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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri Mahavir Singh & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
These are cross appeals by Revenue and assessee are arising out of common order of Commissioner of Income Tax (Appeals)-XII, Kolkata in appeal No.34/XII/ACIT-12/06-07 dated 06.03.2008. Assessment was framed by ACIT, Circle-12, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 31.03.2006 for
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 2 assessment year 2003-04. Therefore we heard both the appeals together and deem it appropriate to dispose them by way of this common order. First we take up Revenue’s appeal in ITA No.1071/Kol/2008 AY 03-04. 2. Revenue has raised grounds, which are reproduced below:- “1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in allowing the assessee of Rs.22,69,471/- towards security deposits which were written off by the assessee company and claimed as deduction u/s. 28 of the I.T. Act when the assessee failed to give any reasons/evidences in support of its claim during the course of assessment proceedings as to why these amounts have become irrecoverable.
Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the claim of the assessee of Rs.34,03,526/- as contingencies written off u/s. 28 of the IT Act without appreciating the face that the assessee paid the sales tax under protest and since the liability as on date does not stand as it has not been crystallized in view of the decision of the appellant Authorities by way of remand orders to the lower Authorities which became time-barred subsequently.
Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in allowing the amount of Rs.17,98,092/- being excess depreciation on building when the current cost of construction should be taken as the sales consideration of the building for the purpose of reducing it from the WDV.
Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in allowing the amount of Rs.9,38,852/- on account of earlier period electricity expenses when the assessment itself failed to collect the bills from the electricity office in due time after the closure of the factory.
Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in allowing the amount of Rs.16,05,000/- being paid to labourers when the assessee failed to furnish the details of disputed labour cases before the A.O.”
Shri K.R. Vasudevan, Shri Basant Gadhyan and Shri Hardik Lakhani, Ld. Authorized Representatives are appearing on behalf of assessee and Shri Sallong Yaden, Ld. Departmental Representatives appearing on behalf of Revenue.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 3 3. The issue raised by Revenue in ground no. 1 in this appeal is that ld. CIT(A) erred in deleting the addition made by the AO for an amount of Rs. 22,59,471/- on account of holding the security deposit written off as capital loss.
The facts in brief are that the assessee in the present case is a Limited Company registered under Companies Act, 1956. The assessee is engaged in manufacturing and selling of various industrial and medical gases. The assessee during the year has written off security deposits for a sum of Rs. 22,59,471/- in the profit and loss account under section 28 of the Act as trading loss due to non-recovery. These security deposits were made by the assessee with the electricity board, telephone department, hospitals and EMD (earnest money deposits) for obtaining commercial contracts. However the AO treated the same as capital loss therefore not allowable deduction as business expenditure while computing the income under the business head. The AO also observed during the assessment proceedings that the assessee failed to furnish the reasons for treating the amount of security deposit as irrecoverable. Accordingly the AO has disallowed security deposits and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) where it was submitted that security deposits were made on revenue account in the course of normal business activities. These were written off as they became irrecoverable. The assessee also relied in the decision of Hon’ble Apex Supreme Court in the case of Badridas Daga v. CIT 34 ITR 10 wherein it was held that loss other than capital loss which is really incidental to the business is allowable under section 28 of the Income Tax Act. The assessee also relied in the case of Satluj Cotton Mills Ltd. Vs. CIT 116 ITR 1 wherein it was held that the loss on account of trading assets was allowable deduction and the loss on account of capital asset was not allowable deduction. In the instant case the security deposits were classified as current assets i.e. trading assets
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 4 as these were made in the normal course and for the effective running of business. Accordingly the learned CIT(A) deleted the addition made by the AO.
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
The ld. DR vehemently supported the order of AO whereas ld. AR supported the order of the learned CIT(A). We have heard the contentions of both the parties and perused the materials available on record. The AR has filed a paper book which is running from pages 1 to 76. From the aforesaid discussion we find that the assessee has written off certain security deposits during the year which were made with the telephone department, electricity department, hospitals and also as EMD etc. The reason for writing off these security deposits was explained as these were irrecoverable. However the same was disallowed by the AO on the ground that there is no provision under the Act to claim the loss by way of writing off capital assets. However, Ld. CIT(A) treated the aforesaid loss on account of trading assets and allowed the deduction while computing the “income” under the business head. Now the question before us whether the above loss is allowable as deduction while computing the income under the business head or not.
