DCIT CIRCLE 1 , TIRUNELVELI vs. RMKV FABRICS PVT. LTD. , TIRUNELVELI

आयकर अपील�य अ�धकरण, ‘सी’ �यायपीठ, चे�नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH: CHENNAI �ी इंटूर� रामा राव, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER Q आयकर अपील सं./ITA No.1621/Chny/2017 �नधा�रण वष� /Assessment Year: 2012-13 Dy. Commissioner of Income Tax, M/s. RMKV Silks Pvt. Ltd., Circle-1, Vs. 176F, Trivandrum Road, Tirunelveli. Tirunelveli – 627 003. [PAN: AAFCR 4024B] आयकर अपील सं./ITA No.1593/Chny/2017 & Cross appeal by Revenue in ITA No.1622/Chny/2017 �नधा�रण वष� /Assessment Year: 2013-14 M/s. RMKV Silks Pvt. Ltd., Vs. Dy. Commissioner of Income 176F, Trivandrum Road, Tax, Tirunelveli – 627 003. Circle-1, Tirunelveli. [PAN: AAFCR 4024B] आयकर अपील सं./ITA No.613/Chny/2018 Cross appeal by Revenue in ITA No.759/Chny/2018 �नधा�रण वष� /Assessment Year: 2014-15 M/s. RMKV Silks Pvt. Ltd., Vs. Asst. Commissioner of Income 176F, Trivandrum Road, Tax, Tirunelveli – 627 003. Circle-1, [PAN: AAFCR 4024B] Tirunelveli.

आयकर अपील सं./ITA Nos.1625 & 1626/Chny/2017 & ITA No.761/Chny/2018 �नधा�रण वष� /Assessment Years: 2012-13, 2013-14 & 2014-15 Dy. Commissioner of Income Tax, Vs. M/s. RMKV Fashion Garments Circle-1, Pvt. Ltd., 176, Trivandrum Road, Tirunelveli. Tirunelveli – 627 003. [PAN: AAFCR 4023G]

:- 2 -: आयकर अपील सं./ITA No.1623/Chny/2017 �नधा�रण वष� /Assessment Year: 2012-13 Dy. Commissioner of Income Tax, M/s. RMKV Fabrics Pvt. Ltd., Circle-1, 176F, Trivandrum Road, Tirunelveli. Tirunelveli – 627 003. [PAN: AAFCR 4022H]

आयकर अपील सं./ITA No.1594/Chny/2017 Cross appeal by Revenue in ITA No.1624/Chny/2017 �नधा�रण वष� /Assessment Year: 2013-14 M/s. RMKV Fabrics Pvt. Ltd., Dy. Commissioner of Income 176F, Trivandrum Road, Vs. Tax, Tirunelveli – 627 003. Circle-1, [PAN: AAFCR 4022H] Tirunelveli. आयकर अपील सं./ITA No.614/Chny/2018 Cross appeal by Revenue in ITA No.760/Chny/2018 �नधा�रण वष� /Assessment Year: 2014-15 M/s. RMKV Fabrics Pvt. Ltd., Dy. Commissioner of Income 176F, Trivandrum Road, Tax, Tirunelveli – 627 003. Vs. Circle-1, [PAN: AAFCR 4022H] Tirunelveli.

(अपीलाथ�/Appellant) (��यथ�/Respondent)

: Shri R.Vijayaraghavan, Advocate अपीलाथ� क� ओर से/ Assessee by : Shri Sailendra Mamidi, Pr. CIT ��यथ� क� ओर से /Revenue by : 12.02.2019 सुनवाई क� तार�ख/Date of Hearing : 30.04.2019 घोषणा क� तार�ख /Date of pronouncement आदेश / O R D E R PER BENCH: Revenue’s appeal in RMKV Silks Pvt. Ltd bearing ITA No.1621/Chny/2017 for AY 2012-13: This is an appeal filed by the Revenue directed against the order of the learned Commissioner of Income Tax (Appeals)-3, Madurai

:- 3 -:

(hereinafter called as ‘CIT(A)’) dated 10.03.2017 for the assessment year

(AY) 2012-13.

“1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 2,87,25,000/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of section 47(xiii) of the I.T. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 52,85,248/- made on interest attributable to the portion of amount standing to the credit of Directors of the assessee company on account of revaluation of Goodwill. 3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of interest for the utilization of the above and hence ought to have sustained the addition made by the A.O. on account of disallowance of interest. 4. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the A.O restored.”

The respondent-assessee namely RMKV Silks Pvt. Ltd. is a private

limited company incorporated under the provisions of Companies Act,

:- 4 -: 1956. It is engaged in the business of wholesale trading in cloth. The

return of income for the assessment year 2012-13 was filed on

22.05.2013 disclosing total loss of Rs.1,42,72,518/-. Against the said

return of income, the assessment was completed by the Dy. CIT, Circle-

1, Tirunelveli (hereinafter called as “AO") vide order dated 30.03.2015

passed u/s. 143(3) of the Act at total income of Rs. 7,47,30,990/-. While

doing so, the AO made the following disallowances:

3.1 The brief facts leading to the above additions are set out by

Assessing Officer in the assessment order. As regards to the addition on

account of under valuation of closing stock on 31.03.2012, it is clear from

the para 3 of the assessment order that the addition was made based on

the concession made by the assessee before Assessing Officer.

3.2 The relevant facts relevant to the disallowance of claim of depreciation on goodwill of Rs. 2,87,25,000/- are as under:

The respondent-assessee company had taken over the business of

the firm namely RMKV Silks as a going concern in terms of the business

transfer agreement dated 08.01.2012. It is claimed by the seller firm that

:- 5 -: the transaction of take over the business falls within the ambit and scope

of provisions of s. 47(xiii) of the Act as:

3.3. The Assessing Officer was of the opinion that the goodwill created

in the books of the firm seller does not involve any cost and therefore,

the actual cost in the hands of the seller firm is nil and therefore, even in

the hands of the successor company the actual cost continuous to be nil

and therefore, not eligible for any depreciation. Furthermore, the

Assessing Officer also doubted the existence of any knowhow of Rs.

19,15,00,000/- as the firm seller is only retail trader of textiles and the

question of creation of knowhow does not arise. Accordingly, the

Assessing Officer denied the claim of depreciation on knowhow of

Rs.19,15,00,000/- and goodwill of Rs. 3,83,00,000/-.

:- 6 -: 3.4. The relevant facts of the disallowance of claim on interest paid to directors are as under:

It is stated before Assessing Officer that the seller firm valued the

goodwill supported by the report of independent CA in the books of

accounts. The goodwill is created by crediting to the partner’s account.

The successor company had also acquired credit balance of partners of

erstwhile firm standing in the books of accounts of the seller firm. The

successor company i.e., the respondent-assessee before us is paying

the interest on such credit balances partners of the seller firm and the

same was claimed as deduction while computing the income under

business of the successor company i.e., the respondent-assessee before

us. The Assessing Officer is of the opinion that mere book entries do not

create any liability and therefore, disallowed claim for allowance of the

interest on the credit balance created by book entries, as it does not

partakes the character of borrowed funds.

3.5 The Assessing Officer made addition of Rs 2,18,67,225/- being the

rent paid to the respondent-assessee company by M/s. RMKV Fabrics

Pvt. Ltd. since, the same was not offered to tax.

3.6 Being aggrieved by the above additions, an appeal was preferred

before ld. CIT(A), who vide impugned order allowed the claim of

depreciation on goodwill and knowhow and also claim of interest of

:- 7 -: expenditure, the ground relating to the addition of closing stock was not

pressed during the course of hearing of appeal. Being aggrieved by the

decision ld. CIT(A), the Revenue is in appeal before us in the present

appeal.

3.7 The ld. CIT-DR vehemently submitted that the ld. CIT(A) ought not

have allowed depreciation on goodwill, inasmuch as, there was no cost

involved in the acquisition of goodwill since, the goodwill is created by

passing book entries. He also placed reliance on the decision of Co-

ordinate Bench of the Tribunal, Mumbai in the case of DCIT vs. Toyo

Engineering India Ltd. [2013] 33 taxmann.com 560 (Mumbai-Trib.). As

regards to, the claim for allowance of interest expenditure of Rs.

52,85,248/-, it is submitted that the same represents only book entries

does not involve any actual flow of funds but based on the fictitious

entries.

3.8 On the other hand, the ld. Counsel submitted that the goodwill

knowhow acquired from the firm are intangible assets eligible for

depreciation. The deeming provisions of s. 47 & 49 of the Act governing

the cost of acquisition for the purpose of computation of capital gains are

not applicable for the purpose of determining the actual cost of an asset

for allowability of depreciation u/s. 32 of the Act. It is further submitted

that the goodwill was purchased by the respondent-assessee company

:- 8 -: from the erstwhile firm and therefore, the depreciation on goodwill,

knowhow is allowable placing reliance on the following decisions:

CIT v. Smifs Securities 348 ITR 302 (SC) Hindustan Coca cola Beverages 331 ITR 192 (Del) B.Raveendran Pillai v. CIT 332 ITR 531(Ker.) Areva T&D 345 ITR 421 (Del.) Triune Energy Services P. Ltd. v. DCIT 237 Taxman 230 (Del.) Chowgule & Company P. Ltd. v. Addl. CIT 2016-TIOL-244HC-Mum-IT CLC & Sons Pvt. Ltd. v. ACIT (ITAT Delhi) (Spl. Bench)

3.9 It was further submitted that the explanations 1 to 8 to s. 43(1) of

the Act deeming the value of cost of acquisition of assets under such

circumstances are not applicable in case of acquisition of assets taken

over by a transfer under the provisions of s. 47(xiii) of the Act. It is

further submitted that even the provisions of s. 43(6) of the Act, which

provides that WDV of depreciable assets of the transfer of the company

shall be the WDV of the assets in the hands of transferee company are

not applicable, as it is not a case of slump sale.

3.10 As regards the claim for allowance of interest on the credit

balances of the partners of the erstwhile firm, it is submitted that the

liabilities are incurred in acquiring goodwill and knowhow, which are the

assets in the hands of firm and the interest is payable on these liabilities

cannot be disallowed. It is further submitted that the interest on amounts

standing to the credit of the accounts of partners on revaluation of assets

is eligible for deduction placing reliance on the decision of Co-ordinate

:- 9 -: Bench of the Tribunal, Chandigarh (SMC) in the case of ACIT v. Sant

Shoe Store in ITA No.141/Chd/1999 dated 25.09.2003.

record. The respondent-assessee company namely M/s. RMKV Silks

Pvt. Ltd. had taken over the business of the firm M/s. RMKV Silks as on

07.01.2012 in terms of business take over agreement entered into.

Before the takeover of the business of the firm by the respondent-

assessee company, the firm had created goodwill, business knowhow of Rs. 3,83,00,000/- and Rs. 19,15,00,000/- respectively in the books of

accounts by debiting the goodwill and knowhow and crediting to the

partner’s account. The firm had not claimed depreciation on this goodwill

and knowhow being self generated assets. The respondent-assessee

had taken over all the assets and liabilities of the firm including the

goodwill and knowhow. The credit balances standing to the credit of the

partners account on account of revaluation of assets were also shown as

liabilities in the hands of the respondent-assessee company. The

respondent-assessee made a claim for the depreciation on the goodwill

and business knowhow claiming to be intangible assets, eligible for

depreciation and also claimed deduction of interest paid on the credit

balances of the partners of the firm.

:- 10 -: 4.1 The Assessing Officer denied both the depreciation on the goodwill

and knowhow as well as interest expenditure claimed on the partner’s

credit balances standing in the books of accounts of the company as

liabilities. The reasons given by the Assessing Officer while denying the

depreciation claim on the goodwill is that there is no cost in the hands of

previous owner and therefore, placing reliance on the provisions of s.

49(1) of the Act held that even in the hands of the successor company

i.e., respondent-assessee before us no cost was involved and therefore,

denied the depreciation. As regards to the disallowance of claim for

allowance of interest expenditure on the partners credit balances

standing as liabilities in the books of the firm, the Assessing Officer is of

the opinion that mere book entries do not create enforceable liability and

disallowed the claim.

4.2 On appeal before the ld. CIT(A), he allowed both the claims

accepting the contention of the appellant that goodwill is acquired by the

assessee by paying consideration to the firm, the credit balances

standing to the credit of partners account constitutes a liability in the

hands of the firm. Accordingly, we held that interest liability on such

balances is allowable as deduction.

require any adjudication.

