest free loans were given from the borrowed funds or from the assessee's own funds. Therefore, the aforesaid issue also requires adjudication afresh by the tribunal. Accordingly, the second substantial question of law is answered.

17 8. So far as third substantial question of law is concerned, the tribunal has directed the Assessing Officer to verify the claim of the assessee whether an amount of Rs.1,31,05,337/- towards salaries is paid to the employees and if it is found to be correct, the same has to be allowed. Therefore, in view of the order of remand, the substantial question of law as framed by this court in fact, does not arise for consideration at this stage. 9. So far as last substantial question of law is concerned, from perusal of Section 43B of the Act provides that any sum payable by way of tax, duty, cess or fee shall be allowed in the year in which it is actually paid. It is not in dispute that on account of directions issued by the court, the assessee paid a sum of Rs.87,50,000/- towards property tax. Therefore, the assessee is entitled to deduction to the extent of property tax which was paid by it. The Commissioner of Income Tax (Appeals) appeal as well as the tribunal

18 have rightly held that the liability was certain and has rightly deleted the disallowance. Reference in this connection may be made to decision of the Supreme Court in BHARAT EARTH MOVERS supra. Therefore, the fourth substantial question of law is answered against the revenue and in favour of the assessee. In view of preceding analysis, the order of the tribunal dated 21.12.2012 insofar as it contains findings with regard to substantial questions of law 1 and 2 is hereby quashed and the matter is remitted to the tribunal to decide the aforesaid issues arising from substantial question of law No.1 and 2 afresh. Needless to sate that it will be open for the parties to raise all such contentions, which are admissible to them under the law.

19 In the result, appeal is disposed of. Sd/- JUDGE Sd/- JUDGE RV/ss