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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
The Income Tax Officer -1 vs M/s. Snofield Foods Pvt. Ltd. Aayakar Bhavan Door No. V/623B, Marutharode English Church Road Village, Kuppayode Road Palakkad 678014 Marutharode, Palakkad 678007 PAN – AAFCS3164B (Appellant) (Respondent) Assessee by: Shri P.M. Veermani, CA Revenue by: Smt. J.M. Jamuna Devi, Sr. DR Date of hearing: 28.02.2023 Date of pronouncement: 03.03.2023 O R D E R Per: George George K., J.M. This appeal at the instance of the Revenue is directed against the order of the CIT(A)/NFAC, Delhi dated 02.06.2022. The relevant assessment year is 2006-07.
Revenue has raised the following grounds of appeal: - “1) The Learned Commissioner of Income tax(Appeals) erred in deleting the addition made by Assessing Officer u/s 41(1), has not gone into the merits of the issue simply relying on the fact that the similar issue is already decided in favour of the assessee in the case of sister concerns. 2) The learned Commissioner of Income tax (Appeals) has not taken into consideration that the assessee should have credited percentage of deduction of the freezer deposit every 2 M/s. Snofield Foods Pvt. Ltd. year as his income as the assessee was claiming depreciation on the value of the asset. 3) Mere relying on the Hon'ble ITAT's order without verification of corresponding facts and applicability in assessee's case has made the order of the Commissioner of Income tax (Appeals) against the interest of revenue. 4) The learned Commissioner of Income tax (Appeals)has failed to appreciate the fact that due to the method claimed by the assessee, in each year the assessee is availing the benefit of depreciation and reduction due to wear and tear declared in the agreement. 5) The Learned Commissioner of Income tax (Appeals)has not taken into consideration of the fact declared in the order that none of the creditors to whom letters have been issued by the Assessing Officer has confirmed the existence of credit. 6) The Learned Commissioner of Income tax (Appeals)erred in relying upon the submission of the assessee that recovery amount is offered as income in the year of termination as per accounting policy without verifying the amount claimed against it. 7) The act of Learned Commissioner of Income tax (Appeals)in deleting the addition made of Rs. 3,54,67,159/- is against the facts and circumstances of the case and tenable as per law.”
3. The brief facts of the case are as follows: - The assessee is engaged in manufacturing and sale of ice creams and other frozen foods. For AY 2006-07, return was filed disclosing ‘NIL’ income. The original assessment in this case was completed u/s 143(3) on 30.12.2008. The AO in the original assessment noted that the assessee has shown liability of Rs.3,73,26,241/- towards deposits and advances from his dealers. The AO directed the assessee to furnish complete details of the same. In response, the assessee furnished a list containing only names and amounts of freezer deposits received during the year amounting to Rs.33,62,987/- and freezer deposit refund amounting to Rs.5,56,526/-. It was explained that assessee was into manufacturing and distribution of ice creams and frozen foods and sells 3 M/s. Snofield Foods Pvt. Ltd. the products through its distributors. It was stated that the assessee makes available deep freezers to its dealers for preservation of ice creams at low temperature. This is done because most of its distributors do not have their own deep freezers and therefore the assessee supplies the same to them to enhance the sale of ice creams. The assessee pointed out that its sale has increased about 28% during the year. The assessee was then requested to furnish the names and address of the dealers to whom freezers were supplied, number of such freezers supplied, deposits received, refund made to them and the final balance outstanding year wise as well as party wise. In response, the assessee stated that it has been collecting freezer deposits from the AY 1994- 95 onwards and the balance as on 31-03-2006 pertains to many previous financial years and therefore the assessee is not in a position to furnish the details asked for. However, the assessee furnished the name of parties from whom such deposits were received along with amount pertaining to previous six years. The AO finally noted that the assessee has furnished only the name of the parties and the amounts from whom freezer deposits were received for the FY 1995-96 onwards and such details have been reflected by the AO in the table on page 6 of his order. The AO then noted that the assessee