:- 11 -:

5.1 Now, we shall deal with each of the issues. Ground of appeal No.2

challenges the decision of ld. CIT(A) allowing the depreciation goodwill,

know-how. As regards, depreciation on goodwill, there is no quarrel on

the legal proposition that the goodwill, know-how being intangible assets

are eligible for depreciation. But, the depreciation is always allowed with

reference to the actual cost incurred by the assessee. Therefore, the

question that arises for determination is what is the actual cost in the

hands of the respondent-assessee company. The provisions of s. 32 of

the Act lays down that the depreciation shall be allowed to the assessee

on the actual cost of the asset. The term “actual cost” is defined under

the provisions of s. 43(1) of the Act. The expression actual cost had

come-up for interpretation before Hon’ble High Court of Delhi in the case

of CIT V. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510 (Del.), wherein

the Hon’ble High Court of Delhi observed as follows:

“The term "actual cost" has been defined in section 43 of the 1961 Act, to mean the actual cost of the asset to the assessee reduced by that portion of the cost thereof, if any, as had been met directly or indirectly by any other person or authority. According to the revenue, the Legislature has not without purpose laid emphasis on the actuality of the cost aspect. Had it been intended that depreciation and development rebate were permissible on whatever amount that had made the assessee to acquire it, it would have left the matter to be confined to cost aspect only. Instead, when the actuality part has been introduced, it has the implication of the reality or genuineness thereof. Any collusive, inflated or fictitious cost, it had been pleaded, cannot be brought within the scope of the term "actual cost". The object behind this legislation was contended to be to curb the malpractices and tendencies to inflate capital costs for obtaining higher depreciation while not burdening the other with any material tax liability.”

:- 12 -: 5.2 The explanations 1 to 13 to s. 43(1) of the Act provides that under

certain circumstances the cost of acquisition or the WDV in the hands of

the transferor companies shall be the same as the WDV in the hands of

the transferor companies. These explanations were inserted by the

legislature with the intention of curbing the practice of inflating the cost of

asset in order to claim higher depreciation. In the present case,

admittedly there was no cost involved on the acquisition of goodwill,

know-how in the hands of the firm. The goodwill, know-how was merely

created by book entry by debiting the goodwill, know-how and crediting

partners’ accounts. This partners’ account was not treated as a part of

capital accounts of the partners’ of the firm. Therefore, the question that

arises is whether or not the act of creating goodwill, know-how is a

colourable device adopted with the intention of inflating the cost in order

to claim higher depreciation. It is important to note here that the seller

firm as well as the successor company is owned and controlled by very

same persons. No doubt, the respondent-assessee filed a report of

valuation on goodwill, knowhow done by M/s. G.Sekar Associates,

Charted Accountant Chennai, the said report does not contain report of

valuation on goodwill, know-how of M/s. RMKV Silks. In respect of other

concerns, it is not clear on what basis he assumed normal profits and

super profits and the multiplying factors applied to value the goodwill,

know-how he merely discussed the theory and principles governing the

:- 13 -: valuation of goodwill, know-how. Thus, the valuation report is bald cannot

be accepted as the basis of valuation of goodwill, know-how. No

credence can be given to the valuer’s report.

5.3 The next question that needs to be explained is whether or not the

act of creation of goodwill, know-how by debiting to goodwill and know-

how and crediting to the partners’ account is valid under law? It is a

fundamental principle under the Partnership Act that during the

subsistence of the partnership the value of interest of each partner qua

the assets of the firm cannot be isolated or carved out from the value of

the partners’ interest in the totality of the partnership asset. It is only

when a partner retires or the partnership is dissolved what partner

receives is his share in the partnership firm. This principle was explained

by the Hon’ble Supreme Court in the case of Addanki Narayanappa v.

Bhaskara Krishnappa [1966] 03 SCR 400 (SC) as under:

".....Whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing, to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the properly as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub- clauses (i ), (ii) and (iii) of clause (b)of section 48......" (p. 404)

:- 14 -:

The position was elaborated later in the same judgment as follows: "...The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges..."

5.4 This principle was followed again by Hon’ble Supreme Court in the

case of Sunil Siddharthbhai v. CIT [1985] 159 ITR 509 (SC) in the

context of applicability of provisions of capital gains on the transfer of

personal asset of the partner to the partnership firm as a capital

contribution after referring to the judgment of Hon’ble Supreme Court in

the case of Addanki Narayanappa v. Bhaskara Krishnappa (supra).

5.5 Having regard to the above principle of law, the act of the seller

firm of creation of goodwill, know-how by crediting the partners’ account

is not tenable in law. It is nothing but a colourable device adopted with

intent to avoid the payment of taxes. The Hon’ble Supreme Court in the

case of Mc Dowell Co. Ltd. v. Commercial Tax Officer [1985] 154 ITR

148 (SC) observed as follows:

:- 15 -: “23. Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.”

5.6 Again the Hon’ble Supreme Court in the case of Maddi

Venkataraman & Co. (P.) Ltd. v. CIT [1998] 229 ITR 534 (SC) held that

violation of provision of a statute is not a necessary ingredient of carrying

on the business by observing as under:

“13. In the instant case, the assessee had indulged in transactions in violation of the provisions of the FERA. The assessee's plea is that unless it entered into such a transaction, it would have been unable to dispose of the unsold stock of inferior quality of tobacco. In other words, the assessee would have incurred a loss. Spur of loss cannot be a justification for contravention of law. The assessee was engaged in tobacco business. The assessee was expected to carry on the business in accordance with law. If the assessee contravenes the provisions of FERA to cut down its losses or to make larger profits while carrying on the business, it was only to be expected that proceedings will be taken against the assessee for violation of the Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction. As was laid down by Lord Sterndale in the case of Alexander Von Glehn & Co. Ltd. ( supra) that it was not enough that the disbursement was made in the course of trade. It must be for the purpose of the trade. The purpose must be a lawful purpose. Moreover, it will be against public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. In the instant case, if the deductions claimed are allowed, the penal provisions of FERA will become meaningless. It has also to be borne in mind that evasion of law cannot be a trade pursuit. The expenditure in this case cannot, in any way, be allowed as wholly and exclusively laid out for the purpose of assessee's business.” 5.7 In the backdrop of the above legal position and facts, the action of

the Assessing Officer in determining the actual cost at Nil in the hands of

the successor company i.e., respondent-assessee cannot be found fault

with. Merely because, the firm had recorded the value of goodwill, know-

:- 16 -: how at certain price the same would not conclusively establish the

correctness of the claim, if the Assessing Officer is of the opinion that the

transaction is by way of subterfuge or device in order to avoid tax which

the assessee is otherwise liable to pay or that the transaction is illusory

or colourable or that the assessee has acted fraudulently. The material

pointed to be noted is that the partners of the erstwhile firm and the

Members and Directors of the assessee-company are the same. They

adopted the character of the corporate entity for the purpose of availing

inflated depreciation and expenditure and benefiting the Directors in the

form of interest income. Therefore, it is a fit case to disregard the

corporate entity and treat as one entity by lifting the corporate veil. In

this connection, the decision of Hon'ble Supreme Court in the case of

Delhi Development Authority v. Skipper Construction Co. Pvt. Ltd. (SC),

is directly applicable where the Hon'ble Supreme Court is of the view that

if the members and directors of any company commits illegality and

defrauding people by the formation of corporate body then the theory

"Lifting the corporate veil" may be applied. Gist of the decision is as

under :

"The Hon'ble Supreme Court of India reported in 1996 AIR 2005 in the case of DDA Vs Skipper Construction Co Pvt ltd has given verdict on the theory of "Lifting the corporate veil". The Hon'ble Supreme Court has held that in case of corporate bodies created by the individual and his family members for committing illegality and defrauding people, the Court can treat them one entity. The Hon'ble Supreme Court has further held that the concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore the

:- 17 -:

corporate character is employed for the purpose of the committing illegality or for defrauding others, the Court could ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The fact that an individual and members of his family have created several corporate bodies would not prevent the Court from treating all of them as one entity belonging to and controlled by that individual and family if it is found that these corporate bodies are merely cloaks behind which lurks that individual and/or members of his family and that the devise of incorporation was really a ploy adopted for committing illegalities and/or to defraud people." In the instant case M/s M Kantiulal & Co Ltd, the word "Pvt. Ltd" is not mentioned in incorporation certificate. The fact remains that all shareholders and directors belong to a single family and these family members have earned huge unaccounted income of Rs. 259 crores as assessed in the hands of company after taking into account the evidences gathered as a result of search & seizure operation. Evidence gathered during the search & seizure operation further fortifies the idea that this company has been used as a conduit for generating unaccounted wealth. Further, the assessee company has not offered to general public any share for subscription. All the shares are held by directors only." 5.8 In the light of above, the Assessing Officer had rightly exercised his

duty by determining the actual cost of the goodwill, know-how at nil.

5.9 The ld. CIT(A) had not examined the issue in proper perspective,

failed to examine the relevant provisions of the Act finally passed

superficial order allowing claim of the respondent-assessee. Therefore,

we reverse the order of ld. CIT(A) and restore the order of assessment

on this issue.

5.10 In the result, ground of appeal No.2 filed by the Revenue is

allowed.

:- 18 -: 6. Ground of appeal No.3 challenges the direction of ld. CIT(A)

allowing the interest payable on the credit balance standing to the credit

of erstwhile partners of the firm.

6.1 The liabilities in the form of credit balance of partners of the firm

were taken over by the respondent-assessee company in terms of the

business takeover agreement, respondent-assessee is liable to pay

interest on such credit balances and such interest was claimed as

deduction in the hands of the respondent-assessee. As stated supra, the

credit balance to the partners’ account had accrued only on account of

creation of goodwill, know-how by crediting the respective partners

account by way of book entry. We dealt with in the preceding

paragraphs on the propriety, legality of the creation of this book entry,

wherein we felt that the book entry of creating goodwill by crediting the

partners account is illegal and dubious device adopted with intention of

inflating the cost in order to claim higher depreciation. It is fictitious in

nature, inasmuch as, there was no liability in the hands of the firm as

there was no obligation of firm towards the partners to pay on account of

the revaluation of the assets. It is a voluntary act on the part of the firm

to create a liability in the hands of the firm. The word “liability” has been

defined by Advanced Law Lexicon to mean responsibility; the state of

one who is bound in law and justice to do something which may be

enforced by legal action. This liability may arise from contracts, either

:- 19 -: express or implied, or in consequence of torts committed. In the present

case, it cannot be said that there is an obligation on the part of the firm to

create goodwill and credit to the partners account. Furthermore, the

provisions of Indian Partnership Act, 1932 prohibits distribution of assets

of the firm during the subsistence of partnership firm vide the provisions

of s. 53 of the Indian Partnership Act, 1932. As observed by us in the

preceding paragraphs while dealing with the issue of allowability of

depreciation on goodwill, know-how, the act of creation of goodwill,

know-how is dubious device adopted with intent to avoid the taxes.

Furthermore, the partners of the firm are the Directors of the company

though the firm and the company are two distinct legal entities but in

substance one entity only. The provisions of s. 53 of the Partnership Act,

1932 expressly prohibits distribution of assets of firm to the partners. The

Co-ordinate Bench of the Tribunal, Chennai in the case of Kali BMH

Systems Pvt. Ltd. also held that “no partner can, during the subsistence

of a firm, claim credit in respect of increased valuation (of any of the

firm’s assets) to any extent, as no partner can predicate his share in any

of the assets of the firm” and “the withdrawal of ‘capital attributable to a

fixed asset, intended to be retained as part of the capital structure of the

firm, amounts to its monetization by the partners for their personal

purposes, and is clearly impermissible, both from the stand-point of credit

:- 20 -: to the partner’s capital account (on revaluation) and its withdrawal,

considered from any perspective – legal, accountancy, and also tax”.

Having regard to the above position of law in the absence of

enforceable liability, the question of payment interest thereon does not

arise. Further, the Hon’ble Supreme Court in the case of Kedarnath Jute

Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) held that the mere book

entry cannot create enforceable liability by holding as under:

“The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of accounts and, therefore, it was debarred from claiming the same as deduction either under section 10(1) or under section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. 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.”

6.2 The allowance of interest as a deduction is governed by provisions

of s. 36(1)(iii) of the Act, an assessee is entitled to deduction only that

part of the amount paid by him for the money borrowed which can be

genuinely regarded as interest. The interest payable on a loan of money

not any other asset acquired under a contract. Reliance in this regard

can be placed on the decision of Hon’ble Supreme Court in the case of

Bombay Steam Navigation Co. [1953] (P.) Ltd. v. CIT [1965] 56 ITR 52

(SC).

:- 21 -: 6.3 The another important point to be noted is that the assessee firm

had not credited the goodwill, know-how to the capital accounts of the

partner. In other words, it is a device adopted by the respondent-

assessee and as well as respondent-assessee to claim deduction in the

hands of the company and benefit the partners of the erstwhile firm and

who are also the Directors of the assessee firm. It is again another

dubious device adopted with an intention of avoiding the payment of

taxes. In fact, the segregation of the partners’ accounts into capital and

current account is only for operation convenience and it constitutes one

account only namely capital accounts of the partners. By segregating

the capital account, into capital and current account, the seller firm

conveniently avoided payment of capital gains on slump sale transaction

by availing the exemption conferred under the provisions of s. 47(xiii) of

the Act.

6.4 Thus, viewed from any angle the interest paid on the credit balance

of the partners of the seller firm is not allowable as a business deduction.