6.1 From the facts we find that the loss claimed by the assessee by way of writing off the security deposits was on the revenue accounts. These security deposits were made by the assessee in the normal course of business. By making the security deposit no fixed assets has come into existence. Therefore such security deposit was classified as current assets in the books of accounts of the assessee. The business expenditure which is not specifically provided in sections 30 to 36 of the Act can be allowed under section 37 of the Act. Such expenditures before qualifying for deduction, are required to be laid out or expended wholly and exclusively for the purpose of the business and profession. But expenditures in the nature of capital expenditures or personal expenses of the assessee are not admissible under
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 5 the said section. However, we find that issue raised by the Revenue is already covered in favour of the assessee in its own case in ITA No.1085/Kol/2007 and 1692/Kol/2007 for the assessment year 2002-03 where the Tribunal “C” Bench on similar facts has held that:-
“5. Ground No. 2 of the revenue pertains to earnest money written off and ground number 3 pertains to deletion of addition of 1,24,655/- being advanced to an employee treating the same as that this expense 6. On going through the order of the ld. CIT(A), we find no reason to interfere on the same. Accordingly both the grounds of the revenue are hereby rejected and dismissed.” In addition to the above we also find numerous judgments of various courts where such losses were allowed as deduction while determining the profit under the business head. Some of them are detailed as under for the purpose of the reference.
In the case of Ramchandar Shivnarayan vs. CIT (1978) 111 ITR 263 (SC) the Apex Court affirming the order of the Hon’ble High Court of Madras has held that if there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as, without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income. It is to be remembered that the direct and proximate connection and nexus must be between the business operation and the loss. Further, the Hon’ble Madras High Court in the case of CIT vs. Textool Co. Ltd. 135 ITR 200 (Mad) has held as follows:-
“where the assessee claims a business loss, the main question to be considered is, whether the loss is incidental to the business……. The tribunal found that the assessee had to import from abroad certain component parts necessary for its manufacturing business. The assessee had to be abide by the scheme of import licences under which the assessee had to pay premiums to the Federation in advance covering the entire import entitlement. Owing to business exigencies,
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 6 the assessee could not fully utilize the import entitlement, resulting in a forfeiture of part of the advance deposit with the Federation. The Tribunal therefore felt no difficulty in finding that the deduction claimed by the assessee in writing off the amounts so forfeited was in the course of and incidental to the assessee’s business”. Similarly, the Bombay High Court in case of I.B.M. World Trade Corporation vs. CIT 186 ITR 412(Bom) has held as follows:-
“As the acquisition of premises on lease would not ordinarily be in the capital field, there is no hesitation in holding that the moneys advanced by the assessee in pursuance of the agreements to the landlord for the purposes of and in connection with the acquisition of the premises on lease were for the purpose of business. Naturally, therefore when such advances are lost to the assessee the loss would be a business loss and not a capital loss.” The Revenue has also raised the issue that the assessee failed to justify as to why the security deposits have become irrecoverable. In our view, it is the assessee who conducts his business affairs in the most effective beneficial manner and in the interest of the organization. The AO cannot step into the shoes of the assessee for defining the best possible ways of the business. Accordingly we opined that the assessee has written off the security deposits in the interest of the business organization. Therefore the question of recovery or irrecovery does not arise under the present conditions and situations. The AO in the present case has not doubted the genuineness of the loss claimed by the assessee but the loss was merely disallowed by holding them as capital loss. As the loss was arising from the writing of the trading assets which was classified as current assets in the books of accounts and also relying in the aforesaid decisions we uphold the order of the Ld CIT(A). Hence this ground of appeal of Revenue is dismissed.