is treating the freezers as his assets and claiming depreciation on the same. The AO then adopted some mathematical calculation and finally concluded in para 19 of the order that the assessee has failed to furnish details of the dealers, their address, the amounts outstanding of each of the parties as on 31.03.2006, number of freezer supplied, number of freezer received back as well as refunds received and therefore the assessee is not able to establish the identity of the persons to whom these amounts are payable. The AO, therefore, added the sum of Rs.3,73,26,241/- which was shown as advances received from dealers as unproved liability. Against this, the assessee preferred appeal which was dismissed by the CIT(A). On further appeal before the ITAT, vide order 4 M/s. Snofield Foods Pvt. Ltd. dated 19-07-2012 in ITA No.152/Coch/ 2011, the matter was set aside back to the AO with the following directions: - "Having considered the rival submissions, we are of the view that, in the interest of natural justice, the assessee should be given one more opportunity to furnish the details before the Assessing Officer, since the assessee could collate the details subsequent to the passing of the assessment order. We also notice that the impugned freezer deposit was shown as outstanding liability in the balance sheet of the assessee and in that case, it may not be possible to treat it as remission of liability. Accordingly, we are of the view that the issue needs examination afresh at the end of the Assessing Officer. Accordingly, we set aside the order of the Ld.CIT(A) and restore the same to the file of the Assessing Officer with a direction to examine the issue relating to the freezer deposit afresh and take a proper decision in accordance with law, after affording necessary opportunity of being heard to the assessee. We also direct the assessee to furnish the details that may be called for by the Assessing Officer in this regard".
4. The AO, pursuant to the remand by the ITAT, examined the deposit agreement signed by the assessee with the dealers and in particular noted clause 7 of said agreement wherein it was agreed that an amount of 20% of the deposit would be deducted every year by the assessee, towards compensation for wear and tear of the freezers. According to the AO, as per this clause, the assessee should have credited 20% of the freezer deposit every year as his income as he was claiming depreciation on the value of the asset. The AO proposed that as 20% of the freezer deposit is deductible from the account of the dealer every year, the entire deposit is reduced to zero after five years. In reply the assessee stated that it has already furnished the year wise and party wise details of freezer deposits collected and repaid as well as the balance outstanding. The assessee also pointed out that the Tribunal in para 6 of its order while setting aside the matter back to the AO has expressed an opinion that freezer deposits being shown as outstanding liability in the balance sheet of the assessee 5 M/s. Snofield Foods Pvt. Ltd. and therefore it may not be possible to treat it as remission of liability. The assessee also relied on the decision of the ITAT in the case of High Range Foods Private Ltd. (sister concern of the assessee) for the AY 2007-08 in ITA No.651/Coch/2010. According to the assessee, the ITAT has clearly held that the freezer deposits cannot be treated as income of the assessee. The AO made enquiries from some creditors seeking confirmation from them and apparently none of the creditors to whom such letters were issued have confirmed the existence of the credit. The AO then relied on clause 7 of the freezer agreement wherein the dealer forfeits 20% of the deposit every year and thereby the assessee should have recognized 20% of the deposit received during the year as income. The AO then embarked on a mathematical computation from AY 2001-02 onwards upto AY 2005-06 and worked out the balance of the deposits which should have been shown in the balance sheet after applying clause 7 of the agreement. According to that computation, the AO was of the view that the correct value of creditors could at best have been Rs.65,20,719/- as against the liability in the balance sheet of Rs.3,73,26,242/-. The difference of Rs.3,08,05,523/- was therefore added to the total income. In addition to this, the AO also added an amount of Rs. 46,61,636/- which is the 20% forfeiture of liability every year cumulatively for the AY 2001-02 upto 2005-06. The AO therefore made an addition of Rs.3,54,67,159/- in the assessment completed under Section 143(3) r.w.s. 254 o the Act (order dated 30.03.2014).