The ld. CIT(A) had not examined the issue in proper perspective. Hence,

we reverse the findings of ld. CIT(A) and restore the order of

assessment.

6.5 In the result, ground of appeal No.3 filed by the Revenue is

allowed.

:- 22 -: 7. In the result, appeal filed by the Revenue in ITA

No.1621/Chny/2017 for AY 2012-13 is allowed.

RMKV Silks Pvt. Ltd. bearing ITA Nos.1593/Chny/2017 & 1622/Chny/2017 for assessment years 2013-14 (Cross Appeals):

Revenue directed against the order of the learned Commissioner of

Income Tax (Appeals)-3, Madurai (hereinafter called as ‘CIT(A)’) dated

10.03.2017 for the assessment year (AY) 2013-14.

8.1 Since, the identical facts and issues are involved in these appeals,

we proceed to dispose the same vide this common order.

8.2 The brief facts of the case are as under:

The assessee namely RMKV Silks Pvt. Ltd. is a private limited

company incorporated under the provisions of Companies Act, 1956.

The return of income for the Assessment Year 2013-14 was filed on

26.01.2013 disclosing total loss of Rs.5,36,57,185/- and this was revised on 31.03.2015 disclosing at a loss of Rs. 11,22,62,283/-. Against the

said return of income, the assessment was completed by the Asst. CIT,

Circle-1, Tirunelveli (hereinafter called as “AO") vide order dated

31.03.2016 passed u/s. 143(3) of the Act at total income of Rs.

9,78,27,920/-. While doing so, the AO made the following disallowances:

:- 23 -: 36(1) & 37 3. Bonus card Provision disallowed Rs. 5,04,54,574/- 4. Capital expenditure claimed as Rs. 6,49,09,981/- repair 5. Under Valuation of closing stock Rs. 1,56,80,900/-

8.3 Being aggrieved by the above disallowances, an appeal was

preferred before ld. CIT(A), who vide impugned order partly allowed the

appeal by granting relief in respect of addition of disallowance of

deprecation of goodwill and disallowance of interest following his

predecessor’s order for assessment year 2012-13 in assessee’s own

case. The ld. CIT(A) also granted relief in respect of provision for bonus

card unredeemed points liability of Rs. 5,04,54,574/- and disallowance of

repairs incurred on leased premises. However, confirmed the addition on

account of valuation of closing stock.

8.4 Being aggrieved by that part of order of the ld. CIT(A), which is

against the assessee, the assessee filed an appeal in ITA

No.1593/Chny/2017 and the Revenue is in appeal on the grounds which

are allowed in favour of the assessee in ITA No.1622/Chny/2017 for

assessment year 2013-14.

8.5 Now we shall take up the assessee’s appeal in ITA

No.1593/Chny/2017 for assessment year 2013-14.

8.6 The assessee raised the following grounds of appeal: “1. The Order of the Commissioner of Income tax (Appeals) is contrary to law, facts and circumstances of the case.

:- 24 -:

2.1 The CIT (Appeals) erred in confirming the addition made by the assessing officer to the dosing stock.

2.2 The CIT (A) should have appreciated that the valuation of closing stock as arrived at by the appellant has consistently been at cost or realizable price whichever is tower since inception of the company.

2.3 The CIT(A) ought to have appreciated that there was no change in the method of valuation of closing stock viz cost or realizable value whichever is Less, in fact the method of arriving at realizable value was fine tuned to reflect the approximate realizable value of the product, based on the management’s perception and experience.

2.4 The CIT(A) ought to have appreciated that the Assessee is valuing the closing stock on the basis of net realizable value for clothes having in mind the period for which the clothes have not been sold. The valuation of the stock by the assessee based on the experience cannot be rejected without any valid reason.

2.5 The CIT(A) ought to have appreciated that when the management realized that a substantial part of the old stock was lying as on 3jSt March, after a careful study of the realization of the old stocks, calibrated the closing stock valuation to peg the same at realizable value whenever it is estimated to fetch a price lower than the cost.

2.6 The CIT(A) ought to have appreciated that by coincidence the estimate of such realizable value of these stocks amounted to 50% and 25% of the original cost in the second year and third year respectively of their shelf life. When older items forming part of the stock was found in the inventory the same was assigned a token value of Rs.100 in order to ensure control and prevent pilferage.

2.7 The CIT(A) failed to appreciate the fact that the estimates of realizable price arrived at by management, as confirmed by the complete data and the sample provided, is accurate since several sales of such old stocks realized prices below the cost of goods and rejection of the same is justified.

2.8 The CIT(A) ought to have appreciated that valuation of stock will have the consequences of postponing the profit or loss to the year of sate of such stock which is inevitable and unavoidable depending upon whether the sale price realized is more or less than the estimated value of the closing stock.

2.9 The CIT(A) failed to appreciate the fact that according to principles of accountancy and prudent commercial practice, while it would be wise to provide for expected losses it would not be prudent to book unrealized profit.

:- 25 -:

2.10 The CIT(A) ought to have appreciated that the valuation of closing stock as arrived by management is in accordance with the law and hence the same should not be questioned unless such valuation loses objectivity. 2.11 Cit failed to appreciate the fact that the stock of Rs. 42,74,51,548/- as on 31.3.13 ( valued at cost) , stock to the tune of Rs. 2,76,35,983/- more than 4 years old was remaining in stock on 25.3.2016 at the time of assessment which has remote chance of realisability. Hence the CIT is not justified the addition of Rs. 1,56,80,900/- by the assessing officer. 2.12 The CIT(A) failed to appreciate the fact that there is no income escaping assessment since the actual sale value gets captured in the year of actual sate. 2.13 The CIT(A) erred in not following the order of the Tribunal favorable to the assessee in the following cases: i) M/s.RmK.Viswanatha Pillai a Sons in ITA Nos 1784 to 1787/Mds/2014 dt.01 .06.2016 ii) Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.201 6. iii) Rmkv textiles 2.14 The CIT(A) erred in following the order of the Tribunal which has been subsequently distinguished by the co-ordinate Bench. 2.15 The CIT(A) erred in not appreciating when there are two views possible the view favorable to the assessee should be followed [CIT Vs Vegetable Products - 88 ITR 192 (SC)] 3. Appellant craves leave to adduce additional evidence at the time of hearing.” 9. Grounds of appeal No.1 & 3 are general in nature therefore, do not

require any adjudication. Ground of appeal No.2 challenges the addition

of ld. CIT(A) directing the Assessing Officer to delete the addition on

account of under valuation of closing stock.

9.1 During the course of assessment proceedings, the Assessing

Officer disputed the value of the closing stock adopted by the assessee-

:- 26 -: company. The Assessing Officer observed that the assessee-company

valued the closing stock adopting the following methodology:

Ageing pattern of the stock Method of Valuation Items purchased and not sold within a Valued at cost year Items purchased and lying in stock 75% of the cost between 1 and 2 years Items purchased and lying in stock 50% of the cost between 2 and 3 years Items purchased and lying in stock for Notional value of Rs.100/- more than 3 years per unit. 9.2 The Assessing Officer is of the opinion that valuing the stock by

adopting arbitrary percentage of the cost is against the method of

valuation adopted by the assessee himself i.e., cost or realizable value.

The Assessing Officer also had taken note of the certain decisions of the

Tribunal in the group of the assessee-company, wherein the Tribunal had

not accepted such method of valuation. Accordingly, the Assessing

Officer had brought to tax the difference between the cost and estimated

realizable value of Rs. 1,56,80,900/- to tax.

9.3 Being aggrieved by the above addition, an appeal was preferred

before ld. CIT(A), who vide impugned order confirmed the action of the

Assessing Officer following the decision of the Tribunal, Chennai in ITA

No.1097/Mds/2016 dated 08.02.2017.

9.4 Being aggrieved, the assessee is in appeal before us in the present

appeal.

:- 27 -: 9.5 It is submitted before us that since the assessment year 2006-07,

the firm whose business was taken over by the assessee-company has

been valuing the stock at cost of market price whichever is lower. It is

stated that the realizable value of the sarees which were not sold for two

years was valued at 75% of cost, and not been sold for three years at

50% of the cost and if it is not sold for more than three years, the same

was valued at a nominal rate of Rs. 100/-. It is further stated that

subsequently, when the sarees were sold at higher price than the valued

cost, the same was offered to tax u/s. 41(1) of the Act. The assessee-

company had followed the similar methodology of valuing the stock, this

came to be accepted in the first year i.e., assessment year 2012-13 and

therefore, following the principle of consistency the methodology of

valuation should be accepted in the current assessment year also. In this

connection, he placed reliance on the decision of Hon’ble High Court of

Delhi Court in the case of CIT v. Dewan Steels Ltd. [2009] 311 ITR 161

(Del.). The another limb of this argument is that it is always prudent to

provide for the estimated losses and the valuation of obsolete stock at

net realizable price should be accepted by placing reliance on the

decision of Hon’ble High Court of Rajasthan High Court in the case of

CIT v. Wolkem India Ltd. [2009] 315 ITR 211 (Raj.). Finally, it was

submitted that the method of valuation regularly followed should be

accepted even if the change of method has not accepted in the first year

:- 28 -: as long as the method adopted is in accordance with accepted

accounting principles.

On the other hand, the ld. CIT-DR placed reliance on the orders of

lower authorities.

9.6 We heard the rival submission and perused the material on record.

The issue in the present grounds of appeal revolves around in the

valuation of closing stock. It is salutary principle of law that the closing

stock should be valued at the cost of market price, whichever is less. It

is the stated policy of the assessee in the present case that stock is

valued in accordance with this principle. But the crux of the issue lies on

the value to be adopted as a market price or realizable value. The

assessee-company had adopted @75%, 50% and Rs. 100/- per piece as

the case may be as a market price or realizable value of the sarees lying

in the closing stock. There is no dispute as to the quantity involved in the

closing stock. The dispute is only with regard to the value of closing

stock. It is not demonstrated before the lower authorities or before us as

to how the 75%, 50% and Rs. 100/- per piece is the realizable value of

the sarees. There is nothing on record to prove that the stock has

become obsolete and there is no demand for the stock or there are no

buyers for the stock. It is for the assessee to establish that there is no

prospect of sale of goods and there was no demand for the goods and

no buyers at the cost price. There can be 101 reasons as to why the

:- 29 -: stock could not be sold. One of the reasons can be perhaps the price

quoted by the seller is unreasonable from the point of view of the buyer.

Therefore, it can be termed as arbitrary valuation of stock regardless of

cost or market value. The values of opening and closing stock are

essential factor in determining the profits of the year and therefore,

arbitrary valuation cannot be accepted as a method of accounting that

may be adopted by the assessee. The Hon’ble High Court of Allahabad

in the case of Chhaoni Lal Pragdas v. CIT [1957] 31 ITR 597 (All.) held

as follows:

“……………This case, to our mind, does not lay down that even if the items in the stock are valued arbitrarily, and not either at cost or at the market rate prevailing, the mere fact that in the earlier years the Income-tax Officer failed to notice this defect, or to raise any objection would justify an assumption that the profits of the assessee can be properly deduced from this method of accounting. In fact, we feel that it is no method of accounting at all. The accounts of a business must represent the correct state of affairs. Goods appearing in the stock must either be valued at the price paid by the assessee on acquiring them or if that be not practicable or the assessee for convenience does not desire to do so, they must be valued at the rate prevailing at the time when the stocks are taken. We are unable to see how by putting an arbitrary value on the stocks the assessee may claim that he is showing in his accounts the correct state of affairs. The value of the stocks would be obviously wrong. The value of the opening and closing stocks are essential factors in determining the profits of the year and wrong and arbitrary valuation cannot, therefore, be accepted as a system or method of accounting that may be adopted by an assessee.”

9.7 The ratio of this decision was reiterated by Hon’ble Jurisdictional

High Court in the case of K. Mohammad Adam Sahib v. CIT [1965] 56

ITR 360 (Mad.).

:- 30 -: 9.8 Thus, the principle is well settled to the extent that an assessee

may value the stock at the cost or market rate but is not entitled to value

below both. The fact that the wrong valuation of stock was accepted by

the Department in the earlier years and Assessing Officer had failed to

notice the defect in the valuation cannot be a bar to adopt the correct

method of valuation in the current year. The ratio of decision of Hon’ble

High Court of Delhi in the case of Dewan Steels Ltd. (supra) cannot be

applied to the facts of the present case, inasmuch as, the arbitrary

valuation cannot be accepted as one of the methods of valuation stock.

Similarly, the ratio of the decision of Hon’ble High Court of Rajasthan in

the case of Wolkem India Ltd. (supra) is not applicable as the question of

factum of obsolescence is not established in the present case. As

regards to the issue of following the decision of Co-ordinate Benches on

the similar issue, we feel that it has no relevance since, our decision is

premised on the well accepted principles of law and facts peculiar to the

case followed the ration on decision of Hon’ble High Court of Madras and

Allahabad High Court. Thus, we do not find any merit in the ground of

appeal filed by the assessee. Accordingly, we dismiss the ground of

appeal No.2 filed by the assessee.