Second issue raised in ground no. 2 by Revenue in this appeal is that the Ld CIT(A) erred in deleting the addition made by AO for Rs. 34,03,526/- on account of contingencies representing the sales tax paid under protest.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 7 8. The assessee has made various payments to the Sales Tax Department under protest at the time of filing the appeal to higher authorities. These appeals were remanded to the lower authorities by the higher authorities but there was no progress so these appeals became time barred. Therefore the assessee has written off the payments made to the Sales Tax Department under protest. However, the AO opined that writing off contingencies for an amount of Rs.34,03,526/- is in the nature of an extra ordinary item therefore the same cannot be allowed as trading loss incurred in the ordinary course of business.
Aggrieved assessee preferred an appeal to Ld. CIT(A) where the assessee submitted that the amount of contingencies written off represent trade loss incurred in the ordinary course of business and as such it is an allowable deduction under Section 28 of the Act. Accordingly, Ld CIT(A) deleted the addition made by the AO.
Being aggrieved by this order of the Ld CIT(A) Revenue is in appeal before us.
Before us Ld. DR vehemently supported the order of AO and he left the issue to the discretion of the Bench whereas Ld. AR supported the order of the Ld CIT(A).
10.1 We have heard the contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the assessee has written off the payments made to the Sales Tax Department Under Protest. The AO treated the same as extraordinary item and disallowed by holding that this does not represent the trade loss arising in the ordinary course of the business. However, in our considered view, the payment made by the assessee under protest to the Sales Tax Department is very much in connection with the business although such kind of loss does not arise in the
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 8 normal course. But at the same time we cannot ignore the business connection with the aforesaid loss. The business expenditure which is not specifically provided in sections 30 to 36 of the Act can be allowed u/s 37 of the Act. The only test is that such expenditures before qualifying for deduction are required to be laid out or expended wholly and exclusively for the purpose of the business and profession. Therefore we disagree with the view taken by the AO. Relying in the case of Mysore Sugar Company Limited 46 ITR 649 (SC), the Hon’ble Supreme Court held as under:- “To find out whether expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.”
Further reliance can also be placed on the decision of jurisdictional High Court in the case of CIT vs. Gillanders Arbuthnot & Co. Ltd. 138 ITR 763 (Cal), wherein the Hon’ble High Court held the followings:- “Even if the amount cannot be treated as a bad debt in the sense that it was not an advance in the course of money-lending business, it can certainly be allowed as a trading loss incurred by the assessee in the course of its business.”
Taking a consistent view of various Hon'ble High Courts, we opined that the aforesaid loss has business connection with the assessee and is claimed on revenue accounts. Therefore we uphold the order of Ld. CIT(A) and dismiss this ground of appeal of the Revenue.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 9 11. Third issue raised by Revenue in ground number 3 is that learned CIT(A) erred in deleting the addition made by the AO for an amount of Rs. 17,98,092/- on account of excess depreciation claimed by the assessee.
During the year under consideration assessee has sold its factory located in Delhi, comprising of land and building. The AO sought the clarification from the assessee regarding the bifurcation of sale proceeds between the land and the building. In response to the notice the assessee submitted that the higher of the following amounts had been considered as received towards building. 1. The market value of the building near to the date of the sale which is Rs. 51,09,800.00 as per the valuer’s report dated 8.12.2000. AND/ OR 2. The book value of the building reflecting in the books of accounts which is Rs. 52,85,030.00. However, the AO disregarded the working of the assessee with regard to the sale consideration of the building. The AO held that the sale consideration/fair market value of the building should be the current cost of the construction without giving the effect of the depreciation. Accordingly the AO has taken the current cost of construction of the building from the valuation report filed by the assessee for an amount of Rs. 2,32,65,950/-. So the AO has reduced the WDV of the building by the Rs. 2,32,65,950.00 and worked out the excess depreciation claimed by the assessee for an amount of Rs. 17,98,092.00. The excess depreciation claimed by the assessee was disallowed by the AO and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal to Ld CIT(A) where it was submitted that the building in question was very old and it was constructed in the year 1950. Subsequently the additions were made in the building by the assessee from time to time up to the year 1977. There was no maintenance of the building as it was lying idle. Therefore, the sale consideration attributable
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 10 to the building cannot be taken as the current cost of construction of the building. Accordingly the ld. CIT(A) deleted the addition made by the AO by observing as under : “However, I am inclined to agree with the appellant that the AO could not have considered the current cost of construction to be the sale consideration without considering the impact of depreciation into account, the building sold being of very old construction. The AO should have taken the valuer’s report into consideration. The AO has not stated in the order why the valuer’s report is not acceptable and it is not that the AO got the buildings revalued by departmental valuer. In the circumstances, AO is directed to delete the addition of Rs.17,98,092/-.