5. Aggrieved by the order of the AO, assessee filed appeal before the first appellate authority. The CIT(A) allowed the appeal of the assessee. The CIT(A) has placed reliance on various orders of the ITAT which are detailed in the impugned order. The relevant finding of the CIT(A) reads as under: - “5.1 The facts have been exhaustively discussed by me above. It is seen that in both the set aside assessments, the AO has relied on 6 M/s. Snofield Foods Pvt. Ltd. clause 7 of the Freezer Deposit Agreement which states that 20% of the deposit would be reduced from the balance due every year. The AO applied this clause to the balance shown as liability in the balance sheet and embarked on a mathematical computation which has resulted in the additions so made. On examination of the P&L Account and balance sheet of the assessee, it is seen that in AY 2006-07, the assessee has disclosed compensation at Rs.5,56,526 as income during the year and the same is included in other income schedule B. For the AY 2007-08, the compensation of Rs.4,487 is included as other income. From the details filed, it is seen that this compensation is the money deducted from the freezer deposits of various dealers at the time of termination of their contracts. The claim of the assessee that as per it's accounting policy, the recoveries made out of freezer deposits on termination of dealer contracts is therefore borne out on facts. The AO has overlooked this while undertaking his mathematical exercise. The assessee has furnished the complete details of the freezer deposits outstanding in a list containing the names, addresses and deposits received from 725 dealers. He has further furnished the complete dealer wise details of freezer deposits received during the year as well as the deposits refunded. The assessee has also furnished the dealer wise details of amounts deducted from the dealer deposits and credited to the P&L A/c as "Other Income" amounting to Rs 5,56,526 for AY 2006-07 & Rs 4,487 for the AY 2007-08. This clearly proves the claim of the assessee that on termination of the contract with dealers, the amounts deducted from their freezer deposits is duly returned as income in the year. This is as per clause 7 of the dealer agreement itself. It is therefore evident on facts that full details of freezer deposits are available with the assessee and has been furnished. 5.2 The AO has also overlooked the decision of the jurisdictional ITAT, Cochin in the case of High Range Foods (P) Ltd. in ITA No.651/Coch/2010, AY-2007-08 wherein from para 8 to 11, the ITAT has held as under: 8. We have considered the rival submission and perused the materials available on record. The assessee treated these freezers even-after the period of three years from supplyto vendors as business assets of the assessee only. There is no transfer of ownership. The revenue has also allowed depreciation on these freezers till date. This fact could establish that the assessee is the owner of the freezer till date. The efflux of time does not result in transfer of ownership of the freezer even as per agreement.
7 M/s. Snofield Foods Pvt. Ltd.
The assessee received Deposit for the supply of freezer from the concerned vendors. The freezers are required to safe keep the edible ice-creams. They are required for the purpose of business. The small vendors may not be inclined to purchase the freezers as they are not affordable to them considering their status. This made the assessee company to supply freezer on the receipt of fixed deposit and the compensation of the spread-over period. They are attached with a liability. The accrual comes only on termination of agreement. The business necessity requires cordial relationship with vendors. The assessee cannot treat these two amounts as receipts in the nature of income unless the so-called agreement terminated. In other words it is not a debt owned by the assessee. Hence under the above facts and circumstances of the case, this issue to be decided in favour of the assessee by setting aside the orders of the authorities.
Besides the assessee never treated this as income in the books. The assessee is consistently holding it so as the amount attached with a liability to refund. The assessee never admitted this amount as income in the books. Only accrued income arose to the assessee during the relevant previous year also can brought to tax under the Income-tax provisions which is a settled law. In other words, there must be a debt owed to the assessee and until this is created in favour of the assessee as a debt due to the assessee, it cannot be said as income accrued. Hence, the decision relied by the Jr. D.R. in the case of CIT vs. T. V. Sundaram lyengar and Sons, cited supra, is clearly distinguishable on facts. In that case, assessee itself admitted this as income as per the book entries. Hence, it is distinguishable.
The decision relied by the Id. Counsel for the assessee in the case of CIT vs. Realest Builders and Services Ltd.- 307 ITR 202 (SC) in addition to the following case are also supports the plea of the assessee. The accrual has been dealt with in the relied judgments. Hence, under the given set of facts and circumstances, we by relying the above decisions set aside the orders of the authorities and allow this ground of the assessee as it cannot be treated as income for the year relevant under appeal. 5.3 From the facts discussed in para 5.1 above, it is evident that the deposits are duly explained and full details have been furnished. Apart from this, applying the decision of the jurisdictional ITAT, it has to be held that no income can accrue to the assessee by virtue of clause 7 of the freezer agreement referred by the AO, and that the deductions made by the assessee from the freezer deposits would accrue as income to the assessee only on termination of the freezer agreements. The facts indicate that the assessee is duly crediting the deductions so made as "Other Income" in the P&L A/c. Therefore, the contentions of the assessee are acceptable. 5.4 It is further seen that the controversy has been dealt with by the jurisdictional ITAT in four other sister concerns of the assessee as mentioned in para 4 wherein identical additions have been deleted.
8 M/s. Snofield Foods Pvt. Ltd. Finally, it is seen that the CIT(A), NFAC in the case of Teejan Foods (P) Ltd for AY 2014-15 has also deleted an identical addition vide his order dated 29-11-2021. Given these facts, it is evident that the dispute at hand is squarely covered in favour of the assessee by the jurisdictional ITAT. Respectfully following the same, the addition of Rs.3,54,67,159 for AY 2006-07 is deleted. The addition of Rs.28,67,490 for AY 2007-08 is also deleted. Grounds 1 to 3 are allowed.
In the result, both appeals are allowed.”
6. Aggrieved by the order of the CIT(A) the Revenue has filed the present appeal before the Tribunal. At the very outset the learned A.R. submitted that the issue raised in the appeal is squarely covered in favour of the assessee by the order of the Tribunal in assessee’s sister concern which has been cited by the CIT(A) in the impugned order. The assessee also placed on record the latest order of the Tribunal on identical facts in the case of ACIT vs. Jojo Frozen Foods Pvt. Ltd. in (order dated 03.03.2020). On a query from the Bench whether appeal has preferred by the Revenue for AY 2007-08, the learned A.R. submitted that no appeal has been preferred by the Revenue before the Tribunal (in the impugned order of the CIT(A), AY 2007-08 was also decided).
The learned D.R. was unable to controvert the assertions of the learned A.R.
We have heard the rival contentions and perused the material on record. The Tribunal in various orders (the CIT(A), in the impugned order had placed reliance on various orders of the ITAT) has clearly held that deductions made by the assessee from the freezer deposits would accrue as an income to the assessee only on termination of the agreement. The Cochin Bench of the Tribunal in the case of Jojo Frozen Foods Pvt. Ltd. (supa) has also taken a 9 M/s. Snofield Foods Pvt. Ltd. similar view. The relevant findings of the Tribunal in the case of Jojo Frozen Foods Pvt. Ltd. read as follows: - 7.7 As regards the issues on merits are concerned, we notice that the ITAT Cochin bench had dismissed the department appeal against the original assessment following its own orders for the earlier years on the ground that the said amount is taxable only in the year of termination and the assessee had already offered such amount to tax in the return of income filed by it. The observation of the Tribunal while dismissing the Revenue appeal is reproduced below for ready reference :- “We have considered the rival submissions on either side and relevant material on record. The issue arises is whether the deposits in respect of the freezer has to be considered as income of the assessee or not. As rightly submitted by the ld AR of the assessee that this issue was considered by the Tribunal in one of the assesses for the earlier assessment year and found that such deposits cannot be considered as income of the assessee. The only objection of the ld DR is that the appeal was filed against the order of the Tribunal and the same is pending before the High Court. But on a query from the Bench, the ld DR has clarified that the High Court has not granted any stay of the operation of the earlier order of the Tribunal. Since the CIT(A) has followed the order of the Tribunal, this Tribunal is of the considered opinion that mere pending of the appeal before the High Court against the order of the Tribunal cannot be a reason to take a different view. Therefore, by following the order of the Tribunal for the earlier assessment year, this Tribunal is of the considered opinion that the deposits collected by the assessee for freezer cannot be considered as income of the assessee.” 7.8 The above order of the Tribunal has not been reversed by the Hon’ble High Court. It was submitted by the learned AR, the appeals filed by the Revenue against the Tribunal’s orders in assessee’s own cases for earlier years was withdrawn for the reasons that tax effect in those cases were below the monetary limit. Therefore, following the Tribunal order, in assessee’s own case (supra), we hold that the freezer security deposit is taxable only on the year of termination of agreement between the assessee and the dealer / distributor. It is ordered accordingly.”
9. Since the facts in the instant case are identical to the facts considered by various orders of the Tribunal cited supra, we hold that security deposit is taxable only on the year of termination of the agreement between the assessee and the dealer/distributor.