ITO 2(1)(1), MUMBAI vs. TATA MOTORS LTD, MUMBAI

This is an appeal filed by the Revenue and Cross Objection by assessee against the order of CIT(A)-6, Mumbai dated 11/03/2011 for the A.Y. 2003-03, in the matter of order passed u/s.143(3) r.w.s. 147 of the IT Act. 2. Following grounds have been taken by the Revenue:-

In the Cross Objection, assessee has alleged the action of CIT(A) in not deciding the ground raised

Further the Supreme Court also held that " The true accountancy view would, I think, demand that these sums should be treated as paid into a suspense account, and should so appear in the balance sheet. The surpluses should not be brought into the annual trading account as a receipt at the time they are received. Only time will show what their ultimate fate and character will be. After many years that fate is such, as to one class of surplus, that in so far as the suspense account has not been reduced by payments to clients, that part of it which is remaining becomes. by operation of law, a receipt of the company, and ought to be transferred from the suspense .account and appear in the profit and loss account for that year as a receipt and profit. That is what it in fact is. In that year assessee become richer by the amount which automatically becomes theirs, and that asset arises out of an ordinary trade transaction. .It seems to me to be the commonsense way of dealing with these matters."

Regarding the issue of considering this amount as a trading receipt or a capital receipt, AO placed reliance in the case of CIT v/s M/s Karamchand Thapar and Other 222 ITR 112 (SC), wherein it is held that an amount which were not received initially as trading receipts could subsequently become trading receipts and any such surplus amount is income of the assessee. 10.1. In view of the above discussion, AO invoked 41(1) and treated the same as revenue receipt liable to tax.

By the impugned order, CIT(A) treated the receipt as capital in nature not liable to tax. The precise observation of CIT(A) was as under:-

Against the above order of CIT(A) both assessee and revenue are in further appeal before us.

During the course of hearing, the Id. DR relied on the order of the AO and contended that the interest on bonds was claimed as a deduction by the assessee and therefore provisions of section 41(1) are clearly attracted. The Id. DR also contended that the difference is in the nature of 'benefit' and therefore taxable under section 28(iv) of the Act. The Id. DR relied on the following decisions in support of his contention: i) CIT v Chipsoft Technology (P.) Ltd. (80 DTR 250)(Del.)(Alternate citation 26 taxmann.com 109)(not handed over by the DR) ii) Solid Containers Ltd (308 ITR 417)(Bom.) iii) Ramaniyam Homes (Tax Case (Appeal) No.278 of 2014) reported in 384 ITR 530 CO 193/Mum/2012 M/s. Tata Motors Ltd., 14. The Id. DR also relied on the Supreme Court decisions in case of CIT v T. V. Sundaram lyengar and Sons Ltd. (222 ITR 344) and CIT v M/s Karamchand Thapar (222 ITR 112) cited by the AO.

On the other hand, contention of learned AR was that in the context of 41(1), it requires to be noted that the amount recovered by the company against the bonds has never been allowed as loss, expenditure or trading liability.' Reliance is placed on the following decisions, which have distinguished the Supreme Court decisions as they were concerned with trading / business transactions and not with capital transactions: i) CIT v Industrial Credit and Development Syndicate Ltd. (155 Taxman 90)(Kar.) - Refer Annexure A16 to Case Law PB ii) Xylon Holdings (Bom.) (supra) Hi) iii) SICOM (ITAT Mumbai) (supra) iv) Garware Polyster (ITAT Mumbai) (supra)

In support of the proposition that provision of Section 41(1) is not attracted, learned AR relied on the following judicial pronouncements. 1. CCIT v Kesaria Tea Co. Ltd. (122 Taxman 91)(SC) 2. Mahindra & Mahindra v CIT (261 ITR 501)(Bom.) 3. CIT v Industrial Credit and Development Syndicate Ltd. 155 Taxman (90)(Kar.) 4. CIT v Xylon Holdings (P.) Ltd. (26 taxmann.com 333)(Bom.) 5. CIT v Softworks Computers (P.) Ltd. (35 taxmann.com 610)(Bom.) 6. CIT v Santogen Silk Mills Ltd. (57 taxmann.com 208)(Bom.) 7. CIT v V. S. Dempo & Co. Ltd. (60 taxmann.com 443)(Bom.) 8. Bombay Gas Co. Ltd. v Addl. CIT (23 taxmann.com 22)(IT A T Mumbai) 9. CIT v Chetan Chemicals (P.) Ltd. (267 ITR 770)(Guj.) 10. Mohsin Rehman Penkar v CIT (16 ITR 183)(Bom.) 11. Orient Corporation v CIT (18 ITR 28)(Bom.) 12. Reliance Industries Ltd. v ACIT (2008-TIOL-286)(ITAT Mumbai) 13. Prism Cement Ltd. v JCIT (285 ITR (AT) 43)(ITAT Mumbai) 14. Mindteck (India) Ltd. v ITa (122 ITO 486)(Bom.)