9.9 In the result, appeal filed by the assessee in ITA No.

1593/Chny/2017 is dismissed.

:- 31 -:

No.1622/Chny/2017 for AY 2013-14.

10.1 The Revenue raised the following grounds of appeal:

“1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 5,02,68,750/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of section 47(xiii) of the I.T. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of R. 2,87,76,000/- made on interest attributable to the portion of amount standing to the credit of Directors of the assessee company on account of revaluation of Goodwill. 3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of interest for the utilization of the above and hence ought to have sustained the addition made by the A.O. on account of disallowance of interest. 4.1 The CIT (A) has erred in deleting the addition of Rs.5,04,54,574/- made under the head bonus redemption expenses. The CIT (A) failed to consider the fact that the liability incurred by the assssee, was in the nature of contingent and fully dependent upon the uncertain future visit and at the option of the customers and hence was not a known liability. 4.2 The CIT (A) failed to consider the decision of the Hon’ble Supreme Court in the case of Bharath Earth Movers Vs CIT wherein it was held that ‘what should be certain is the incurring of the liability’. But in the present case, the incurring of liability is uncertain and there is no reasonable scientific method adopted by the assessee to estimate the

:- 32 -:

future visits and the purchase behavior of customers so as to justify creating of provision for such liability. 4.3 The CIT(A) failed to consider the decision of Hon’ble Delhi High Court in the case of Seagram Distilleris (P) Ltd Vs CIT-Ill, New Delhi (2015)(62 taxman.com 100 (Delhi) wherein it was held that the provision made for a contingent liability ought not to be allowed and the SLP filed by the assessee against the High Court’s ruling was dismissed by the Hon’ble S.C (2016) 72taxmann.com334(SC) and also failed to consider the decision of Hon’ble S.C in the cases of Shree Sajjan Mills Ltd Vs CIT(sc) 156 ITR 585 and Indian Molasses Co. (P) Ltd Vs CIT (Sc) 37 ITR 66 wherein it was held that expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. 5.1 The CIT(A) failed to consider the fact that the assessee incurred the expenditure of Rs.6,49,09,981/- towards ‘Gen. Store Changes, Additional Gondolas Fitting, Room alteration, Inside Mall new Frontage and Signs, Civil, Interior work, Supply of LED Down Lighters and Fixing of New CDMT with a view to bringing an enduring benefit of the business. 5.2 The CIT(A) failed to consider the decision of Hon’ble Supreme Court in the case of M/s Ballimal Naval Kishore and Anr Vs CIT(1997)224 ITR 414(SC), wherein it was held that total renovauon, ieaumg io suusiaiiitai is only capital expenditure. 5.3 The CIT(Appeals) failed to consider explanations to section 30 and 31 of Income-tax Act, 1961, wherein it is mentioned that the cost of repairs and as the case may ill not include any expenditure in the nature of capital expenditure. 5.4 The CIT(A) failed to consider explanation 1 to section 32 wherein it was mentioned that ‘where the assessee incurred any capital expenditure for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.’ 6. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the A.O restored.”

10.2 Now we shall deal with each of the grounds of appeal raised by

the Revenue. The grounds of appeal No.1 & 6 are general in nature and

do not require any adjudication.

:- 33 -:

10.3 Ground of appeal No.2 challenges the correctness of decision of

ld. CIT(A) allowing the deprecation on goodwill and know-how. This

issue is consequential in nature, as in the first year of takeover of the

business from the firm i.e., in assessment year 2012-13, in the appeal

filed by the Revenue in ITA No.1621/Chny/2017, it was held by us that

no depreciation on goodwill and know-how is admissible as there was no

actual cost incurred in acquiring the same. Accordingly, this ground of

appeal filed by the Revenue is allowed.

10.4 Ground of appeal No.3 challenges the correctness of decision of

ld. CIT(A) allowing interest on the balances standing to the credit of

partners of erstwhile firm. This issue is also consequential in nature from

the assessment year 2012-13. In the assessment year 2012-13, in the

appeal filed by the Revenue in ITA No.1621/Chny/2017, we held that the

book entries cannot create enforceable liability and is only a device

adopted with an intention of avoiding payment of taxes. Accordingly, the

interest paid on the balances standing credit of partners of erstwhile firm

cannot be allowed as a deduction, while computing the income from

profits of business. Accordingly, ground of appeal No.3 filed by the

Revenue is allowed.

10.5 Ground of appeal No.4 challenges the decision of ld. CIT(A) allowing the provision for bonus card liability of Rs. 5,04,54,574/-. The

:- 34 -:

assessee-company made a claim for deduction of provision for liability of

unredeemed bonus points of Rs. 5,04,54,574/-. The facts of claim as

stated by the assessee-company before the Assessing Officer are as

under:

“4.2 Any customer making a purchase, if he chooses to become a bonus card member and signs the membership form, is entitled for two points (Rs.1/-) for every Rs. 100 /- of his immediate previous purchases. The accumulated bonus points, earned on earlier purchases, are adjusted towards the future purchases on the date he chooses to redeem. The liability arises immediately after the customer becomes a member after a purchase. The customer is entitled to redeem the accumulated points at any time on his future purchases at any one of the group of concerns situated at any of the locations. 4.3 The RmKV Group of concerns makes a provision for bonus card at the year-end after adjusting the redemption that has taken place during the year.” 4.4 It has also been clarified by the AR that the provision in each year is made for those points which relates to purchases made during the year but the customer has not availed the redemption by presenting his/her claim during the year.lt is seen that as per the Balance Sheet, the bonus card liability under the head Trade Payables stands at Rs.14,70,24,828/- as on 31-03-2013. The provision made during the year amounts to Rs.5,04,54,574/-. 4.5 The assessee has treated Bonus card provision as a definite liability arising on account of the sale made to Bonus card customers. These customers are entitled to redeem the same at any point of time of purchase of goods from any of their showrooms located at different places. 4.6 As per Accounting Standards 29, a contingent liability is: (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) a present obligation that arises from past events but is not recognized because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) a reliable estimate of the amount of the obligation cannot be made. 4.7 Further,

:- 35 -: As per AS 29, An enterprise should not recognize a contingent liability. 4.8 It can be seen that the Bonus Card Provisions made fall under the category of contingent liability where the existence of the liability can be confirmed only by the occurrence of future events. For the recognition of the same, the following conditions need to be satisfied: a. The customer who already has received the Bonus card points must visit the showroom for a second or subsequent time. b. The customer has to make a second or subsequent purchase. c. The customer has to choose to avail/redeem the already accrued bonus card points at the time of second or subsequent purchase. d. The customer must have the Bonus card discount card in possession or the registered mobile number etc. at the time of making the second or subsequent purchase.”

10.6 The Assessing Officer taking note of condition attached to the

scheme that the assessee-company can withdraw the benefits conferred

under the scheme exercising the absolute discretion vested with the

company, held that the provision made for bonus points is only

contingent nature hence, disallowed the claim.

10.7 Being aggrieved by the above addition, the assessee-company

preferred an appeal before ld. CIT(A), who vide impugned order allowed

the appeal following the decision of ITAT, Chennai in ITA No.1097 &

1098/Mds/2016 dated 08.02.2017. Being aggrieved by the above

decision, the Revenue is in appeal before us in the present appeal.

10.8 The ld. CIT-DR submitted that the provision for bonus card liability

cannot be allowed as a deduction as the ratio of decision of Hon’ble

:- 36 -: Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT

[2009] 314 ITR 62 (SC) is not applicable to the facts of the present case.

On the other hand, the ld. Counsel for the assessee Mr. Vijayaraghavan

submitted that the provisions for bonus card liability is not a contingent

liability as per accounting standard 29, the decision of the Hon’ble

Supreme Court in the case of Bharath Earth Movers 245 ITR 428 and in

the case of Rotorck Controls India P. Ltd. (supra).

The issue involved in the present ground of appeals is on the allowability

of provision made for liability towards unredeemed bonus points. The

salient features of the bonus card are that the assessee-company

introduced a customer loyalty programme, whereby customers of the

assessee would become entitled to points on purchase of sarees and

cloth etc., which could be redeemed towards the future purchases. Any

customer, who purchases the sarees and cloth from the assessee-

company can become a member of the bonus card at his sole discretion.

A member of the card is entitled for two points (equivalent to Rs. 1/- on every purchase of Rs. 100/-). The accumulated bonus point earned on

the earlier purchase can be redeemed in the subsequent purchases

subject to redemption of minimum 500 points within a period of three

years. In case the points are not redeemed within stipulated period points

get lapsed. The assessee-company has been making provision towards

:- 37 -: unredeemed bonus points. Then that the question that arises is that

whether this provision towards unredeemed bonus points can allowed as

a deduction while computing the profits and gains of business. The

Hon’ble Supreme Court in the cases of Metal Box Company of India v.

Their Workmen 73 ITR 53 (SC) and Bharat Earth Movers v. CIT 245 ITR

428 [2000] (SC) had laid down the principle that a provision for liability is

allowable as a deduction provided that liability is a present obligation

arising from the past events the settlement of which is expected to result

in outflow of resources and in respect of which a reliable estimate is

possible for the amount of obligation. The Hon’ble Supreme Court in the

case of Bharat Earth Movers (supra) observed as follows:

“4. The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.”

11.1 Applying this principle, the Hon’ble Supreme Court in the case of

Rotork Controls India P. Ltd. (supra) held as follows:

“11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not

:- 38 -:

only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983-84 onwards. Valve Actuators are sophisticated goods. Over the years appellant has been manufacturing Valve Actuators in large numbers. The statistical data indicates that every year some of these manufactured Actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. 13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to

:- 39 -:

provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfils accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant- enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are - provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case.”

11.2 Applying these principles, the Hon’ble Supreme Court held that the

provision for warranty expenditure is allowable as deduction provided a)

an enterprise has a present obligation as a result of past event; b) it is

:- 40 -: probable that an outflow of resources will be required to settle the

obligation; and c) a reliable estimate can be made of the amount of the

obligation.

11.3 Applying the above parameters to the facts of the present case,

when the customer earns bonus points, it is not the obligating event that

creates an obligation, which results in outflow of the resources. The

transactions of purchase and the consumer loyalty programme in terms

of which the bonus points are earned by the customer are independent

and distinct transactions. The object of introducing customer loyalty

programme is only to increase customer base and attracting the

customers again. The expenditure on bonus points is not necessary for

the purpose of making sales, the revenue in respect of which was

recognized. There is no co-relation between the sales and the expenses

on redemption of the bonus points. The expenditure is required to be

recognized only in case the corresponding revenue receipt is recognized.

In the present case, there is no corresponding revenue to the

expenditure on unredeemed bonus points. These principles were

enunciated by Hon’ble Supreme Court in the case of Calcutta Co. Ltd. v.

CIT [1959] 37 ITR 1 and in the case of CIT v. Bilahari Investment Ltd.

299 ITR 1 (SC), which are extracted below vide para 12 & 13:

“12. The argument of the Revenue that as per the agreements signed by the students, they were called upon and were required to pay the entire fee upfront for the entire course at the time of admission and, therefore, the assessee had earned full fee at that

:- 41 -:

stage itself was rejected observing and referring to the principle of law laid down in E.D. Sassoon & Co. Ltd. (supra) that fee was debt due at the time of deposit. The fee was paid in advance though services were yet to be rendered. Reference was made to Calcutta Company Ltd. v. CIT [1959] 37 ITR 1 (SC) that when the fee was paid in advance it would be in nature of deposit or an advance. Otherwise, it would lead to an anomalous situation not intended in law, as when the amount was received the expenses to be deducted to arrive at the net income were yet to be incurred, and would be incurred in the next financial year. The following principle was enunciated by the Supreme Court in Calcutta Co. Ltd. (supra):— "The expression "profits or gains" in section 10(1) of the Income-tax Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom -whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date." 13. In other words, principle of matching between the revenue receipt and the expenditure to be incurred was applied. Reference was also made to the judgment of the Supreme Court in CIT v. Bilahari Investment (P) Ltd. [2008] 168 Taxman 95/299 ITR 1 (SC), wherein referring to the concept of matching it was observed:— “Matching Concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that "revenues" of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years which brings in the concept of Deferred Tax Accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year. It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS 22 is to reconcile the matching principle with the Fair Valuation Principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is done only by Accounting Standards and not by provisions of the Companies Act."

11.4 It is only on the subsequent purchases, there is an obligation on

the part of the assessee-company to redeem the points which results in

:- 42 -: outflow of resources, it is only at this point of time the liability can be

recognized. Indisputedly, in the present case, the liability is recognized

at the time of earning the bonus points. The number of points earned

would only enable the assessee to estimate the liability of the obligation.

Further, the Assessing Officer had made a note of material fact that the

assessee-company has an absolute discretion to withdraw the scheme

without assigning any reasons. This goes to show that there is no

absolute obligation on the part of the assessee-company to redeem the

bonus points earned. These facts would go to show that the conditions

required for recognizing the liability for the purpose of provision does not

stand satisfied. The principles governing the allowability of provision of

warranty cannot be applied to the provision of the kind on hand for the

reason that the provisions for warranty is based on the principle of

matching, which has no application to the provision on hand as observed

by the Hon’ble Supreme Court. Therefore, the ratio lay down by the

Hon’ble Supreme Court in the case of Rotorck Controls India P. Ltd.