Being aggrieved by this order of the Ld. CIT(A) the revenue is in appeal before us.
Before us Ld. DR vehemently supported the order of AO whereas Ld. AR relied on the order of the learned CIT(A). We have heard the contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the assessee has taken the sale consideration of the building of Rs.52,85,030/- being book value of the building as per accounting records for working out the short-term capital gain. However, the AO rejected the working of the assessee and taken sale consideration the value of the current cost of construction of the building which is Rs.2,32,65,950/-. The AO accordingly reduced the WDV of the building by the amount of current cost of construction i.e. Rs. 2,32,65,950/-. As a result of change in the WDV excess depreciation claimed by the assessee was worked out by the AO for an amount of Rs.17,98,092/- which was disallowed and added to the income of the assessee.
Now the question before us what should be the value of the consideration of the building sold by the assessee. In the instant case, we find from the submission of the assessee that the building was very old and it was constructed in the year 1950. Subsequently the additions were made in the building up to the financial year 1977. Besides the above, there was no
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 11 maintenance of the building as the factory was closed down. We also find from the valuer’s report dated 8th December 2000 issued by M. Chaudhry and associates that the market value of the building near to the date of sale was at Rs.51,09,800/-. In the instant case, assessee has declared the sale consideration higher than the market value which is Rs.52,85,030/- being book value of the building as per accounting records. We further observed that the AO has not doubted the market value of the assessee building as per valuer’s report. The learned DR has also not brought anything on record contrary to the finding of the learned CIT(A). In view of above and considering the facts of the case, we find that the market value of the building as determined by the valuer is the correct value of the sale consideration of the building. Since the building in question is very old so there is no reason to take the current cost of construction of building as sale consideration for the computation of long term capital gain. The value given in the valuation report is correct value of the building as the same has not been challenged by the AO. Accordingly in our considered view, we have no hesitation in upholding the order of learned CIT(A). Hence this ground of appeal of the revenue is dismissed.
Fourth issue raised by Revenue ground number 4 in this appeal is that the Ld.CIT(A) erred in deleting the addition made by the AO for Rs. 9,38,852/- on account of electricity expenses pertaining to the earlier year’s.
The assessee has made the payment of arrears of electricity dues in respect of the property located in Delhi and claimed the same as deduction in the year under consideration. The assessee also claimed that it was not aware for the outstanding arrears of electricity charges as the factory was closed down. The assessee came to know for the same when the property was sold therefore the electricity expenses were determined and crystallized in the year under consideration. However the AO disregarded the claim of the assessee on the ground that as per the tax audit report the assessee was
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 12 following the mercantile system of accounting. So the expenses pertaining to earlier years should have been accounted for in the respective financial years also. The expenses of the earlier years cannot be claimed as deduction in the year under consideration. Accordingly the AO disallowed the electricity expenses and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal to Ld. CIT(A) who has deleted the addition made by the AO.
Being aggrieved by this order of the Ld. CIT(A) Revenue is in appeal before us.
Before us Ld. DR vehemently supported the order of AO and on the other hand the Ld. AR relied on the order of the Ld CIT(A).
We have heard the contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the factory of the assessee which was located in Delhi was closed down in November 1996. The assessee after the closure of the factory did not book any electricity expense in its books of accounts on the ground of non-receipt of electricity bills although the assessee was following mercantile system of accounting. The assessee claimed all the bills of electricity dues in the year under consideration as deduction on the ground that these dues came to its notice in this year only and same were settled accordingly. However the AO disagreed with the view of the assessee and held these expenses as prior period expenses so he disallowed. But at the appellate stage Ld CIT(A) reversed the order of the AO.