It is therefore submitted that the difference on buy- back of US bonds is not taxable under section 41(1) of the Act.

With regard to learned DR’s argument regarding taxing the same u/s.28(iv), contention of learned AR was that the AO has in reassessment proceedings taxed the surplus on buy- back of US bonds under section 41(1) of the Act and not under section 28(iv). 19. The Id. DR has submitted that the assessee has bought back bonds at market price which is lower than the face value of the bonds and the 'surplus' derived therefrom is 'benefit' taxable under section 28(iv) of the Act. The Id. DR relied on the following decisions: i) Solid Containers (supra) ii) Ramaniyam Homes (P) Ltd., (supra) 20. We have considered rival contentions and carefully gone through the orders of the authorities below. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR during the course of hearing before us. From the record, we found that the US bonds were issued by the assessee company during FY 1997-98 for part financing of small car project and expansion of existing commercial vehicle business on capital account.

The deduction was claimed by assessee in respect of 'interest' paid on bonds and not in respect of principal amount of bonds and therefore the observations of the AO at para 3 of the reassessment order are factually incorrect. The difference (face value of bonds less cost at which bonds were bought back) arising on buy- back was in respect of principal amount of US bonds. Therefore, the basic conditions for application of section 41(1) of the Act are not satisfied therefore, provisions of section 41(1) of the Act are not attracted. These basic conditions laid down under section 41(1) are reiterated by the Supreme Court in case of CCIT v Kesaria Tea Co. Ltd. (122 Taxman 91).

This is not a case where income has been charged to tax under the wrong section. The AO has charged the income to tax under section 41(1) of the Act and not under section 28(iv) of the Act. Section 41(1) seeks to tax remission or recession of a trading liability, while section CO 193/Mum/2012 M/s. Tata Motors Ltd., 28(iv) seeks to tax value of any benefit or perquisite, whether convertible into money or not, from exercising of any business or profession. Thus, it may be noted that the sections operate in two different spheres altogether and therefore the question of application of wrong section does not arise.

The decision of Alok Gautam supra was concerned with taxation alleged credits in bank accounts by way of gift entries and the AO sought to tax the same as unexplained investment under section 69 of the Act. The addition under section 69 was deleted by the CIT(A). Before the Tribunal, the revenue argued that the alleged gifts were taxable under section 68 of the Act as unexplained cash credits. The proposition raised by the Id. DR is not adjudicated as an issue by the Tribunal at all and therefore this judgement is not a relevant precedent. Whereas, in two jurisdictional special bench cases relied on by the assessee, this point has been specifically considered 24. The Supreme Court decisions in case of T. V. Sundaram lyengar and Karamchand Thapar relied on by the Id. DR are distinguishable as under: i. In T.V. Sundaram lyengar, the Supreme Court was concerned with an assessee who used to collect amounts in the name of deposit, which remained unclaimed. The amounts collected were in the nature of sale consideration / trade advances as the Supreme Court itself observed that there was no dispute that the deposits were received in the course of carrying on of business of the assessee. The Court considered the amount as recovery of additional amount as integral part of the commercial transaction and therefore chargeable to tax. The Supreme Court in case of T. V. Sundaram lyengar was not concerned with loan for capital account and therefore the case is distinguishable on facts. ii. In the case of Karamchand Thapar, the assessee was in the business of acting as an agent for collieries and coal purchasing companies. The assessee used to collect under-loading charges from CO 193/Mum/2012 M/s. Tata Motors Ltd., the collieries in its own right and pass such charges recovered to the final customers only when demanded by such customers. The issue therefore arose whether the excess of such charges recovered by the assessee was chargeable to tax. The Supreme Court held that the assessee received these charges in its own right and not on behalf of its customers. The transaction in this case occurred during the course of business of the assessee and was not a capital transaction. Therefore, the decision is distinguishable on facts.

In view of the above discussion, we do not find any infirmity in the order of CIT(A) for deleting addition made u/s.41(1).