(supra) as well as Bharat Earth Movers (supra) has no application to the

facts of the present case. The ld. CIT(A) without properly appreciating

the scheme of the bonus points had wrongly applied the ratio of the

decision of the Hon’ble Supreme Court in the case of Rotorck Controls

India P. Ltd. (supra). Therefore, we reverse the findings of the ld. CIT(A)

and confirm the action of the Assessing Officer in making the addition of

:- 43 -: provision for liability for bonus card points. Hence, this ground of appeal

filed by the Revenue is allowed.

11.5 The next ground of appeal No.5 challenges the decision of ld.

CIT(A) allowing the renovation expenditure incurred on leased premises.

The assessee had capitalized in books of accounts certain expenditure

incurred on renovation, improvement of lease hold premises. However,

the same was claimed as revenue expenditure for the purpose of income

tax. It is stated by the assessee that the expenditure is incurred on

interior work in the showrooms at Bangalore Orion Mall, Velachery

Phoenix Market City, Vadapalani Forum Vijaya Mall and the same was

claimed to the revenue expenditure. The Assessing Officer after

considering the submissions held that the expenditure is in capital in

nature.

11.6 On appeal before ld. CIT(A), it came to be allowed as a revenue

expenditure noting that the similar expenditure was allowed by ITAT as a

revenue expenditure.

11.7 Being aggrieved, the Revenue is in appeal before us in the present

appeal.

11.8 The ld. CIT-DR submitted that the ld. CIT(A) had granted relief in

flagrant ignorance of provisions of Explanation 1 to s. 32 of the Act,

:- 44 -: which provides that when the assessee incurred any capital expenditure

for the purpose of business or profession on the construction of any

structure or doing of any work in or in relation to, and by way of

renovation or extension of or improvement to, the building, then, the

provisions of this clause shall apply as if the said structure or work is a

building owned by the assessee. On the other hand, the ld. Counsel for

the assessee submits that the Explanation 1 to s. 32 of the Act is not

applicable to an expenditure, which is in the nature of revenue

expenditure and submits that renovation to the leased premises is a

revenue expenditure and in support of this proposition relied on the

following decisions: 1.Thiru Arooran Sugars Ltd. v. CIT 350 ITR 324

(Mad.) 2. Roger Enterp. v. Rises Pvt. Ltd. 169 Taxman 41 (Del.) & 3) CIT

v. Bharat Commercial Corporation 226 ITR 242 (Pat.).

11.9 We heard the rival submission and perused the material on

record. The issue involved in the present grounds of appeal is whether

the expenditure incurred by the respondent-assessee on interior

decoration, false ceiling and wooden structures carried out on the leased

premises constitutes whether revenue or capital expenditure. The

Assessing Officer had discussed the nature of the expenditure vide para

5.2 of assessment order. He was of the opinion that in view of the

provisions of Explanation 1 to s. 32 of the Act, the same is a capital

:- 45 -: expenditure and allowed the depreciation at 5% i.e., the rate of

depreciation applicable to buildings.

11.8 On appeal before the ld. CIT(A), he held the expenditure to be the

revenue in nature considering the explanation of the respondent-

assessee that the expenditure is incurred in the nature of current repairs.

11.9 The Revenue challenges this findings of the ld. CIT(A). The issue

is requires to be adjudicated in the light of the Explanation 1 to s. 32(1) of

the Act. This explanation was inserted by Taxation Laws (Amendment

and Miscellaneous Provisions) Act, 1986, w.e.f 1-4-1988. The said

explanation reads as under:

“Explanation 1. – Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purpose of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.”

that the expenditure contemplated in the said Explanation is capital in

nature as the assessee enjoying the lease hold rights on the building is

deemed to be the owner of the building. Once the assessee is deemed

to be the owner of the building, any improvements or decoration carried

out on the building partakes the character of the building, and by

refurbishing, decorating or by doing interior work in the building an

:- 46 -:

enduring benefit was derived by the assessee for the period of

occupation and therefore, the expenditure incurred cannot be treated as

revenue expenditure. The Hon’ble Supreme Court in the case of Ballimal

naval Kishore v. CIT 224 ITR 414 (SC) held that the expenditure incurred

on renovation, refurbishing to the building result in enduring benefit by

holding as under:

“3. The expression used in section 10(2)(v) is 'current repairs' and not mere 'repairs'. The same expression occurs in section 30(a) (ii)and in section 31(i) of the Income-tax Act, 1961. The question is what is the meaning of the expression in the context of section 10(2) of the 1922 Act. In New Shorrock Spg. & Mfg. Co. Ltd., Chagla, C J., speaking for the Division Bench, observed that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. The learned Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc., requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The Learned Chief Justice observed: "The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure on repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which, the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." (p. 343) In taking the above view, the Bombay High Court dissented from the view taken by the Allahabad High Court in Ramkishan Sunderlal v. CIT [1951] 19 ITR 324 where it was held that the expression 'current repairs' in section 10(2) (v) was restricted to petty

:- 47 -:

repairs only which are carried out periodically. The learned Judge agreed with the view taken by the Patna High Court in CIT v. Darbhanga Sugar Co. Ltd [1956] 29 ITR 21 and by the Madras High Court in CIT v. SriRama Sugar Mills Ltd [1952] 21 ITR 191 . 4. In Liberty Cinema v. CIT [1964] 52 ITR 153, P.B. Mukharji, J., speaking for a Division Bench of the Calcutta High Court, held that an expenditure incurred with a view to bring into existence a new asset or an advantage of enduring nature cannot qualify for deduction under section 10(2)(v). 5. In our opinion, the test evolved by Chagla, CJ., in New Shorrock Spg. &Mfg. Co. Ltd. 's case (supra) is the most appropriate one having regard to the context in which the said expression occurs. It has also been followed by a majority of the High Courts in India. We respectfully accept and adopt the test. Applying the aforesaid test, if we look at the facts of this case, it will be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, can it be said that the said repairs qualify as 'current repairs' within the meaning of section 10(2)(v). It was a case of total renovation and has rightly been held by the High Court to be capital in nature. Indeed, the finding of the High Court is that as against the sum of Rs. 17,000 for which the assessee had purchased the factory in 1937, the expenditure incurred in the relevant accounting year was in the region of Rs. 1,20,000.” 12.1 The language of the Explanation 1 is very plain and clear and there

was no scope to give a different meaning. It is the bounden duty of the

Courts to give literal meaning to the expressions and phraseology used

by the legislature in the absence of any ambiguity in the provisions. The

decision relied upon by the ld. Counsel for the assessee i.e., CIT v.

Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 (Mad.) etc. are

rendered prior to introduction of Explanation 1 to s. 32(1) of the Act and

therefore, the principles laid down in the said decisions have no

application after insertion of the Explanation 1 to s. 32(1) of the Act. The

ld. CIT(A) without properly appreciating the legal provisions governing

:- 48 -: the issues had granted relief. Therefore, we reverse the findings of ld.

CIT(A) and restore the assessment order on this issue. Hence, this

ground of appeal filed by the Revenue is allowed.

12.2 In the result, appeal filed by the Revenue in ITA

No.1622/Chny/2017 is allowed

ITA Nos.613/Chny/2018 & 759/Chny/2018 for Assessment Year 2014- 15 (Cross Appeals):

common order of the learned Commissioner of Income Tax (Appeals)-

1(i/c), Madurai (hereinafter called as ‘CIT(A)’) dated 13.12.2017 for the

assessment year (AY) 2014-15.

13.1 Since, the identical facts and issues are involved in these appeals,

we proceed to dispose the same vide this common order.

13.2 The brief facts of the case are as under:

The return of income for the assessment year 2014-15 was filed

disclosing loss of Rs. 15,31,18,878/- on 28.11.2014. Against the said

return of income, the assessment was completed by the Asst. CIT,

Circle-1, Tirunelveli vide order dated 23.12.2016 passed u/s. 143(3) of the Act at total income of Rs. 2,03,12,842/-. While doing so, the

Assessing Officer made the following additions:

:- 49 -: 2. Disallowance of interest claimed on the outstanding balance standing in the name of Directors of Rs. 2,87,76,000/-. 3. Disallowance of provision towards liability of bonus card Rs. 2,43,00,571/-. 4. Addition on account of closing stock of Rs. 3,99,44,986/-.

13.3 Being aggrieved by the addition an appeal was preferred before ld.

CIT(A), who vide impugned order deleted the addition on account of

disallowance of depreciation on goodwill, know-how, interest

expenditure, bonus card liability and expenditure on renovation etc.

However, confirmed the addition on account of valuation of closing stock.

13.4 Being aggrieved by that part of order of the ld. CIT(A), which is

against the assessee, the assessee filed an appeal in ITA

No.613/Chny/2018 and the Revenue is in appeal on the grounds which

are allowed in favour of the assessee in ITA No.759/Chny/2018 for AY

2014-15.

No.613/Chny/2018 for AY 2014-15.

14.1 The assessee raised the following grounds of appeal: “1. The Order of the Commissioner of Income tax (Appeals) is contrary to Law, facts and circumstances of the case. 2. Valuation of Closing Stock:

:- 50 -:

2.1 The CIT (Appeals) erred in confirming the addition made by the assessing officer to the closing stock Rs. 3,99,44,986/-. 2.2 The CIT (A) should have accepted the valuation of closing stock as arrived at by the appellant which has consistently been at cost or realizable price whichever is Lower. 2.3 The CIT(A) ought to have appreciated that the Law itself permits the business entities to value the stock at its realizable price and hence the same should not be questioned unless such valuation Loses objectivity. 2.4 The CIT(A) ought to have appreciated that the Assessee is valuing the closing stock on the basis of net realizable value for clothes having in mind the period for which the clothes have not been sold. The valuation of the stock by the assessee based on the experience cannot be rejected without any valid reason. 2.5 The C)T(A) ought to have appreciated that when the management realized that a substantial part of the old stock was lying as on 31st March, after a careful study of the realization of the old stocks, calibrated the closing stock valuation to peg the same at realizable value whenever it is estimated to fetch a price lower than the cost. 2.6 The CIT(A) ought to have appreciated the fact that the sale price realized on the stock pertaining to March 2014 till October 2016 was way below their cost price as demonstrated before assessing officer, and any further realizability of such stocks with ageing over 3 years was highly unlikely. 2.7 The CIT(A) failed to appreciate the fact that the estimates of realizable price arrived at by management, as confirmed by the complete data and the sample provided, is accurate since several sales of such old stocks realized prices below the cost of goods and rejection of the same is unjustified. 2.8 The CIT(A) ought to have appreciated that valuation of stock will have the consequences of postponing the profit or loss to the year of sale of such stock which is inevitable and unavoidable depending upon whether the sale price realized is more or less than the estimated value of the closing stock. 2.9 The CIT(A) failed to appreciate the fact that according to principles of accountancy and prudent commercial practice, while it would be wise to provide for expected tosses it would not be prudent to book unrealized profit. 2.10 The CIT(A) ought to have appreciated that the valuation of closing stock as arrived by management is in accordance with the Law and hence the same should not be questioned unless such valuation Loses objectivity.

:- 51 -: 2.11 The CIT(A) failed to appreciate the fact that there is no income escaping assessment since the actual sale value gets captured in the year of actual sale. 2.12 The CIT(A) erred in not following the order of the Tribunal favorable to the assessee in the following cases: i) M/s.RmK.Viswanatha Piltai & Sons in ITA Nos 1784 to 1787/Mds/2014 dt.O1 .06.2016 ii) Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.2016. 2.13 The CIT(A) erred in following the order of the Tribunal which has been subsequently distinguished by the co-ordinate Bench in the case of M/s. Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.2016 2.14 The CIT(A) erred in not appreciating when there are two views possible the view favorable to the assessee should be followed [CIT Vs Vegetable Products - 88 ITR 192 (SC)] 3. Appellant craves leave to adduce additional evidence at the time of hearing.” 14.2 The only issue involved in the present appeal is addition on

account of under valuation of closing stock. This issue was also dealt by

us at length in the assessment year 2013-14 in assessee’s own case in

ITA No.1593/Chny/2017, wherein for the reasons given by us vide paras

9.6 to 9.8, this issue was decided against the assessee. For the parity of

reasons given therein, this ground of appeal is decided against the

assessee.

14.3 In the result appeal filed by the assessee in ITA

No.613/Chny/2018 is dismissed.

No.759/Chny/2018 for AY 2014-15.

:- 52 -:

The Revenue raised the following grounds of appeal:

“1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 3,77,01,563/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of section 47(xiii) of the IT. Act.

2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill.

2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 2,87,76,000/- made on interest attributable to the portion of amount standing to the credit of Directors of the assessee company on account of revaluation of Goodwill.