From the facts in hand we find that assessee failed to claim the electricity expenses due to non-receipt of the bills as the Delhi factory was closed in November 1996. We find force in the argument of the Ld. AR that
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 13 these expenses were made known to the assessee and accordingly settled in the year under consideration. Therefore in our considered view these expenses were exclusively incurred in connection with the business only and eligible for deduction under section 37 of the Act. In holding, so we relied in the case of Saurashtra Cements and Chemicals Industries 213 ITR 523 where Hon’ble Gujarat High Court held that the expenses pertaining to the transactions of earlier years do not become liability payable in earlier year unless it can be said that liability was determined and crystallized in the year on the basis of maintaining account of mercantile basis. In view of above, we have no hesitation in upholding the order of learned CIT(A). Hence this ground of appeal of revenue is dismissed.
Fifth issue raised by Revenue in ground no. 5 in this appeal is that learned CIT(A) erred in deleting the addition made by AO for Rs.16.05 lacs on account of failure on the part of the assessee to furnish details of disputed Labour cases. The assessee had paid a sum of Rs.16.05 lacs to its ex- workers of its Delhi Factory out of Court settlement with the labourers and claimed deduction under section 37 of the Act. The assessee for claiming such deduction has relied in the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair Vs. CIT 247 ITR 178 (SC) wherein it was held that the expenditure incurred in connection with the settlement of labour disputes was allowed for deduction as business expenditure. However the AO disregarded the claim of the assessee by holding that the facts of the above case were different from the instant case. In the present case the factory was closed down on account of pollution problems and not on account of labour disputes. Therefore the expenses incurred on labour disputes out of court settlement cannot be allowed as deduction by treating the same as revenue expenditure. The AO treated the same expenditure as capital in nature. The AO also recorded that the details of the labour disputes were not furnished at the time of assessment. Accordingly the AO disallowed the expenses and added to the total income of assessee.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 14 22. Aggrieved, assessee preferred an appeal to learned CIT(A) who deleted the addition made by the AO holding that the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair (Supra) is entirely applicable to the case of the assessee. Being aggrieved by this order of the Ld.CIT(A) Revenue is in appeal before us.
Before us Ld. DR vehemently supported the order of AO and on the other hand the ld. AR relied on the order of the learned CIT(A). We have heard the contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the AO has disallowed the labour expenses by treating it as capital in nature. However we find from the facts of the case that the liability towards the labour expenses was determined and crystallized in the year under consideration so it should be allowed as deduction under section 37 of the Act. We also find that the liability towards the labour expenses was on the revenue account so holding it on capital account is not appropriate. Moreover, the decision of the Hon'ble Supreme Court K. Ravindranathan Nayeras (supra) is entirely applicable to the facts of the assessee as the instant case also relates to the labour dispute. The learned DR also failed to bring anything on record to controvert the finding of the Ld CIT(A). Therefore taking a consistent view in the judgment of Hon'ble Supreme Court and we have no hesitation in upholding the order of Ld CIT(A). Hence this ground of appeal of the revenue is dismissed.
In the result, Revenue’s appeal is dismissed. Coming to assessee’s appeal in ITA No. 669/Kol/08 AY 03-04. 25. Grounds raised by assessee are as under:- “1(a) That on the facts and in the circumstances of the case, the CIT(Appeals)erred in upholding the action of the Assessing Officer in disallowing Rs.9,49,461/-, being amount written off in the Profit & Loss Account during the year under appeal on account of adjustment of Port charges against deposits lying with Calcutta Port Trust.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 15 1(b). That on the facts and in the circumstances of the case, the CIT(Appeals) erred in holding that the write off of Rs.949,461/- is capital in nature.
2(a) That on the facts and circumstances of the case, the CIT(Appeals)erred in not adjudicating entire issues, as raised by the appellant, relating to the computation of long term capital gain attributable to sale of Delhi property.