AO has also disallowed assessee’s claim of deduction u/s.35DDA on the plea that as per the details filed alongwith letter dt. 7/08/06 the assessee has claimed Rs,27,84,80,763/- in respect of the amounts paid towards ESS claim of 2000-01 and as the same, amount was allowed in earlier years on 1/5th basis and this was the 2nd year of claim u/s. 35DDA. The assessee has now submitted that a sum of Rs. 24,91,28,000/- has been paid in respect of claim 2000-01 towards pension and lumpsum. Therefore the claim to the extent of Rs.24,91,28,000/- being the amount actually paid is only allowed and the difference being Rs.2,93,52,763/- is disallowed u/s.35DDA. 27. Similarly in respect of ESS claim for 2001-02 in respect of Pension and Lumpsum, the assessee has submitted that only Rs.11,99,32,000/- has been paid. However the amount claimed and allowed was Rs.14,16,14,800/-. Therefore, as the amount actually paid is only Rs.11,99,32,000/-, the difference of Rs.2,16,82,800/- is being disallowed.

By the impugned order, CIT(A) deleted the same after observing as under:- 5.3 I have considered the facts ·of the issue and the submissions made by the AR and find merit in them. The issue under consideration is clearly covered by' the ITAT Mumbai decision in appellant's subsidiary M/s. H V Axles' Limited's case (ITA No.4306/Mum/05 A.Y.01-02), the relevant portion of which is extracted below: In ground No.3, the ld. AR contended that the ld.CIT(A) erred both in law and on facts in holding that the deduction u/s.35DDA is inadmissible on total liability incurred at the time of voluntary retirement and that deduction was admissible only on the amount actually paid during the year. The Id.CIT(A) further erred in holding that 'paid' used in section 35DDA means 'actually paid' and as such 'paid' as defined in sec.43(2) has no application for the purpose of the said section. 4.1 The Id.AR further contended that the issue raised in ground No.3 is also covered by the decision of Hon'ble Bombay High Court in the case of CIT vs. Tata Hydro Electric Supply Co. Ltd. 219 IR 178 CO 193/Mum/2012 M/s. Tata Motors Ltd., (Bom). The relevant portion of the finding of the Hon'ble Jurisdictional High Court reproduced below: “Business expenditure - deduction approved superannuation fund provision made for contribution to fund-assessee following mercantile system of accounting- obligation to prove for liability "paid" in section 36(1)(iv) to be given same meaning as in section 43(2) - assessee entitled to depreciation. on increased repayment liability - Income Tax Act, 1961, section 32." 4.2 We have carefully perused the facts of the case and relevant records including the decision of the Jurisdictional High Court relied upon by the assessee and found that the issue is covered by the said decision. The ld. DR was fair to concede the contention of Id.AR. Respectfully following the above decision of the Hon.ble Jurisdictional High Court (supra}, the findings o-f the ld.CIT(A) on this issue cannot be sustained, therefore, this ground of appeal

As per learned AR Deduction U/S 35DDA is allowed for a period of 5 years. Once a deduction has been allowed, it cannot be denied in subsequent assessment years unless deduction granted earlier is withdrawn. For this Reliance is placed on the following:

CIT v Paul Brothers (216 ITR 548) (Bom) 2. CIT v/s Modi Industries Limited (327 ITR 570)(Del) 3. Saurashtra Cement & Chemical Industries Ltd., vs. CIT (123 ITR 669) (Guj) 34. We have considered rival contentions and carefully gone through the orders of the authorities below. Section 43(2) defines the word 'paid' to mean 'actually paid or incurred according to the method of accounting. Since, the assessee follows 'mercantile' basis of accounting, the word 'paid' ought to be interpreted as 'incurred'. Even the context does not require different interpretation of the word 'paid' in section 35DDA. There are three different phrases used in the Act in the context of computation of business income viz. 'paid', 'actually paid' and 'payment has actually been made.' CO 193/Mum/2012 M/s. Tata Motors Ltd., 35. In respect of section 36(iv), the Bombay High Court in case of Tata Hydro Electric has clearly observed that there is nothing in the subject or context which requires otherwise or a departure from the meaning conveyed by the definition of 'paid' in section 43(2). The assessee submitted that cases where the intention of the legislature is to allow deduction on actual payment, it has provided for the same by use of different words / phrases. Absence of such words / phrases in section 35DDA indicates that the deduction has to be allowed in accordance with the meaning of the word 'paid' as defined in section 43(2).