3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of interest for the utilization of the above and hence ought to have sustained the addition made by the A.O. on account of disallowance of interest.

4.1 The CIT (A) has erred in deleting the addition of Rs.2,43,00,571/- made under the head bonus redemption expenses. The CIT (A) failed to consider the fact that the liability incurred by the assessee was in the nature of contingent and fully dependent upon the uncertain future visit and at the option of the customers and hence was not a known liability.

4.2 The CIT (A) failed to consider the decision of the Hon’ble Supreme Court in the case of Bharath Earth Movers Vs CIT wherein it was held that ‘what should be certain is the incurring of the liability’. But in the present case, the incurring of liability is uncertain and there is no reasonable scientific method adopted by the asessee to estimate the future visits ‘and the purchase behaviour of customes so as to justi’ creating of provisio such liability.

4.3 The CIT(A) failed to consider the deicison of Hon’ble Delhi High Court in the case of Seagram Distilleris (P) Ltd Vs CIT-Ill, New Delhi

:- 53 -:

(201 5)(62 taxman.com 100 (Delhi) wherein it was held that the provision made for a contingent liability ought not to be allowed and the SLP filed by the assessee against the High Court’s ruling was dismissed by the Hon’ble S.C (2016) 72taxmann.com334(SC) and also failed to consider the decision of Hon’ble S.C in the cases of Shree Sajjan Mills Ltd Vs CIT(sc) 156 ITR 585 and Indian Molasses Co. (P) Ltd Vs CIT (sc) 37 ITR 66 wherein it was held that expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. 5.1 The CIT(A) failed to consider the fact that the assessee incurred the expenditure of Rs.4,27,08,600/- towards ‘Gen. Store Changes, Additional Gondolas Fitting, Room alteration, Inside Mall new Frontage and Signs, Civil, Interior work, Supply of LED Down Lighters and Fixing of New CDMT’ with a view to bringing an enduring benefit of the business. 5.2 The CIT(A) failed to consider the decision of Hon’ble Supreme Court in the case of M/s Ballimal Naval Kishore and Anr Vs CIT(1997)224 ITR 414(SC), wherein it was held that total renovation, leading to substantial improvements, is only capital expenditure. 5.3 The CIT(A) failed to consider explanations to section 30 and 31 of Income-tax Act 1961, wherein it is mentioned that the cost of repairs and as the case may be current repairs, shall not include any expenditure in the nature of capital expenditure. 5.4 The CIT(A) failed to consider explanation I to section 32 wherein it was mentioned that ‘where the assessee incurred any capital expenditure for the purpose of business or professin on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.’ 6. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the AO restored.”

Ground of appeal No.2:

correctness of the decision of ld. CIT(A) allowing the depreciation on

goodwill and know-how. This issue was dealt by us in the assessee’s

:- 54 -: own case for the assessment year 2012-13 i.e., the first year of claim in

the Revenue appeal in ITA No.1621/Chny/2017 wherein for the reasons

given therein vide paras 5.1 to 5.7 decided the issue against the

assessee and in favour of the Revenue. For the parity of reasons given

therein, this ground of appeal also decided against the assessee and in

favour of the Revenue. Accordingly, this ground of appeal filed by the

Revenue is allowed.

Ground of appeal No.3:

of ld. CIT(A) allowing the interest on credit balance of Directors of the

respondent-assessee. This issue was also dealt by us in the assessee’s

own case for the assessment year 2012-13 i.e., the first year of claim in

the Revenue appeal in ITA No.1621/Chny/2017, wherein for the reasons

given therein vide paras 6.1 to 6.4 decided the issue against the

assessee and in favour of the Revenue. For the parity of reasons given

therein, this ground of appeal is also decided against the assessee and

in favour of the Revenue. Accordingly, this ground of appeal filed by the

Revenue is allowed.

Ground of appeal No.4:

of ld. CIT(A) allowing the provision towards unredeemed bonus points.

This issue was also dealt by us in the assessee’s own case for the

:- 55 -: assessment year 2013-14 in the Revenue appeal in ITA

No.1622/Chny/2017, wherein for the reasons given therein vide

paras11.1 to 11.4 decided the issue against the assessee and in favour

of the Revenue. For the parity of reasons given therein, this ground of

appeal is also decided against the assessee and in favour of the

Revenue. Accordingly, this ground of appeal filed by the Revenue is

allowed.

Ground of appeal No.5:

of ld. CIT(A) allowing the expenditure incurred on renovation and

temporary wooden structures on leased premises as revenue

expenditure. This issue was also dealt by us in the assessee’s own case

for the assessment year 2013-14 in the Revenue appeal in ITA

No.1622/Chny/2017, wherein for the reasons given therein vide paras

11.9 to 12.2 decided the issue against the assessee and in favour of the

Revenue. For the parity of reasons given therein, this ground of appeal is

also decided against the assessee and in favour of the Revenue.

Accordingly, this ground of appeal filed by the Revenue is allowed.

is allowed.

RMKV Fashion Garments Pvt. Ltd. in ITA Nos.1625, 1626/Chny/2017 & 761/Chny/2018 for the assessment years 2012-13, 2013-14 & 2014- 15 respectively:

:- 56 -:

different orders of the learned Commissioner of Income Tax (Appeals)-

3/1(i/c), Madurai (hereinafter called as ‘CIT(A)’) dated 10.03.2017 &

13.12.2017 for the assessment years (AYs) 2012-13, 2013-14 & 2014-15

respectively.

21.1 Since, the identical facts and the issues are involved in these

appeals, we proceed to dispose the same vide this commons order.

21.2 The Revenue raised the following grounds of appeal in ITA

No.1625/Chny/2017 for assessment year 2012-13:

“1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 81,00,000/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of section 47(xiii) of the I.T. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by theA.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 37,21,000/- made on interest attributable to the portion of amount standing to the credit of Directors of the assessee company on account of revaluation of Goodwill. 3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of

:- 57 -: interest for the utilization of the above and hence ought to have sustained the addition made by the A.O. on account of disallowance of interest. 4. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the A.O restored.”

The respondent-assessee is a company incorporated under the

provisions of the Companies Act, 1956. It is engaged in the business of

wholesale cloth trade. The return of income for the assessment year

2012-13 was filed on 29.09.2012 disclosing total loss of Rs.

2,00,50,898/-. During the previous year relevant to the assessment year

under consideration, the respondent-assessee acquired all assets and

liabilities of one partnership firm namely RMKV Associates as they stood

in the books of the said firm as on 08.01.2012 as per the business

transfer agreement. The said firm had claimed the benefit of the

provisions of s. 47(xiii) of the Act in respect of transaction sale of

business. In the return of income, the respondent-assessee claimed

depreciation on the intangible assets being goodwill, know-how of Rs.

6,48,00,000/- stated to have been taken over from the said partnership

firm. Admittedly, this goodwill was created in the books of erstwhile firm

by book entry by crediting to the respective partners’ accounts. The

balance standing to the credit of partners of erstwhile firm was also taken

over by the assessee company.

:- 58 -:

goodwill, know-how and also claimed interest on the credit balance of the

partners taken over by the respondent-assessee. The Assessing Officer

had disallowed both the claims.

the issues. The Revenue is in appeal before us challenging the

correctness of the order of ld. CIT(A).

appeal No.2 challenges the decision of ld. CIT(A) allowing the

depreciation on goodwill, know-how. In the case of RMKV Silks Pvt. Ltd.

involving identical facts of the case for the assessment year 2012-13 in

Revenue’s appeal bearing ITA No, 1621/Chny/2017, it is held by us vide

paras 5.1 to 5.7 for the reasons stated therein, the depreciation on

goodwill, know-how is not allowable. For the parity of reasons stated

therein, these grounds of appeal filed by the Revenue are allowed.

allowed.

allowing the interest on the credit balance of erstwhile partners of the

firm. In the case of RMKV Silks involving identical facts of the case for

:- 59 -: the assessment year 2012-13 in Revenue’s appeal bearing ITA

No.1621/Chny/2017, it is held by us vide paras 6.1 to 6.3 for the reasons

stated therein, the interest on credit balances of partners of erstwhile firm

is not allowable. For the parity of reasons stated therein, these grounds

of appeal filed by the Revenue are allowed.

allowed.

No.1625/Chny/2017 for assessment year 2012-13 is allowed.

ITA No.1626/Chny/2017 for assessment year 2013-14 (Revenue’s appeal):

The respondent-assessee is a company incorporated under the

provisions of the Companies Act, 1956. It is engaged in the business of

wholesale cloth trade. The return of income for the assessment year

2013-14 was filed on 26.11.2013 disclosing total income as nil. Against

said return of income, the assessment was completed by Asst. CIT,

Circle-1, Tirunelveli vide order dated 30.03.2016 passed u/s. 143(3) of

the Act at total income of Rs. 1,67,34,837/-. While doing so, the

Assessing Officer disallowed the depreciation on goodwill, know-how of

:- 60 -:

Rs. 1,41,75,000/- and interest on credit balances of partners erstwhile

firm of Rs. 77,76,000/-.

30.1 On appeal before ld. CIT(A), the ld. CIT(A) granted relief on both

the issues. The Revenue is in appeal before us challenging the

correctness of the order of ld. CIT(A).

30.2 The Revenue raised the following grounds of appeal in ITA

No.1626/Chny/2017 for assessment year 2013-14:

“1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 1,41,75,000/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of section 47(xiii) of the I.T.. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 77,76,000/- made on interest attributable to the portion of amount standing to the credit of Directors of the assesee company on account of revaluation of Goolwill. 3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of interest for the utilization of the above and hence ought to have sustained the addition made by the A.O. on account of disallowance of interest.

:- 61 -: 4. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A)may be reversed and that of the A.O restored.” 31. Grounds of appeal No.1 & 4 are general in nature. Ground of

appeal No.2 challenges correctness of the decision of ld. CIT(A) allowing

the depreciation on goodwill, know-how. The claim was held to be

inadmissible in the first year of the claim in the Revenue’s appeal for the

assessment year 2012-13 in ITA No.1625/Chny/2017 vide para 25, the

claim being consequential from initial assessment year it cannot be

allowed in the subsequent years. Hence, this ground of appeal filed by

the Revenue is allowed.

allowed.

allowing the interest on the credit balance of erstwhile partners of the

firm. The claim for interest was held to be inadmissible in the first year of

the claim in the Revenue’s appeal for the assessment year 2012-13 in

ITA No.1625/Chny/2017 vide para 27 being consequential from initial

assessment year, it cannot be allowed in the subsequent years. Hence,

this ground of appeal filed by the Revenue is allowed.

allowed.

:- 62 -: 35. In the result, appeal filed by the Revenue in ITA

No.1626/Chny/2017 for assessment year 2013-14 is allowed.

ITA No.761/Chny/2018 for assessment year 2014-15 (Revenue appeal): 36. The brief facts of the case are as under:

The respondent-assessee is a company incorporated under the

provisions of the Companies Act, 1956. It is engaged in the business of

wholesale cloth trade. The return of income for the assessment year

2014-15 was filed on 28.11.2014 disclosing total loss of Rs. 1,72,78,511.

Against said return of income, the assessment was completed by Asst.

CIT, Circle-1, Tirunelveli vide order dated 23.12.2016 passed u/s. 143(3)

of the Act at total income of Rs. 11,28,789/-. While doing so, the

Assessing Officer disallowed the depreciation on goodwill, know-how of

Rs. 1,06,31,250/- and interest on the credit balances of partners

erstwhile firm of Rs. 77,76,000/-.

36.1 On appeal before ld. CIT(A), the ld. CIT(A) granted relief on both

the issues. The Revenue is in appeal before us challenging the

correctness of the order of ld. CIT(A).

36.2 The Revenue raised the following grounds of appeal in ITA

No.761/Chny/2018 for assessment year 2014-15:

:- 63 -:

2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 1,06,31,250/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of sectin 47(xiii) of the IT. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (20l3)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 77,76,000/- made on interest attributable to the portion of amount standing to the credit of Directors of the assessee company on account of revaluation of Goodwill. 3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of interest for the utilization of the above and hence ought to have sustained the addition made by the A,O. on account of disallowance of interest. 4. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the A.O restored.” 37. Grounds of appeal No.1 & 4 are general in nature. Ground of

appeal No.2 challenges the decision of ld. CIT(A) allowing the

depreciation on goodwill, know-how. This is third year of claim, since the

claim for depreciation on goodwill, know-how was held to be inadmissible

in the first year of the claim in the Revenue’s appeal for the assessment

year 2012-13 in ITA No.1625/Chny/2017, the claim cannot be allowed in

the subsequent years being consequential from initial assessment year.

Hence, this ground of appeal filed by the Revenue is allowed.

:- 64 -: 38. In the result, ground of appeal No.2 filed by the Revenue is

allowed.

allowing the interest on the credit balance of erstwhile partners of the

firm. This is third year of claim, since the claim for interest was held to be

inadmissible in the first year of the claim in the Revenue’s appeal for the

assessment year 2012-13 in ITA No.1625/Chny/2017, the claim cannot

be allowed in the subsequent years be consequential from the initial

assessment year. Hence, this ground of appeal filed by the Revenue is allowed.

allowed.

for assessment year 2014-15 is allowed.