2(b). That on the facts and circumstances of the case, the CIT(Appeals) erred in not adjudicating ground nos. 3(g) and 3 (h) of the grounds of appeal taken by the appellant before the CIT(Appeals) .
2(c). That on the facts and circumstances of the case, the CIT(Appeals) erred in not adjudicating and thereby upholding the action of the Assessing Officer in not allowing deduction of Rs.11,88,098/- and Rs.3,45,777/- being expenses incurred towards vacating Delhi property & other expenses relating to sale of Delhi Property while computing the long term capital gains arising from the sale of Delhi property.
2(d) That on the facts and circumstances of the case, the CIT(Appeals)erred in not adjudicating and thereby upholding the action of the Assessing Officer in rejecting the Valuer’s Report for considering the fair market value of land as on 01/04/1981 at Delhi and inserted arbitrarily taking the fair market value of land at 2/3rd of the value determined by the valuer while computing the long term capital gains arising from the sale of Delhi land.
2(e) That on the facts & circumstances of the case, the CIT(Appeals) failed to appreciate that the Assessing Officer has rejected the valuer’s report arbitrarily & the value adopted by the Assessing Officer has no basis whatsoever.
2(f). That on the facts and circumstances of the case, the CIT(Appeals) erred in upholding the action of the Assessing Officer in not reducing the amount of Rs.47,50,000/- while computing the long term capital gains arising from the sale of Delhi property.”
The first issue raised by assessee in ground no. 1 in this appeal is that ld. CIT(A) erred in confirming the order of AO by disallowing port charges written off for an amount of Rs.9,49,461/- against deposits lying with Calcutta Port Trust.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 16 27. The assessee had been importing raw materials, stores and spares parts through Calcutta Port Trust (CPT for short). The CPT did not raise the bills to the assessee for the services rendered in connection with the above import. However the assessee deposited the money time to time with CPT in connection with the import of goods which was classified in its books of accounts as current assets. The amount payable to CPT as port charges was determined and known to the assessee in the year under consideration. So the assessee adjusted the amount paid earlier to CPT with the port charges and claimed such expenses under section 37 of the Act. However the AO disregarded the claim of the assessee by holding that the goods were imported in earlier years which have already been accounted for. Therefore the expenses pertaining to port charges should have been recorded in the year of import as the assessee is following mercantile system of accounting. Accordingly the AO disallowed the port charges for an amount of Rs.9,49,461/- and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal to Ld CIT(A) who has upheld the order of the AO by observing as under:- “6. Regarding second ground of Rs.9,49,461 it is pleaded that the appellant was required to keep a deposit with port authorities towards port charges leviable towards clearance of the reported materials. As and when the materials were acquired the company received a statement from the Port Trust and on receipt of such statement, the appellant used to adjust trading charges against the deposit amount. The appellant claimed the said sum as an allowable business expenditure u/s.37(1). The appellant has also submitted that before the Assessing Officer that the deposit was lying in the books under the head other current assets in the balance-sheet without adjustment on account of actual port charges payable. Since the appellant has itself admitted that the said deposit was entered with the books under the head other current assets, it gives credence to the AO’s belief that the said amount was of the capital nature. As such the write up of such asset cannot be termed as revenue expense. In the circumstances, disallowance of Rs.9,49,461 is upheld.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 17 Being aggrieved by this order of the ld. CIT(A) the assessee is in second appeal before us.
The learned AR before us submitted that the expenses claimed by the assessee in connection with the port charges are very much is related to the business of the assessee therefore the same should be allowed under section 37 of the Act. The statement of the expenses was received during the year so they were ascertained in this year only and all these expenses are revenue in nature. On the other hand the ld. DR vehemently supported the order of lower authorities.
29.1 We have heard the contentions of both the parties and perused the materials available on record. From the aforesaid discussion we find that the assessee has imported the goods in the earlier years which were booked as expenditure in the year of import but the assessee did not book the port expenses incurred in connection with the import as the bills for port charges were not provided by CPT. However the assessee was depositing the money with the CPT in connection with the import of the goods and the same was classified under the head current assets in the books of accounts. These bills were provided in the year under consideration by CPT and the assessee accounted for the same in the books of accounts in the year under consideration on the ground that these expenses were determined and crystallized in the year under consideration. However, the lower authorities have disallowed by the treating the same as prior period expenses and holding that these expenses should have been claimed as deduction in the year of import of the goods. However in the instant case, the facts revealed that the assessee failed to claim the expenses due to non-availability of the bills from the CPT but the assessee kept paying the money to the CPT in the form of deposits. The bills were determined and crystallized in the year under consideration so in our considered view these expenses are very much in connection with the business and entitled for deduction under section 37 of
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 18 the Act. In holding so we are putting our reliance in Hon'ble Gujarat Hon'ble High Court in the case of Saurashtra Cement & Chemical Industries Ltd. Vs. CIT 23 ITR 523 (Guj), wherein the Hon'ble Gujarat High Court at page 531 has observed “… such items without investigation in to the facts about the crystallization of such dues could not be disallowed merely on the ground that they related to transactions pertaining to an earlier accounting year” In this context it is also submitted that merely because an expense relates to an earlier year, it does not become the liability payable in that particular year. Any liability, though pertaining to earlier year, depends upon making a demand and its acceptance by the assessee. If such liability has actually been claimed during subsequent year, it cannot be disallowed merely on the ground that the accounts are maintained on mercantile basis and it relates to transactions pertaining to an earlier year. Further reliance is also placed on the decision of ITAT Delhi Bench in the case of Kumar Aerosoles (P) Ltd. Vs. ACIT 55 TTJ 385 (Del) wherein expenses relating to electricity, telex, typewriter rent and telephone though relating to earlier years, are allowable in the year in which the demand is raised. Again, in the case of ITO v. Infratex Eng. Co. 38 TTJ 551 (Del), the ITAT Delhi has held that even though the assessee has maintained books of account on mercantile basis, the assessee could not claim liability in the earlier year when the same had not accrued. It is now well settled that even under mercantile system of accounting the liability is allowable in the year of accrual even if it relates to an earlier year. Further in the case of United bank of India vs. DCIT (1999) 68 ITD 332 (Cal) it has been held that any liability which may be considered to have been arisen only in a subsequent year has to be allowed as deduction even if the same may be attributable to the business conducted by the assessee in an earlier year. In view of the above we reverse the orders of the lower authorities and ground of appeal raised by the assessee is allowed.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 19 30. Second issue raised by the assessee in ground number 2 in this appeal is that ld. CIT(A) erred in confirming the order of AO on account of various disallowances .
During the year under consideration assessee had sold its factory comprising of the building and land which was located at 66 Najafgarh Road, Shivaji Marg, Kirti Nagar, New Delhi on dated 25th June 2002. As a result of sale the assessee declared long term capital gain from the sale of land for an amount of Rs. 7,30,15,457.00. While working out the capital gain the assessee has claimed the following deductions : 1. Prepayment discount Rs. 47,50,000.00 2. Expenses for vacating property Rs. 11,88,098.00 3. Other connected expenses Rs. 3,45,777.00 4. Valuation as on 1.4.1981 Rs. 1,46,20,000.00
Prepayment discount The factory was sold to M/s Lohia Developers private Limited (for short LDPL) for an amount of Rs.15.51 crores on dated 25th of June 2002. Subsequently on dated 20th day of March 2003 the assessee has reduced the sale price by an amount of Rs. 47.50 lacs on account of prepayment. However the AO disregarded the claim of the assessee by holding that the reduction in the sale consideration on account of prepayment of the amount by M/s LDPL is purely cash discount and the same cannot be reduced from the sale consideration for the purpose of computing the capital gain under section 45 read with section 48 of the Act.
