D.C.I.T., CIRCLE-10, KOLKATA, KOLKATA vs. M/S EUREKA FORBES LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B”, BENCH KOLKATA BEFORE SHRI S.S.VISWANETHRA RAVI, JM & DR. A.L.SAINI, AM आयकर अपील सं./ITA Nos.2126&2625/Kol/2013 ("नधा"रण वष" /Assessment Year:2008-2009 & 2009-2010) Deputy Commissioner of Vs. M/s Eureka Forbes Ltd., Income Tax, Circle-10, 7, Chakraberia Road (S), P-7, Chowringhee Square, Kolkata-700025 3rd Floor, Kolkata-700069 "थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAACE 5767 F .. (अपीलाथ" /Appellant) (""यथ" / Respondent) Revenue by : Shri Niraj Kumar, CIT DR Assessee by : Dr. Samir Chakraborty, Sr. Advocate & Shri Abhijit Biswas, Advocate सुनवाई क" तार"ख / Date of Hearing : 06/12/2016 घोषणा क" तार"ख/Date of Pronouncement 21/12/2016 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM:

These two captioned appeals filed by the Revenue, pertaining to the assessment years 2008-2009 & 2009-10, are directed against the order passed by ld. Commissioner of Income Tax (Appeals)-XII, Kolkata in Appeal No.507/XII/Cir-10/10-11, dated 18.03.2013 and Appeal No. 508/XII/10/2011-12, dated 19.08.2013, which in turn arise out of orders passed by the Assessing Officer (AO) Under Section143(3) of the Income Tax Act 1961, (in short the ‘Act’), dated 30.12.2010 and 30.12.2011. 2. These two appeals filed by the Revenue pertain to same assessee, different assessment years, common issues involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. First, we take Revenue’s appeal in ITA No.2126/Kol/2013. 3. Brief facts of the case qua the assessee are that the assessee filed

its return of income on 27.09.2008 declaring total income of Rs.34,58,89,112/- for the assessment year 2008-09. The return of income

was processed u/s.143(1) of the I.T.Act on 12.08.2009 by the DCIT,

Circle-10, Kolkata. Later on, the case was selected for scrutiny U/s 143(3)

of the Act and the AO completed the assessment by making the addition

on account of cash credit u/s.68 of the Act at Rs.4,80,63,259/-, addition

on account of repairs and maintenance expenses at Rs.1,43,46,644/-,

addition on account of irrecoverable advance written off at Rs.1,49,00,000/-, provisions for future warranty claims at Rs.4.51 crores

and expenditure incurred in acquisition of bid at Rs.1,18,96,000/-.

before the ld. CIT(A), who has deleted the additions made by the AO, by observing the followings :-

Observations of ld CIT (A) for Ground No.1 “4. I have considered the finding of the A.O. in his order dt. 30-12- 2010 and the written submission filed by the A.R. during the appellate proceeding. Appeal on ground no. 1 is against the disallowance of Rs. 48063259/- as unexplained cash credited u/s. 68 of the I.T Act, 1961. The AO has given finding in the assessment order that the assessee did not discharge the initial burden to supply the details like PAN, complete address etc. of suppliers. The A.O. has also mentioned that the appellant has failed to discharge its onus to prove the existence, creditworthiness etc. of its creditors and therefore, the AO treated this liability as bogus and disallowed the same treating it as cash credit u/s. 68 of the I.T.Act, 1961. During the appellate proceeding the A.R. submitted a detailed submission documents and evidences of the existence of various parties with whom the assessee had transactions. The same were sent to the A.O. for verification and his remand report. But no remand report has been submitted by the A.O. Again a reminder was sent. But no remand report has been received. On 10.10.2011 DCIT, Cir-10. Kolkata attended the appellate proceeding, but nothing in writing has been received from the AO. The AR in his written submission filed, has brought on record that during the assessment proceeding hardly 10 days were given to submit addresses, PAN etc. of more than 1300 parties with whom the assessee had entered into transactions. However, relevant address along with PAN were submitted. During the appellate proceeding also the AR has submitted a comprehensive list of such parties, their addresses, PAN etc. The AR has also brought on record that all the payments by the assessee company were made through account payee cheque only. It has also been pointed out that creditworthiness of parties (creditors) is apparent from details as parties are mainly corporate entities including listed companies financial details of which is available in public domain. The AR has filed a case law of Addl. CIT Vs. Bahri Bros. Pvt. Ltd. (154 ITR 244) Patna. In this order the Hon'ble High Court has observed "the very fact that all the transactions were entered into between the parties through account-payee cheques makes the question of identity of creditors fall into oblivion and it becomes absolutely irrelevant.

I have considered the finding of the AO. in his assessment order and I have also considered the written submission and case laws filed by the A.R. during the appellate proceeding. I find that the A.O. asked the assessee to file complete address, PAN and other Identity proof of all the parties with whom the assessee had transactions at the fag end of assessment proceeding. It would not be possible for the A.R. to collect & file the complete details of such large no. of people within such a short time. Later on, the A.R. has submitted complete details with address proof etc. at the time of appellate proceeding which were sent to A.O.also. Regarding creditors since all the payments by the assessee had been made by account payee cheques, therefore, existence of such parties cannot be denied. Further, the AR. has brought on record that mostly the creditors are listed companies whose financial status is already available in public domain. I have also considered the case law cited by the A.R. I think the creditors existence is hardly questionable as observed by the Hon' ble Patna High Court in the case of Bahri Bros. Pvt. Ltd. (supra)". After-taking into consideration all these facts and material (submission, details, documents etc. filed by the AR) available on record, I think AO is not justified in making addition of Rs.4,80,63,259/- on this ground. Thus, assessee's appeal on grounds No.1 is allowed.”