RMKV Fabrics Pvt. Ltd. in ITA No.1623/Chny/2017 for assessment year 2012-13 (Revenue’s appeal):

the learned Commissioner of Income Tax (Appeals)-3, Madurai

(hereinafter called as ‘CIT(A)’) dated 10.03.2017 for the assessment year

(AY) 2012-13.

:- 65 -: 43. The brief facts of the case are as under: The respondent-assessee is a company incorporated under the

provisions of the Companies Act, 1956. It is engaged in the business of

retail cloth trade. The return of income for the assessment year 2012-13

was filed on 29.09.2012 disclosing total loss of Rs. 5,85,74,365/-.

Against said return of income, the assessment was completed by Dy.

CIT, Circle-1, Tirunelveli vide order dated 30.03.2015 passed u/s. 143(3)

of the Act at total income of Rs. 1,70,27,377/-. During the previous year

relevant to the assessment year under consideration, the respondent-

assessee acquired all assets and liabilities of one partnership firm

namely RMKV Fabrics as they stood in the books of the said firm as on

07.01.2012 as per the business transfer agreement. The said firm had

claimed the benefit of the provisions of s. 47(xiii) of the Act in respect of

transaction sale of business. In the return of income, the respondent-

assessee claimed depreciation on the intangible assets being goodwill,

know-how of Rs. 17,49,00,000/- stated to have been taken over from the

said partnership firm. Admittedly, this goodwill was created in the books

of erstwhile firm by book entry by crediting to the respective partners’

accounts. The balance standing to the credit of partners of erstwhile firm

was also taken over by the assessee firm. While completing the

assessment, the Assessing Officer disallowed the depreciation on

:- 66 -:

goodwill, know-how of Rs. 2,18,62,500/- and interest on credit balance of

partners erstwhile firm of Rs. 1,08,01,000/-.

the issues. The Revenue is in appeal before us challenging the

correctness of the order of ld. CIT(A).

:- 67 -: 46. Grounds of appeal No.1 & 4 are general in nature therefore, do not

require any adjudication. The ground of appeal No.2 challenges the

decision of ld. CIT(A) allowing the depreciation on goodwill, know-how.

In the case of RMKV Silks Pvt. Ltd. involving identical facts of the case

for the assessment year 2012-13 in Revenue’s appeal bearing ITA

No.1621/Chny/2017, it is held by us vide para 5.1 to 5.7, for the reasons

stated therein, the depreciation on goodwill, know-how is not allowable.

For the parity of reasons stated therein, these grounds of appeal filed by

the Revenue are allowed.

allowed.

allowing the interest on the credit balance of erstwhile partners of the

firm. In the case of RMKV Silks Pvt. Ltd. involving identical facts of the

case for the assessment year 2012-13 in Revenue’s appeal bearing ITA

No. 1621/Chny/2017, it is held by us vide paras 6.1 to 6.3, for the

reasons stated therein, the interest on credit balance of erstwhile

partners is not allowable. For the parity of reasons stated therein, these

grounds of appeal filed by the Revenue are allowed.

allowed.

:- 68 -: 50. In the result, appeal filed by the Revenue in ITA

No.1623/Chny/2017 for assessment year 2012-13 is allowed.

RMKV Fabrics Pvt. Ltd. in ITA Nos.1594/Chny/2017 & 1624/Chny/2017 for AY 2013-14 (Cross Appeals):

directed against the common order of the learned Commissioner of

Income Tax (Appeals)-3, Madurai (hereinafter called as ‘CIT(A)’) dated

10.03.2017 for the assessment year 2013-14.

we proceed to dispose the same vide this common order.

The assessee-company namely RMKV Fabrics Pvt. Ltd. is a

private limited company incorporated under the provisions of Companies

Act, 1956. The return of income for the assessment year 2013-14 was

filed on 26.11.2013 disclosing total loss of Rs. 13,92,21,343/- and this was revised and disclosing at a loss of Rs. 19,83,04,133/-. Against the

said return of income, the assessment was completed by the Asst. CIT,

Circle-1, Tirunelveli vide order dated 31.03.2016 passed u/s. 143(3) of

the Act at total income of Rs. 1,66,05,415/-. While doing so, the AO

made the following disallowances: 1. Disallowance of depreciation on Rs. 3,82,59,375/-

:- 69 -: goodwill 2. Disallowance of interest claim u/s. Rs. 2,27,35,602/- 36(1) & 37 3. Bonus card Provision disallowed Rs. 3,53,87,903/- 4. Capital expenditure claimed as Rs.10,77,94,626/- repair 5. Under Valuation of closing stock Rs. 1,07,32,042/-

preferred before ld. CIT(A), who vide impugned order partly allowed the

appeal by granting relief in respect of addition of disallowance of

deprecation of goodwill and disallowance of interest following his

predecessor’s order for assessment year 2012-13 in assessee’s own

case. The ld. CIT(A) also granted relief in respect of provision for

unredeemed bonus points expenditure of Rs. 3,53,87,903/- and

disallowance of repairs incurred on leased premises. However,

confirmed the addition on account of under valuation of closing stock.

against the assessee, the assessee filed an appeal in ITA

No.1594/Chny/2017 and the Revenue is in appeal on the grounds which

are allowed in favour of the assessee in ITA No.1624/Chny/2017 for

assessment year 2013-14.

No.1594/Chny/2017 for AY 2013-14.

:- 70 -:

“1. The Order of the Commissioner of Income tax (Appeals) is contrary to Law, facts and circumstances of the case. 2. Valuation of Closing Stock: 2.1 The CIT (Appeals) erred in confirming the addition made by the assessing officer to the closing stock. 2.2 The CIT (A) should have appreciated that the valuation of closing stock as arrived at by the appellant has consistently been at cost or realizable price whichever is lower ever since inception of the company.

2.3 The CIT(A) ought to have appreciated that there was no change in the method of valuation of closing stock viz cost or realizable value whichever is less, infact the method of arriving at realizable value was fine tuned to reflect the approximate realizable value of the product, based on the management’s perception and experience.

2.4 The CIT(A) ought to have appreciated that the Assessee is valuing the closing stock on the basis of net realizable value for clothes having in mind the period for which the clothes have not been sold. The valuation of the stock by the assessee based on the experience cannot be rejected without any valid reason.

2.5 The CIT(A) ought to have appreciated that when the management realized that a substantial part of the old stock was lying as on 31st March, after a careful study of the realization of the old stocks, calibrated the closing stock valuation to peg the same at realizable value whenever it is estimated to fetch a price lower than the cost.

2.6 The CIT(A) ought to have appreciated that by coincidence the estimate of such realizable value of these stocks amounted to 50% and 25% of the original cost in the second year and third year respectively of their shelf life. When older items forming part of the stock was found in the inventory the same was assigned a token value of Rs.100 in order to ensure control and prevent pilferage.

2.7 The CIT(A) failed to appreciate the fact that the estimates of reliazable price arrived at by management, as confirmed by the complete data and the sample provided, is accurate since several sates of such old stocks realized prices below the cost of goods and rejection of the same is unjustified.

2.8 The CIT(A) ought to have appreciated that valuation of stock wilt have the consequences of postponing the profit or toss to the year of sale of such stock which is inevitable and unavoidable depending

:- 71 -:

upon whether the sate price realized is more or less than the estimated value of the closing stock.

2.9 The CIT(A) failed to appreciate the fact that according to principles of accountancy and prudent commercial practice, white it would be wise to provide for expected tosses it would not be prudent to book unrealized profit. 2.10 The CIT(A) ought to have appreciated that the valuation of closing stock as arrived by management is in accordance with the law and hence the same should not be questioned unless such valuation loses objectivity.

2.11 Cit failed to appreciate the fact that the stock of Rs. 49,19,68,876/- as on 31 .3.13 (valued at cost), stock to the tune of Rs. 98,28,940/- more than 4 years old was remaining in stock on 25.3.2016 at the time of assessment which has remote chance of reatisabitfty. Hence the cit is not justified the addition of Rs. 107,32,042/- by the assessing officer. 2.12 The CIT(A) failed to appreciate the fact that there is no income escaping assessment since the actuaL saLe value gets captured in the year of actual sate.

2.13 The CIT(A) erred in not following the order of the Tribunal favorable to the assessee in the following cases:

I) M/s.RmK.Viswanatha Pitlal & Sons in ITA Nos 1784 to 1787/Mds/2014 dt.01 .06.2016

ii) Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.201 6.

iii) Rmkv textiles

2.14 The CIT(A) erred in following the order of the Tribunal which has been subsequently distinguished by the co-ordinate Bench.

2.15 The CIT(A) erred in not appreciating when there are two views possible the view favorable to the assessee should be followed [ CIT Vs Vegetable Products - 88 ITR 192 (SC)]

account of under valuation of closing stock. In the case of RMKV Silks

Pvt. Ltd. for the assessment year 2013-14 in the assessee’s appeal in

:- 72 -: ITA No.1593/Chny/2017, involving identical facts the issue is decided by

us against the assessee, for the parity of reasons stated therein these

grounds of appeal also filed by the assessee-company are dismissed.

No.1594/Chny/2017 for the assessment year 2013-14 is dismissed.

No.1624/Chny/2017 for AY 2013-14.

The Revenue raised the following grounds of appeal: “1. The order of the CIT(Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs. 3,82,59,375/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisions of section 47(xiii) of the I.T. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3 The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 2,27,35,602/- made on interest attributable to the portion of amount standing to the credit of Directors of the assessee company on account of revaluation of Goodwill. 3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of interest for the utilization of the above and hence ought to have

:- 73 -:

sustained the addition made by the A.O. on account of disallowance of interest.

4.1 The CIT (A) has erred in deleting the addition of Rs.3,53,87,903/- made unde the head bonus redemption expenses. The CIT (A) failed to consider the fact that the liability incurred by the assessee was in the nature of contingent and fully dependent upon the uncertain future visit and at the option of the customers and hence was not a known liability.

4.2 The CIT (A) failed to consider the decision of the Hon’ble Supreme Court in the case of Bharath Earth Movers Vs CIT wherein it was held that ‘what should be certain is the incurring of the liability’. But in the present case, the incurring of liability is uncertain and there is no reasonable scientific method adopted by the asessee to estimate the future visits and the purchase behaviour of customers so as to justify creating of provision for such liability

4.3 The CIT(A) failed to consider the deicison of Hon’ble Delhi High Court in the case of Seagram Distilleris (P) Ltd Vs CIT-Ill, New Delhi (2015)(62 taxman.com 100 (Delhi) wherein it was held that the provision made for a contingent liability ought not to be allowed and the SLP filed by the assessee against the High Court’s ruling was dismissed by the Hon’ble S.C (2016) 72taxmann.com334(SC) and also failed to consider the decision of Hon’ble S.C in the cases of Shree Sajjan Mills Ltd Vs CIT(sc) 156 ITR 585 and Indian Molasses Co. (P) Ltd Vs CIT (sc) 37 ITR 66 wherein it was held that expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure.

5.1 The CIT(A) failed to consider the fact that the assessee incurred the expenditure of Rs. 10,77,94,626/- towards ‘Gen. Store Changes, Additional Gondolas Fitting, Room alteration, Inside Mall new Frontage and Signs, Civil, Interior work, Supply of LED Down Lighters and Fixing of New CDMT’with a view to bringing an enduring benefit of the business.

5.2 The CIT(A) failed to consider the decision of Hon’ble Supreme Court in the case of M/s Ballimal Naval Kishore and Anr Vs CIT(1997)224 ITR 414(SC), wherein it was held that total renovation, leading to substantial improvements, is only capital expenditure.

5.3 The CIT(A) failed to consider explanations to section 30 and 31 of Income-tax Act 1961, wherein it is mentioned that the cost of repairs and as the case may be current repairs, shall not include any expenditure in the nature of capital expenditure 5.4 The CIT(A) failed to consider explanation 1 to section 32 wherein it was mentioned that ‘where the assessee incurred any capital

:- 74 -: expenditure for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.’ 6. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the A.O restored.”

60.1 Grounds of appeal No.1 & 6 are general in nature, which do not

require any adjudication. Ground of appeal No.2 challenges the

correctness of decision of ld. CIT(A) allowing the depreciation on

goodwill, know-how of Rs. 3,82,59,375/-. This is the second year of

claim. This issue being consequential from initial assessment year. In

the first year of takeover of the business from the firm i.e., in assessment

year 2012-13, in the appeal filed by the Revenue in ITA No.

1623/Chny/2017, it was held by us vide para 46 that no depreciation on

goodwill and know-how is admissible as there was no actual cost

incurred in acquiring the same. Accordingly, these grounds of appeal

filed by the Revenue are allowed.

60.2 In the result, ground of appeal No.2 filed by the Revenue is

allowed.