Expenses for vacating property
The assessee at the time of assessment submitted that for getting the property vacated certain expenses were incurred. These expenses relate to the payment made by the company to certain persons as detailed below :
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 20 1. Laxman Singh Rawat Rs. 5.80 lacs paid on 21.01.2002 2. Sardarilal Sharma Rs. 5 lacs paid on 07.02.2002 3. Kamal Sharma Rs.3.25 lacs paid on 07.02.2002
However, the AO observed that the difference in the expenses claimed in the return of income by the assessee and in the submission of the assessee. in the return the expenses were claimed for Rs. 11,88,098.00 but in the in the assessment proceedings the expenses were claimed for rs. 14,05,000.00. The AO also observed that factory was lying idle. Accordingly the AO opined that the explanation of the assessee regarding the expenses incurred in connection with the getting the property vacated is not reliable. Therefore the plea of the assessee was disregarded by the AO.
Other connected expenses At the time of assessment proceedings the assessee failed to furnish the details of the above said expenses therefore these expenses were disallowed by the AO.
Valuation as on 1.4.1981 The assessee has taken a valuation report of the land as on 1.4.1981 which was valued at Rs.146.20 Lacs. The valuer while valuing the property has solely relied on a book with the title “ Guide to House Tax in Delhi 2001–02” written by Nabhi. So the AO opined that the valuer has not valued the property independently and in scientific manner. Accordingly the AO rejected the valuation of the property and has taken two-third of the amount of Rs.146.20 lacs as the fair market value as on 1.4.1981.
Aggrieved, assessee preferred an appeal to ld. CIT(A) who has upheld the order of AO by treating the reduction in sale consideration on account of prepayment amount by M/s LDPL as cash discount.
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 21 Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
At the outset, we observed that the Ld CIT(A) has not adjudicated the claim of the assessee regarding the expenses incurred for getting the property vacated for Rs.11,88,098/-, other expenses for Rs.3,45,777/- and the valuation of the property as stood on 01.04.1981. In this view of the matter and for natural justice we restore back the matter to the file of Ld. CIT(A) for fresh adjudication as per law. Needless to mention that assessee should co- operate at the appellant stage. This ground of assessee’s appeal is allowed for statistical purpose.
For the disallowance of Rs.47.50 Lacs the learned AR has submitted that it is well settled law to tax the real income. In the instant case the assessee had given a cash discount and the same cannot be treated as income of the assessee. On the other hand the learned the ld. DR vehemently relied on the order of authorities below.
We have heard the rival contentions of both the parties and perused the material available on record. From the aforesaid discussion we find that the AO and ld. CIT(A) has treated the cash discount given by the assessee as the income of the assessee. However we find that the discount was given by the assessee on account of prepayment made by the party. In our considered view the discount given by the assessee should be reduced from the sale consideration to work out the actual income of the assessee. In this connection we are having reliance in the case of Shakuntala Kantilal [1991] 190 ITR 56 where the Hon'ble Bombay High Court has held that the expression full value of consideration contemplates both additions to, as well as deductions from, the apparent value. What it means is the real and effective consideration. Further in the case of Dr. Fareed Jamshid Italia (2011) 203 taxman 241 where it has been observed by the Hon'ble Madras High
ITA No.1071& 669/Kol/2008 A.Y. 2003-04 DCIT Cir-12 Kol. v. M/s BOC India Ltd. Page 22 Court that ‘full value of consideration’ as defined under section 48 of the Act cannot be said to mean apparent consideration’ as envisages in Chapter XX- C of the Act. In view of the above we hold that the cash discount given by the assessee cannot be treated as income. Accordingly the addition made by the lower authorities stands deleted. Hence this ground of appeal of the assessee is allowed.
In the result, assessee’s appeal is partly allowed for statistical purpose.
In combined result, appeal of Revenue is dismissed and that of assessee is allowed partly for statistical purpose. Order pronounced in the open court 19/04/2016 Sd/- Sd/- (Mahavir Singh) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp �दनांकः- 19/04/2016 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-DCIT, CIR-12, 3, Govt. Place (West), Kolkata-700 001 2. ��यथ�/Respondent-M/s BOC India Ltd., Oxygen House, P-43, Taratala Road,Kol-88 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।