Observations of ld. CIT (A) for Ground No.2 Appeal on ground no. 2 is against the disallowance of Rs.1,43,46,644/- incurred of repairs and maintenance on the ground that the same were capital in nature. The AO in the assessment order has given his finding that the expenditure incurred and debited under this head have an enduring benefit and has brought into existence new capital assets for assessee. The AO has also pointed out that the assessee/A.R. failed to establish as to how the expenditure incurred could help the appellant in the process of earning profit in the course of its business. During the appellate proceeding the A.R. has submitted that the assessee spent Rs.4,09,64,919/- out of which the A.O. has disallowed Rs. 1,43,46,644/- treating it as capital expenditure. The AR has also submitted a value-wise and quantity-wise summary of list of items disallowed. From the details filed by the A.R. it is seen that the expenditure of Rs. 76.47 lakhs has been incurred on leased premises. The A.R. has brought on record the case law of Modi Spg. & Wvg. Mills Company Ltd. Vs. CIT (1993) 200 ITR 544 Delhi. In its judgement the Hon'ble Delhi High Court has observed that if a tenant incurs an expenditure on rented building for its renovation or alteration, he does not acquire any capital assets because the building does not belong to him and, such an expenditure will be revenue in nature. From the chart filed by the A.R. it is seen that Rs.13.65 lakhs has been paid as annual maintenance charges for computer etc. Rs. 3.5 lakhs on prepaid expenses, Rs. 7.82 lakhs on replacement items and Rs. 42.02 lakhs on others. I have considered the finding of the A.O. and the submission along with the chart and case laws filed by the A.R. Keeping in view the ratio decided by the Hon'ble Delhi High Court in the case of Modi Spg. & Wvg. Mills Company Ltd.(supra) expenditure on leased premised cannot be capital in nature. Similarly, annual maintenance charges and prepaid expenses are also not expenditure incurred to acquire capital asset. However. replacement items of Rs. 7.82 lakhs may be of capital in nature. Similarly, since all the details of expenditure of Rs. 42.02 lakhs are not available on records. Therefore, 10% of such expenses i.e. Rs.420000/- are taken as expenditure incurred for assets of capital in nature. Thus, AO's addition under this head is restricted to Rs. 7.82 lakhs plus Rs.4.20 lakhs i.e. Rs.12,02,000/-. Hence, assessee's appeal on ground no. 2 is partly allowed.

Observations of ld CIT(A) for Ground No.3 7. Appeal on ground no.4 is against the disallowance of Rs.1,49,00,000/- being irrecoverable advance written off. The fact of the case is that the assessee company had 70% of equity in a subsidiary company which was in the same line of business as that of the assessee. During the year under assessment the assessee company had given advances of Rs. 149 lakhs to the subsidiary company for its working capital requirements. But the subsidiary company was continuously making losses. Therefore, the management of the assessee company decided to come out of the affairs of the subsidiary company and thus transferred its shares. As the subsidiary company was making losses only, therefore, the assessee company could not recover its advances and thus charged it to its profit and loss account as business expenditure. In the assessment order the A.O. disallowed this amount giving his finding that the advance was given by the assessee to its subsidiary company, not obtaining any material or benefits for the business of the assessee. The A.R. has filed a written submission in which he has brought on record that the subsidiary company was set up as a service provider for maintenance of various electrical and electronic appliances. The assessee also engaged in a similar activity of dealing in water purifier (Aqua-guard) and vacuum cleaner. Thus, there is a clear cut relationship between activity of assessee company and that of the subsidiary company. The A.R. has submitted a case law of Western India Oil Distributing Company Ltd. Vs. CIT (77 ITR 140) in which the Hon'ble Bombay High Court held that expense incurred for the purpose of termination of disadvantageous trade relationship are incurred wholly and exclusively for the purpose of company's trade. I have considered the finding of the A.O. on this issue and the written submission and case laws filed by the A. R. I find that the assessee company had given advances to its subsidiary company which was also in the same line of business as that of the assessee. As the assessee company decided to come out of the business activity of its subsidiary because of continuous loss making by the subsidiary company, therefore, this issue is squarely covered by the finding given by the Hon'ble Bombay High Court in the case of Western India Oil Distributing Company Ltd.(supra). Thus assessee's appeal on this ground is allowed.

Observations of ld. CIT(A) for Ground No.4 8. Appeal on ground no.5 is against the disallowance of Rs.4,51,00,000/- u/s.37(1) of the I.T.Act, 1961. The assessee had made a provision of Rs.4.51 crore for the future warranty claims on account of the giving warranty for certain products undertaking to repairs, replacement of items that failed to perform satisfactorily during warranty period. The AO has given his finding that the calculation of expenditure on replacement of items during the warranty period was based on surmises and conjectures. It was not backed by statistics and so it was unscientific. The AR in his written submission has pointed out that a complete statistical data was provided to the AO regarding replacement of items in earlier years. The AR has also submitted a case law of Rotork Controls India Pvt. Ltd. Vs. CIT (314 ITR 62) (SC). In this case the Hon’ble Supreme Court held that where there was warranty obligation such obligation was a part of the sale price and stood attached to the sale price of the product. It was held that a warranty obligation is a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. If it is so made it is a liability allowable as deduction u/s. 37 of the Act. I have considered the finding of the A.O. on this issue and the written submission and case law filed by the A.R. during the appellate proceedings. I think this issue is squarely covered by the ratio decided by the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd (supra). Thus, assessee's appeal on ground no. 5 is allowed. Observations of ld. CIT(A) for Ground No.5 9. Appeal on ground no. 6 is against the disallowance of Rs.1,18,96,000/- being expenditure incurred on account of acquisition bid. The fact of the case is that in order to expand its business in international market the assessee company participated in the biding process for acquisition of M/s. KXI in USA and for that purpose the assessee incurred an expenditure of Rs. 1,18,96,000/- in the form of professional fees, legal charges etc. However, as the bid price was not commensurate with the' product offered by M/s. KXI USA, therefore, the assessee exited from the final bid of the acquisition of the company. The A.O. in his assessment order has mentioned that as the assessee could not explain the advantages from the acquisition of the target company and the future benefits arising .out of such an acquisition. Therefore, expenditure incurred for the same was disallowed by the AO. The A.R. in his written submission filed during the appellate proceeding has pointed out that M/s. KXI, USA (the targeted company for acquisition) was engaged in the business of water purifiers the same as the assessee. The assessee wanted to acquire this company in order to expand its business overseas. But since the prices quoted in the final bid was not commensurate to the product, therefore, the assessee exited from the final biding. The AR. has also brought on record the case law of CIT vs Graphite India Ltd. 221 ITR 420 (Kol). In this judgment the Hon'ble Kolkata High Court has held that any expenditure incurred with the motive of expanding the possibility of the business of the assessee, such expenditure incurred did not bring into existence any capital asset of enduring nature and, therefore, it is to be considered as business expenditure. I have considered the finding of the AO and the written submission and case law filed by the A.R. during the appellate proceeding. I find that this issue is squarely covered by the ratio decided by the jurisdictional High Court in the case of Graphite India Ltd. (supra). Thus, assessee's appeal on ground no.6 is allowed.

5.1. The Ld. Departmental Representative (DR) submitted before us that the assessee is public limited listed company and hence, its conduct in all matters should have been exemplary. However, it is seen that the assessee has repeatedly found wanting in submission of evidences. The ld. DR pointed out that PAN No. is a basic document to conduct inquiry.

The ld. Assessing Officer has mentioned in his assessment order, the list

of parties supplied by the assessee. The said list of parties does not contain PAN No. Moreover, the said list does not contain the addresses (

vide page 3-6 of AO order). Without PAN No. it is difficult to conduct

internal inquiry as well as external inquiry. The Ld. DR also pointed out that the observations of the ld.CIT(A) that all transactions are through

cheques therefore these are genuine, is wrong. That is, all transactions

through cheque, does not mean that they are not bogus. In all the transactions, the identity, genuineness, and creditworthiness had not been proved by the assessee. The ld. CIT (A) admitted the additional

evidence without getting the remand report from the AO. As per section 250 (4) of the Act, the ld. CIT (A) could make such further inquiry as he

thinks fit, if he did not receive the remand report from Assessing Officer. If fact, the ld CIT(A) did not make further inquiry to prove the identity,

genuineness and creditworthiness of the creditors, therefore he did not follow the procedure given in section 250(4) of the I.T. Act.

The assessee has failed to discharge his onus of providing the initial

evidence on the issue like PAN Card, Bank statements, address,

confirmations and other details required by the AO. The assessee has failed miserably to do so. It is clear that no evidences were produced by the assessee to discharge the initial burden. The assessee has prevented

an enquiry by not bringing any material on record to show that the creditors are genuine. Therefore, the addition made by AO of Rs.

4,80,63,259/-u/s. 68 of the Act, is correct.

5.2 Ld. AR for the assessee has submitted before us that the assessee,

had submitted the details of major parties of Small Scale Suppliers, Other

Suppliers and Other Liabilities. Apart from this, the assessee had made a detailed submission before the ld CIT(A) which is reproduced below: “However, due to inadequate time provided by the A.O. of 1 week, the assessee was unable to submit details of all the parties due to voluminous nature of transactions. At the Outset, it is submitted that such disallowances are unjustified and unwarranted in case of large Company like Appellant which regularly gets its annual accounts audited by Statutory auditors (Annexure-I) and Tax Audit u/s 44AB, has Gross Sales of more than Rs.800 Crores, earned Net Profit of Rs.51.74 Crores during the year and paid taxes of Rs. 11.72 Crores. The AO failed to appreciate that in such a short time the Appellant was able to provide PAN and other details of more than 90% parties and could have provided the details of balance parties if sufficient time was granted to the Appellant. The Appellant also submits that the genuineness of Company is evident from the fact that Appellant is assessed under section 143(3) every year but no such disallowances have been made in the past assessments. It is submitted that the details of payment against such outstanding, supplied during the time of assessment was not for the year but as per data readily available in the limited time.”

5.3 Having heard the rival submissions, perused the material available on record, we are of the view that there is merit in the submissions of the ld.

DR for Revenue, as the propositions canvassed by the ld DR are supported by the facts narrated by him above. As he pointed out that ld.

CIT (A), as per section 250(4) of the Act, may, before disposing of any appeal, make such further inquiry as he thinks fit. But ld. CIT (A) did not conduct any inquiry to establish the identity, genuineness and creditworthiness of the creditors. Besides, the Assessing Officer did not give enough time to the assessee to submit details of all the parties. The assessee has pointed out before the ld.CIT (A), by way of written

submission, that Assessing Officer allowed one week time, which was not sufficient to prepare voluminous details. The said submission of the assessee is reproduced below: “However, due to inadequate time provided by the A.O. of 1 week, the assessee was unable to submit details of all the parties due to voluminous nature of transactions….”

Therefore, this issue requires a fresh examination at the end of the Assessing Officer for two reasons:

(i).The ld CIT(A) could not make further inquiry, as per section 250(4) of the Act, to establish the identity, genuineness and creditworthiness of the creditors. (ii). The Assessee did not get enough time to submit the details before the Assessing Officer.

Therefore, we are of the view that this issue requires fresh examination at the end of the Assessing Officer, therefore, we direct the Assessing

Officer to make fresh inquiry to establish the identity, genuineness and creditworthiness of the creditors. We, therefore, remit the case back to the file of AO with the direction mentioned supra.

5.4 In the result, the appeal filed by the Revenue, on this issue, is allowed

for statistical purposes.

as Revenue, AO Treated as Capital in nature.

6.1 The ld. DR for the Revenue had submitted that the entries in the annexure 9 which was submitted by Assessee before Assessing Officer,

do not bear the character of revenue expenditure or not in nature of repairs and maintenance. The ld.CIT(A) did not follow the proper

procedure and he could not obtain the remand report from the Assessing

Officer. As per section 250(4) of the Act, the ld CIT (A) did not conduct

further inquiry to establish whether expenditure is in the nature of Revenue or Capital. It is settled position of law that a lot of factors would determine whether the expenditure is capital or revenue in nature. It is seen in the said Annexure that the assessee has debited expenses like

purchase of scanners, UPS, batteries, provisions for earlier years, huge

plumbing expenses, expenditure in civil construction like extra space for godown, aluminium cubicals and fittings, purchase of chairs, sofas. There

are some entries which do not have any head but only amount has been mentioned. The expenditure mentioned by the assessee have an enduring benefit and has brought into existence a new capital asset for the assessee. Like for example, the scanner, the battery, the chairs are permanent assets. The office of the assessee, the godown, the computer,

the building are permanent business assets of the assessee and hence,

any expenditure incurred by the assessee for renovating the office,

godown etc. is to be treated as capital expenditure. The assessee has failed to establish as to how the expenditures mentioned by him can help

the assessee in the process of earning profit in the course of his business

activities. These expenditures, are adding value to the property, creating

new property or appreciably prolonging its life. The assessee is in the business of selling vacuum cleaners, water purifiers etc. and definitely not in the computer business or cinema theatre etc. to justify the expenditures

mentioned above as being incidental to his business. The assessee has incurred huge expenditure which has resulted in long term benefit to the assessee and such expenditure is not allowable as revenue expenditure

and the same cannot be passed as repair and maintenance. Therefore,

an amount of Rs.1,43,46,644/- out of a total of Rs.4,09,64,919/- incurred under the head 'repairs and maintenance' is treated as capital in nature.

This way, the ld DR has reiterated the stand taken by the Assessing

Officer. The ld DR also relied on the following judgment:

CIT,Madurai Vs.Saravana Spg. Mills (P) Ltd. [2007] 163 Taxmann 201(SC): Assessee manufacturer of yarn replaced old 3 ring frames by new ones and claimed expenditure incurred in said activity as current repairs contending that whole textile mill was a ‘Plant’ and ring frames were one of 25 machines which constituted a single process and therefore, replacement of frames be treated as replacement of part of plant/total machinery and not replacement of a machine-Assessing Officer held that each machine including ring frame was an independent and separate machine capable of independent and specific function and, therefore, expenditure incurred for replacement of entire machine would not come within meaning of words ‘current repairs”

6.2 The Ld. AR submitted that during the year under consideration, the assessee had incurred expenses on repairs & maintenance of Rs.4,09,64,919/- out of such amount the AO has disallowed

Rs.1,43,46,644/-. The assessee submitted complete details regarding the above mentioned expenditure as well as explained the nature thereof.

The Ld. AR further submitted that all these expenses have been incurred

by the assessee on Leased Assets. The assessee is not owner of leased

assets. Therefore any repairs and maintenance expenditure incurred by the assessee on leased assets do not give ownership to claim

depreciation. That is, in order to claim depreciation the assessee must be legal owner of the asset. Therefore, the expenditure incurred to maintain

the leasehold property is revenue in nature. The ld AR for the assessee

has shown us lease agreements and lease details. The AR for the assessee also relied on the following judgment: [1998] 99 Taxman 575 (SC): “In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction. The assesssee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever, substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed and depreciation. Looking to the nature of the advantage which the assessee obtained in commercial sence, the expenditure appeared to be revenue expenditure. The building was never belonged to the assessee. Right from the inception the building was under the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage the which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The High Court had , therefore, rightly considered this as obtaining a business advantage. The expenditure was , therefore, to be treated as revenue expenditure.”

6.3 Heaving heard the rival submissions, perused the material available

on record, we are of the view that there is merit in the submissions of the assessee, as the proposition canvassed by the ld.AR for the assessee are supported by the judgment of hon`ble supreme court in the case of CIT

Vs. Madras Auto Service (P) Ltd. (Supra). The ld AR pointed out that the assessee spent the amount to repair leased property. The leased property

belongs to the Lessor and not to the assessee. The assessee can not claim depreciation also. Considering the factual position, we are of the view that order passed by the ld CIT (A) does not contain any infirmity.

Therefore, we confirm the order of ld.CIT(A). 6.4 In the result, the appeal filed by the revenue on this issue is dismissed.

1,49,00,000/- written off by the assessee.

7.1 The Ld. DR for the Revenue has reiterated the stand taken by the Assessing Officer. He stated that Assessing Officer has passed a reasoned order stating the followings:

“It is clear that this advance was given to a newly formed subsidiary company and not to obtain any material or benefits for the purposes of the business of the assessee company. It is also noticed that the assessee company sold of these shares and then charged this advance under revenue expenditure. The allowability of expenditure has been dealt with u/s.30 to 36 and Section 37 of the I.T.Act 1961. The Key principles of allowability of an expenditure have purpose as the cardinal point to be considered before its allowance or otherwise. As discussed, the assessee is in the business of selling, manufacturing of vacuum cleaners and not in the business of advancing loans. In this instant case of the assessee, the assessee himself has admitted to have advanced loans as working capital to the subsidiary company wherein it had held 70% equity. The assessee has failed to discharge its onus to establish any nexus between its own business and the business of the subsidiary. It has failed to adduce any evidence to bring out any covert or overt advantage in the business of the assessee itself. The assessee has failed to provide any evidence like the object clause of memorandum of association of the subsidiary company, the qualification of the stake holder, the results of the subsidiary company, the nature of the advance alongwith agreement, the price in which this investments in the subsidiary company was sold, the efforts made by the company to recover these advances, the other transaction of trade between the, subsidiary company and the assessee company etc. The assessee has merely cited two cases which are distinguishable both on law and facts and hence, the claim of this expenditure u/s.37 does not have any legs to stand. In fact, the assessee has not even supplied the resolution of the board in this regard. In fact, in the absence of the details of the sale of the shares of the subsidiary company, the fact of a package deal can not be ruled out. To claim a debt as bad debt and as a deduction, the debt should be in respect of the business which is carried on by the assessee in this assessment year. In fact, the assessee has made the differentiation and categorize this as an advance and not a debt because a debt arises on account of transactions of the business carried out by the assessee' and to that extent debt means something more than a mere advance. The advance written off can not be allowed as a bad debt or an irrecoverable advance as revenue deduction. To claim a deduction it has to be proved that there is close proximity between the business of the assessee and the person to whom such loans have been advanced. In the present case, the advance which has become bad has not emerged from the trading activity of the assessee and hence, can not be allowed as a revenue deduction. The assessee company is neither a banker, nor a money lender and neither is this advance incidental to the business of the assessee but merely money being handed over to a subsidiary company and in turn the subsidiary company failing to return the same cannot be allowed as deduction uls.36 or U/s. 37 on writing of the same. Reliance is also placed on [2010] 6 taxmann.com 86 (Hyd- TAT) ITAT, Hyderabad Bench 'B', in the case of Hyderabad Vst. Industries Ltd. Vs. ACIT in ITA No. 691/Hyd/2005, July, 2010. The assessee has miserably failed to marshal enough evidence to support its case that these advances would in any way caused any advantage to itself either in the present or in the future. It has also not been able to adduce any evidence to support the theory of proximity between the assessee's own business and its subsidiary and neither, furnished anything to substantiate the stand of the assessee with regards to the test of purpose.”

This way, the Departmental Representative (DR) for the Revenue, has primarily reiterated the stand taken by the Assessing Officer, which we

have already noted above.

7.2 On the other hand the ld. AR for the assessee has submitted that subsidiary company was set up as a service provider for maintenance of various electrical and electronic appliances. The assessee is presently

engaged in a similar type of activity i.e. service provider, for its water

purifiers. Thus, there is a clear nexus between the business carried on by the subsidiary company and the assessee. Since the subsidy company

was incurring losses, the assessee sold off its share. However, the advances given by the assessee were not recoverable. Hence, the expenditure in form of advances incurred by the assessee is in the nature of normal business expenditure, and hence, be allowed u/s.37(1) of the Act. The Ld. AR for the assessee has also relied on the judgment of Bombay High Court in the case of Western India Oil Distributing Company

Ltd. Vs. CIT [1970] ,77 ITR 140 in which the Hon`ble court held that the expense incurred for the purpose of termination of disadvantages trade

relationship are incurred wholly and exclusively for the purpose of company`s trade.

7.3 Heaving heard the rival submissions, perused the material available

on record, we are of the view that there is merit in the submissions of the assessee, as the proposition canvassed by the ld.AR for the assessee are supported by the judgment of Bombay High Court (Supra) and facts

narrated by him. The Ld AR pointed out that the assessee is presently

already engaged in a similar type of activity i.e. service provider, for its water purifiers. Thus, there is a clear nexus between the business carried

on by the subsidiary company and the assessee. Since the subsidy

company was incurring losses, the assessee sold off its share. However,

the advances given by the assessee were not recoverable. Hence, the expenditure in form of advances incurred by the assessee is in the nature

of normal business expenditure, and should be allowed u/s.37(1) of the Act. Considering the factual position and precedent cited by the assessee,

we are of the view that the ld. CIT (A) had passed a reasoned order and it does not require any interference, therefore, we confirm the order

passed by the ld CIT(A). 7.4 In the result, the appeal filed by the Revenue on this issue is dismissed.

4.51 Crores.

8.1 The ld. DR for the Revenue had primarily reiterated the stand

taken by the Assessing Officer and submitted before us that the assessee

is primarily engaged in the manufacturing and selling of two items, that is,

vaccum cleaner and water purifying systems, and hence, the liability is contingent . The assessee has not provided any statistical data for the past few years where warranty claims have been made by the assessee.

There being no evidence by the assessee to prove by data about the correctness and accuracy of the claim, the entire amount of Rs.4.51

crores should be disallowed.

8.2 On the other hand Ld. AR for the assessee has submitted that an obligation under warranties is an obligation in present and only the discharge of such obligation is at a future date. Also, as per AS-29 issued

by the ICAI, any present obligation requiring future outflow of resources

and for which a reliable estimation can be made, provision for such obligation shall be recognized in the books of the entity. In case of the assessee, the sale of products with warranty is a present obligation even

that gives rise to a future probable outflow of resources, the probability of incurring of which is more high. Hence the assessee have recognized

provision on the best estimate of the cost to make good the warranty products sold before the balance sheet date. Therefore, disallowance

should be deleted and the amount of provision recognized for warranty

claims be allowed under section 37 of the Act. The Ld. AR for the assessee has also relied on the judgment of Hon`ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. Vs.CIT, 314 ITR 62, wherein

the Hon`ble Supreme Court held that where there was a warranty

obligation such obligation was a part of the sale price and stood attached

to the sale price of the product. It was held that a warranty obligation is a present obligation as a result of past events resulting in an out flow of resources and a reliable estimate could be made of the amount of obligation. If it is so made it is a liability allowable as deduction U/s 37 of the Act.

8.3 Heaving heard the rival submissions, perused the material available

on record, we are of the view that there is merit in the submissions of the assessee, as the proposition canvassed by the ld.AR for the assessee are supported by the judgment of Hon`ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. (Supra) and the facts narrated by him. The Ld AR pointed out that warranty obligation is a part of sale price. The Company normally gives warranty for its products to undertake repair and replacement of items that failed to perform satisfactorily during warranty

period. The customer purchases the products because the company gives

warranty to repair/replace the defective products. Considering the factual

position and precedent cited by the assessee, we are of the view that the ld. CIT (A) had passed a reasoned order and it does not require any interference, therefore, we confirm the order passed by the ld CIT(A).

8.4 In the result, the appeal filed by the Revenue on this issue is dismissed.

9.Ground No. five relates to expenditure incurred in acquisition bid

at Rs.1,18,96,000/-

9.1 Ld. DR for the revenue has primarily reiterated the stand taken by the Assessing Officer which is given as under:

“The assessee has failed to substantiate the claim for allowance of this expenditure under the P&L account as it has not brought any evidence such as legal and professional charges incurred, correspondences with the company in question, resolution of the Board, the annual report of the company in which the assessee claims to have been interested, details of foreign travel with this purpose etc. Further, it has not been able to bring out the complementary nature of the business of the assessee and the company which it attempted to acquire. The assessee has merely submitted the name of a company and some case laws which are distinguishable from the case of the assessee. The assessee has also not provided any evidence where a fact can come out that the directors of both the company met and though that it would be advantageous to both the companies if this acquisition takes place. Even if, the acquisition bid was successful, the acquisition would be of a capital asset and hence, the expenditure would partake the nature of capital expenditure. Since the assessee has not brought any evidence to prove that both the companies were carrying on complementary businesses and the acquisition was necessary for the smooth and efficient conduct of the business, the question of allowability of this expense under P&L account does not seem logical. The assessee has also failed to prove that the transaction of acquisition of this company was in any way related to the commencement, and carrying on of the assessee's own business and hence, in a normal course cannot be regarded as expenditure for the purpose of the business, which was carried in the accounting period. The assessee has also not been able to bring anything on record to make out a case of advancement of business by entering into this transaction at any future date. The assessee has not provided any evidence in as much as the projections of profits after the acquisition of this company. The assessee has not provided any material evidence on the due diligence procedure carried out if any. The assessee has not furnished its analysis if any, of the company in question purportedly for acquisition. In fact, the assessee has not even mentioned the nature of products being manufactured by the company purportedly to be acquired. Hence, in a nutshell, the assessee has failed to bring anything on record to prove the genuineness of this transaction, the complementary nature of both the businesses, and the way in which this expenditure was for the purposes of smooth and efficient conduct of the business, and future benefits arising out of such an acquisition. In the absence of such evidences the entire expenditure of Rs.118.96 lakhs on account of acquisition bid is disallowed and added back to the income of the assessee.”

9.2 The LD. AR for the assessee has submitted before us that M/s KXI,

the targeted company for acquisition, was engaged in the business of water purifiers, the same as the assessee. It was sought to be acquired

as a geographical expansion of the assessee’s existing line of business of water purifiers. The bid price was not commensurate with the products

offered by the M/s KXI, hence, the assessee exited from the bid process

and consequently acquisition did not take place. However, the assessee

had incurred expenditure on account of legal and professional fees, in the bidding process. Further the project of acquisition being in the course of the existing business of the assessee, the expenditure incurred in connection with the same shall also be considered as business

expenditure. The ld AR also relied on the judgement of Hon`ble Kolkata

High Court in the case of CIT Vs. Grahphite India Ltd. 221 ITR 420(Kol)

wherein it was held that any expenditure incurred with the motive of expanding the possibility of the business of the assessee, such expenditure incurred does not bring into existence any capital assets of enduring nature and therefore, it is to be considered to be business

expenditure. 9.3. Heaving heard the rival submissions, perused the material available

on record, we are of the view that there is merit in the submissions of the assessee, as the proposition canvassed by the ld.AR for the assessee are supported by the judgment of Hon`ble Calcutta High court in the case of Grahphite India Ltd. (Supra). The Ld. AR pointed out that M/s KXI, the targeted company for acquisition, was engaged in the business of water

purifiers, the same as the assessee. It was sought to be acquired as a geographical expansion of the assessee’s existing line of business of water purifiers therefore, expenditure incurred on acquisition bid is revenue expenditure.

Considering the factual position and precedent cited by the assessee, we

are of the view that the ld. CIT (A) had passed a reasoned order and it does not require any interference, therefore, we confirm the order passed

by the ld CIT(A).

9.4 In the result, the appeal filed by the Revenue on this issue is dismissed.

Revenue`s appeal in ITA No.2625/Kol/2013(AY 2009-2010)

The grounds raised by the Revenue in this appeal are as under :-

as under :-

“I have carefully considered the submission put forth on behalf of the appellant along with the supporting documents/details furnished & case laws relied upon, perused the facts of the case including the observation of the AO made in the assessment order and other materials brought on record. I find substantial force in the argument advanced by the A/R of the appellant. It is submitted that the appellant had submitted complete details regarding the above mentioned expenditure as well as the details of tax deducted thereon, vide its letter dated 2nd December 2011 before the AO. The A/R of the appellant contended that on perusal of the details provided as Annexure, It could be seen that the A.O. has disallowed expenses ranging from Rs.200/- to Rs.12 Lakhs by treating them as capital in nature. On a perusal of the list, it also could be seen that such expenses are recurring in nature and did not result in any benefit of enduring life. As regards the expenditure incurred on leased premises, it is submitted that the Hon'ble Delhi High Court in the case of Modi Spg.& Wvg. Mills Co. Ltd. v. CIT [1993] 200 ITR 544 has held that if a tenant incurs an expenditure on a rented building for its renovation or alteration, he does not acquire any capital asset, because the building does not belong to him and, ordinarily, such an expenditure will be of a revenue nature. I find from the copy of the order of the Hon'ble ITAT ( Annexure - Ill) that this ratio of the High Court has been applied by the Hon'ble ITAT in Appellant's own case in AY 1992-93 and has held the same as revenue in nature and allowed it as deduction. As per the Hon'ble ITAT ( Point no. 9 page3) it is mentioned that- "The facts that the assessee incurred the said expenditure only for renovating its office premises by replacing the old furniture etc , the assessee has not created any new asset but had incurred the expenditure facilitate its business and therefore we agree with the Ld AR of the Assessee that the nature of the expenditure incurred by the assessee is revenue expenditure and the same has to be allowed as deduction u/s 37(1) of the Act. " It is also brought to my notice that the tor the Assessment Year 2008-09 in Appeal no. 507/XII/Cir-10/10-11, the Commissioner of income Tax (Appeal -XII) has partly allowed the expenditure while- adjudicating the similar issue considering the submission of the appellant. I have gone through the decision of my predecessor on the issue on the similar set of facts wherein he observed as under: "Appeal on ground no. 2 is against the disallowance of Rs. 14346644/- incurred of repairs and maintenance on the ground that the same were capital in nature. The AO. in assessment order has given his finding that the expenditure incurred and debited under this head have an enduring benefit and has brought into existence new capital assets for assessee. The AO has also pointed out that the assessee/AR. failed to establish as to how the expenditure incurred could help the appellant in the process of earning profit in the course of its business. During the appellate proceeding the AR. has submitted that the assessee spent Rs.40964919/- out of which the AO has disallowed Rs.14346644/- treating it as capital expenditure. The A.R,. has also submitted a value-wise and quantity-wise summary of list of items disallowed. From the details filed by the AR it is seen that the expenditure of Rs. 76.47 lakhs has been incurred on leased premises. The AR has brought on record the case law of Modi Spg."& Wvg. Mills Company Ltd. Vs. CIT (1993)200 ITR 544 Delhi. In its judgement the Hon'ble Delhi High Court has observed that if a tenant incurs an expenditure on rented building for its renovation or alteration, he does not acquire any capital assets because the building does not belong to him and, such an expenditure will be revenue in nature. From the chart filed by the AR it is seen that Rs. 13.65 lakhs has been paid as annual maintenance charges for computers etc. Rs.3.5 lakhs on prepaid expenses, Rs. 7.82 lakhs on replacement items and Rs. 42.02 lakhs on others. I have considered the finding of the AO and the submission along with the chart and case laws filed by the AR. Keeping in view the ratio decided by the Hon'ble Delhi High Court in the case of Modi Spg. & Wvg. Mills Company Ltd. (supra) expenditure on leased premised cannot be capital in nature. Similarly, annual maintenance charges and prepaid expenses are also not expenditure incurred to acquire capital asset. However, replacement items of Rs.7.82 lakhs may be of capital in nature. Similarly, since all the details of expenditure of Rs.42.02 lakhs are not available on records. Therefore, 10% of such expenses i.e. Rs. 420000/- are taken as expenditure incurred for assets of capital in nature. Thus, AO's addition under this head is restricted to Rs.7.82 lakhs plus Rs. 4.20 lakhs i.e. Rs.12,02,000/-. Hence, assessee's appeal on ground no. 2 is partly allowed."

10.1 Considering the above cited facts, on the same identical issue, we

have already dismissed the appeal of the Revenue ( vide para 6.3 above),

in Revenue`s appeal 2126/k/2013, A.Y. 2008-09. Therefore, we dismiss

the ground No. 1 of Appeal in ITA No.2625/K/2013. 11. In regard to ground No.2 in Revenue appeal in ITA

No.2625/Kol/2013, the ld.CIT(A) has observed as follows :- “I have carefully considered the submission put forth on behalf of the appellant along with the supporting documents/details furnished & case laws relied upon, perused the facts of the case including the observation of the AO mode in the assessment order and other materials brought on record. It is submitted that in the case of the Appellant, the sale effected directly to the dealers is fully recognized as revenue by the Appellant immediately and then only any discount / incentive is given. The Appellant submitted that' the relationship between Appellant and Distributors/Dealers is on 'principal to principal' basis and not that of 'principal and agent' as considered by the AO, which is a precondition for invoking Section ,194H of the Act. Further such incentives and discounts are given to the dealers on outright purchase of goods and therefore it is argued that no tax is deductible in terms of Section 194H on Incentives or discounts in such transactions. In support of this contention, the A/R of the appellant placed reliance on the judgments of a number of High Courts and ITATs as above. My attention is also drawn to the decision of my predecessor on the issue while adjudicating the appeal for the Assessment Year 2008-09 in appeal no. 507/XII/Cir- 10/10-11 and contended that the same was decided in favour of the appellant on the identical set of facts and ground. It is noted that the Commissioner of income Tax (Appeal -XII) has observed that the relationship between the appellant company and distributing companies is not of principal and agent but of transaction between 'principal to principal' and therefore, in this case TDS on incentives is not applicable. Hence disallowance u/s 40(a)(ia) of the Act is not justified. Accordingly appellant's appeal was allowed. The relevant portion of the order of my predecessor is reproduced below:

"Appeal on ground no. 3 is against the disallowance of expenses on selling and sales promotion of Rs. 30200000/- u/s. 40(a)(ia) of the I.T.Act, 1961. The AO has given his finding that the assessee spent Rs. 285216992/- on sales promotion during the year out of which Rs. 30200000/- were paid as incentives and discounts to the dealers of company. As no tax was deducted on such payments. Therefore, the amount of Rs. 30200000/- was disallowed u/s. 40(a)(ia) of the I.T.Act,1961. The AR has filed a detailed submission during the appellate proceeding. The AR has submitted that the relation between the assessee company and dealer companies is not of the principal and the agent. Rather it is a relation/transaction between two different and separate companies i.e. transaction between principal to principal. Therefore, there was no question of deducting tax at source. The AR has also submitted that assessee's this explanation has been accepted by the department continuously for more than 20 years and it has been accepted in later years also. Only during assessment of 2008-09 that the A.O. treated the relation between assessee and distributing companies as principal and agent and not as transaction between principal to principal. The AR has also cited a number of case laws which have been considered. I have considered the finding of the A.O. and written submission and case laws filed by the A.R. during the appellate proceeding. I find that there are no. 1 written agreement between assessee and all the dealers, no. 2 the assessee company accounts for payment to distributors as discounts/incentives, no. 3 the distributors are free to resale the product at any pride as they deemed fit within MRP, no. 4 the distributors work mainly for their own profits earned on the basis of their sales at prices decided by them. The incentives and discounts based on their off take only add to their normal profits. Thus, it is clear from above facts that the relation between the assessee company and distributing companies is not of principal and agent but of transaction between principal to principal. Therefore, in this case TDS on incentives is not applicable. Hence, disallowance u/s.40(a)(ia) is not justified. Accordingly, assessee's appeal on ground no. 3 is allowed.

11.2 Ld. DR for the Revenue has primarily relied on the stand taken by the Assessing Officer. Whereas, Ld AR for the assessee has pointed out

that the Revenue did not file appeal against the earlier order of the ld.CIT(A) on the same issue, therefore the Revenue cannot blow hot and cold. Even on merits of the case we find that the relationship between Assessee and Distributors/Dealers is on 'principal to principal' basis. The ld CIT (A) has passed a reasoned order on this issue as pointed out in the above para 11. Therefore, we confirm the order passed by the ld CIT (A) on this issue. 11.3 In the result, the appeal filed by the Revenue on this issue is dismissed. 12. In the result, the appeals filed by the Revenue in ITA No. 2126/Kol/2013 A.Y. 2008-09 and ITA No.2625/Kol/2013 A.Y. 2009-10, are dismissed. Order pronounced in the open court on this 21/12/2016. (S.S.VISWANETHRA RAVI) (DR. A.L.SAINI) "या"यक सद"य / JUDICIAL MEMBER लेखा सद"य / ACCOUNTANT MEMBER कोलकाता /Kolkata; "दनांक Dated 21/12/2016 "काश "म"ा/Prakash Mishra,"न.स/ PS आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant-DCIT Circle-10, Kolkata 2. ""यथ" / The Respondent.-M/s Eureka Forbes Ltd. 3. आयकर आयु"त(अपील) / The CIT(A), Kolkata. 4. आयकर आयु"त / CIT "वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, कोलकाता / DR, ITAT, Kolkata 5. 6. गाड" फाईल / Guard file. स"या"पत ""त //// आदेशानुसार/ BY ORDER,

उप/सहायक पंजीकार (Asstt.