60.3 Ground of appeal No.3 challenges the correctness of decision of ld.

CIT(A) allowing the interest on credit balance of partners of erstwhile firm

as a deduction. This issue is also consequential in nature from the

assessment year 2012-13. In the assessment year 2012-13, in the

:- 75 -: appeal filed by the Revenue in ITA No.1623/Chny/2017, it was held vide

para 48 that the book entries cannot create enforceable liability and is

only a device adopted with an intention of avoiding payment of taxes.

Accordingly, the interest paid on the balances standing credit of partners

of erstwhile firm cannot be allowed as a deduction, while computing the

income from profits of business. Accordingly, ground of appeal No.3 filed

by the Revenue is allowed.

60.4 In the result, ground of appeal No.3 filed by the Revenue is

allowed.

60.5 Ground of appeal No.4 challenges the correctness of decision of ld.

CIT(A) allowing the provision for liability of unredeemed bonus points of

the customers. In the case of RMKV Silks Pvt. Ltd. for the assessment

year 2013-14 in the Revenue’s appeal in ITA No.1622/Chny/2017,

involving identical facts the issue is decided by us against the assessee,

for the parity of reasons stated therein these grounds of appeal also filed

by the Revenue are allowed.

60.6 In the result, ground of appeal No.4 filed by the Revenue is

allowed.

60.7 Ground of appeal No.5 challenges the correctness of ld. CIT(A)

allowing the expenditure on renovation, refurbishing, interior decoration

:- 76 -: incurred on lease premises as revenue expenditure. In the case of

RMKV Silks Pvt. Ltd. for the assessment year 2013-14 in the Revenue’s

appeal in ITA No.1622/Chny/2017, involving identical facts the issue is

decided by us against the assessee, for the parity of reasons stated

therein these grounds of appeal also filed by the Revenue are allowed.

60.8 In the result, ground of appeal No.5 filed by the Revenue is

allowed.

No.1624/Chny/2017 for the assessment year 2013-14 is allowed.

RMKV Fabrics Pvt. Ltd. bearing ITA Nos.614/Chny/2018 & 760/Chny/2018 for AY 2014-15 (Cross Appeals):

directed against the common order of the learned Commissioner of

Income Tax (Appeals)-1(i/c), Madurai (hereinafter called as ‘CIT(A)’)

dated 13.12.2017 for the assessment year 2014-15.

62.1 Since, the identical facts and issues are involved in these appeals,

we proceed to dispose the same vide this common order.

The return of income for the assessment year 2014-15 was filed on

28.11.2014 disclosing total loss of Rs. 18,12,21,608 /-. Against the said

:- 77 -: return of income, the assessment was completed by the Asst. CIT,

Circle-1, Tirunelveli vide order dated 23.12.2016 passed u/s. 143(3) of the Act at total loss of Rs.6,88,43,797/-. While doing so, the Assessing

Officer made the following additions:

CIT(A), who vide impugned order deleted the addition on account of

disallowance of depreciation on goodwill, know-how, interest

expenditure, bonus card liability. However, confirmed the addition on

account of under valuation of closing stock.

against the assessee, the assessee filed an appeal in ITA

No.614/Chny/2018 and the Revenue is in appeal on the grounds which

are allowed in favour of the assessee in ITA No.760/Chny/2018 for AY

2014-15.

:- 78 -:

No.614/Chny/2018 for AY 2014-15.

The assessee raised the following grounds of appeal: 1. The Order of the Commissioner of Income tax (Appeals) is contrary to Law, facts and circumstances of the case. 2. Valuation of Closing Stock: 2.1 The CIT (Appeals) erred in confirming the addition made by the assessing officer to the dosing stock of Rs. 2,30,99,133/-: 2.2 The CIT (A) should have accepted the valuation of closing stock as arrived at by the appellant which has consistently been at cost or realizable price whichever is Lower. 2.3 The CIT(A) ought to have appreciated that the Law itself permits the business entities to value the stock at its realizable price and hence the same should not be questioned unless such valuation Loses objectivity. 2.4 The CIT(A) ought to have appreciated that the Assessee is valuing the closing stock on the basis of net realizable value for clothes having in mind the period for which the clothes have not been sold. The valuation of the stock by the assessee based on the experience cannot be rejected without any valid reason. 2.5 The CIT(A) ought to have appreciated that when the management realized that a substantial part of the old stock was lying as on 3l March, after a careful study of the realization of the old stocks, calibrated the closing stock valuation to peg the same at realizable value whenever it is estimated to fetch a price lower than the cost. 2.6 The CIT(A) ought to have appreciated the fact that 32% of the unsold stock as of 31.03.2013 remained unsold till. 25.03.2016, the realizability of which was highly unlikely. 2.7 The CIT(A) failed to appreciate the fact that the estimates of realizable price arrived at by management, as confirmed by the complete data and the sample provided, is accurate since several sales of such old stocks realized prices below the cost of goods and rejection of the same is unjustified. 2.8 The CIT(A) ought to have appreciated that valuation of stock will have lie consequences of postponing the profit or loss to the year of sale of such stock ich inevitable and unavoidable depending upon whether the sale price realized is me o less than the estimated value of the closing stock. For RmKV fabrics Pvt. Ltd.

:- 79 -:

2.9 The CIT(A) failed to appreciate the fact that according to principles of accountancy and prudent commercial practice, while it would be wise to provide for expected Losses it would not be prudent to book unrealized profit. 2.10 The CIT(A) ought to have appreciated that the valuation of closing stock as arrived by management is in accordance with the Law and hence the same should not be questioned unless such valuation Loses objectivity. 2.11 The CIT(A) failed to appreciate the fact that there is no income escaping assessment since the actual sale value gets captured in the year of actual sale. 2.12 The CIT(A) erred in not following the order of the Tribunal favorable to the assessee in the following cases: i) M/s.RmK.Viswanatha PilLai & Sons in ITA Nos 1784 to 1787/Mds/2014 dt.01.06.2016 ii) Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.2016. 2.13 The CIT(A) erred in following the order of the Tribuna which has been subsequently distinguished by the co-ordinate Bench in the case of M/s.Best Choice ITA Nos.1766 to 1768/Mds/2014 dt 05.08.2016 2.14 The CIT(A) erred in not appreciating when there are two views possible the view favorable to the assessee should be followed [CIT Vs Vegetable Products - 88 ITR 192 (SC)] 3. Appellant craves leave to adduce additional evidence at the time of hearing.”

on account of under valuation of closing stock is justified. This issue was

also dealt by us in the assessment year 2013-14 in assessee’s own case

in ITA No.1593/Chny/2017, wherein for the reasons given by us vide

para 9.6 to 9.8, this issue was decided against the assessee. For the

parity of reasons given therein, this ground of appeal is decided against

the assessee.

:- 80 -:

is dismissed.

No.760/Chny/2018 for AY 2014-15.

The Revenue raised grounds of appeal: 1. The order of the CIT (Appeals) is opposed to law on the facts and in the circumstances of the case. 2.1 The CIT(A) has erred in allowing the depreciation on Goodwill of Rs.2,86,94,531/- even though the assessee company had only received the Goodwill as a result of succession of firm by it as per the provisiOns of section 47(xiii) of the I.T. Act. 2.2 The CIT(A) ought to have seen that there was no goodwill in the nature of commercial rights purchased by the assessee and this was only a book entry and another way of disclosing the intrinsic value of the fixed asset of the company, and since the assessee has not proved the purchase of goodwill, it is not entitled depreciation on goodwill. 2.3The CIT(A) ought to have followed the decision of ITAT Mumbai Bench in the case of DCIT vs. Toyo Engineering India ltd. (2013)(33 taxman.com 560 (Mumbai -Trib.) and hence ought to have sustained the disallowance of depreciation on goodwill made by the A.O. 3.1 The CIT(A) has erred in deleting the addition of Rs. 2,27,35,602/- made on interest attributable to the portion of amount standing to the credit of Directors of the assessee company on account of revaluation of Goodwill. 3.2 The CIT(A) ought to have seen that the partners of the firm have brought self generated Goodwill by credit in their current account and the same was not in the form of either cash or deposit for payment of interest for the utilization of the above and hence ought to have sustained the addition made by the A.O. on account of disallowance of interest. 4.1 The CIT (A) has erred in deleting the addition of Rs.3,78,48,545!- made under the head bonus redemption expenses. The CIT (A) failed to consider the fact that the liability incurred by the assesee was in the nature of contingent and fully dependent upon the

:- 81 -:

uncertain future visit and at the option of the customers and hence was not a known liability. 4.2 The CIT (A) failed to consider the decision of the Ron’ble Supreme Court in the case of Bharath Earth Movers Vs CIT wherein it was held that ‘what should be certain is the incurring of the liability’. But in the present case, the incurring of liability is uncertain and there is no reasonable scientific method adopted by the asessee to estimate the future visits and the purchase behaviour of customers so as to justify creating of provision for such liability 4.3 The CIT(A) failed to consider the deicison of Hon’ble Delhi High Court in the case of Seagram Distilleris (P) Ltd Vs CIT-Ill, New Delhi (2015)(62 taxman.comlOO (Delhi) wherein it was held that the provision made for a contingent liability ought not to be allowed and the SLP filed by the assessee against the High Court’s ruling was dismissed by the Hon’ble S.C (2016) 72taxmann.com334(SC) and also failed to consider the decision of Hon’ble S.C in the cases of Shree Sajjan Mills Ltd Vs CIT(sc) 156 ITR 585 and Indian Molasses Co. (P) Ltd Vs CIT (sc) 37 ITR 66 wherein it was held that expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. 5. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the AO restored.

require any adjudication. Ground of appeal No.2 challenges the

correctness of decision of ld. CIT(A) allowing the depreciation on

goodwill, know-how of Rs. 2,86,94,531/-. This is the third year of claim.

This issue is being consequential from the earlier assessment years. In

the first year of takeover of the business from the firm in assessment

year 2012-13, in the appeal filed by the Revenue in ITA No.

1623/Chny/2017, it was held by us that no depreciation on goodwill and

know-how is admissible as there was no actual cost incurred in acquiring

:- 82 -: the same. Accordingly, these grounds of appeal filed by the Revenue

are allowed.

70.1 In the result, ground of appeal No.2 filed by the Revenue is

allowed.

70.2 Ground of appeal No.3 challenges the correctness of decision of ld.

CIT(A) allowing the interest on credit balance of partners of erstwhile firm

as a deduction. This issue is also consequential in nature from the

assessment year 2012-13. In the assessment year 2012-13, in the

appeal filed by the Revenue in ITA No.1623/Chny/2017 , we held that the

book entries cannot create enforceable liability and is only a device

adopted with an intention of avoiding payment of taxes. Accordingly, the

interest paid on the balances standing credit of partners of erstwhile firm

cannot be allowed as a deduction, while computing the income from

profits of business. Accordingly, ground of appeal No.3 filed by the

Revenue is allowed.

70.3 In the result, ground of appeal No.3 filed by the Revenue is

allowed.

70.4 Ground of appeal No.4 challenges the correctness of decision of ld.

CIT(A) allowing the provision for liability of unredeemed bonus points of

the customers. In the case of RMKV Silks Pvt. Ltd. for the assessment

:- 83 -: year 2013-14 in the Revenue’s appeal in ITA No.1593/Chny/2017,

involving identical facts the issue is decided by us against the assessee,

for the parity of reasons stated therein these grounds of appeal also filed

by the Revenue are allowed. Hence, ground of appeal No.4 filed by the

Revenue is allowed.

for assessment year 2014-15 is allowed.

RMKV Silks Pvt. Ltd. in ITA Nos. 1593/Chny/2017 & 613/Chny/2018 for

assessment years 2013-14 & 2014-15 respectively are dismissed.

Appeals filed by the Revenue in the case of M/s. RMKV Silks Pvt. Ltd. in

ITA Nos.1621, 1622/Chny/2017 & 759/Chny/2018 for assessment years

2012-13, 2013-14 & 2014-15 respectively are allowed. Appeals filed by

the Revenue in the case of M/s. RMKV Fashion Garments Pvt. Ltd. in

ITA Nos.1625, 1626/Chny/2017 & 761/Chny/2018 for assessment years

2012-13, 2013-14 & 2014-15 respectively are allowed. Appeals filed by

the assessee in the case of M/s. RMKV Fabrics Pvt. Ltd. in ITA

Nos.1594/Chny/2017 & 614/Chny/2018 for assessment years 2013-14 &

2014-15 respectively are dismissed. Appeals filed by the Revenue in the

case of M/s. RMKV Fabrics Pvt. Ltd. in ITA Nos.1623, 1624/Chny/2017 &

:- 84 -: 760/Chny/2018 for assessment years 2012-13, 2013-14 & 2014-15 respectively are allowed. Order pronounced on the 30th day of April, 2019 in Chennai.

Sd/- Sd/- (इंटूर� रामा राव) (धु�वु� आर.एल रे�डी) (DUVVURU RL REDDY) (INTURI RAMA RAO) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai, �दनांक/Dated: 30th April, 2019 EDN, Sr. P.S आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF