ACIT, NEW DELHI vs. M/S. CO-OPERATIVE STORES LTD., NEW DELHI

The appeal is preferred by the Assessee against the order dated 18.12.2016 of CIT(A)-18, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in Appeal No. 182/14-15 arising out of an appeal before it against the assessment order dated 31.03.2014 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle-32(1), New Delhi (hereinafter referred as the Ld. AO).

In terms of our order dated 7th May,2008, an amount of Rs.54.31 crore being arrears of wages upto 31st December,2007, was directed to be disbursed by the highest bidder Rs.55 crores stands deposited by highest bidder. The sum of Rs. 20 crore out of Rs.55 crore which lies with the Registry of the Supreme Court, will be disbursed by the Official Liquidator and the nominee of the Central Registrar Co-operative Societies in the presence of one Union representative of each Union within four weeks from today. The representative of the highest bidder will also remain present in the said meeting. It is made clear that the workers will sign the receipt of payment, which will be adjusted towards the arrears of Rs.54.31 crores.

2.1 This apart, the Hon’ble Supreme Court directed that the balance amount should be paid by the highest bidder within a period of 8 weeks covering arrears of Rs. 54.31 crores.

"Regarding justification of expenses as incurred as mentioned in Annexure-VIII of the tax audit report, it is submitted that the wages & salary, PF, Rent to local authorities was paid by the existing management during the year under consideration in terms of Hon'bie High Court order dated 7th May, 2008. The assessee was directed to pay the same immediately. Copy of impugned order is being enclosed for your perusal and record. These expenses were crystalized / accrued during the year under consideration and were paid as per the direction /order of the Hon'bie Supreme Court of India dated 13.08.2010. Detail of the prior period expenses are as under:-" 3.1 The Ld. AO however held that liability to pay for the aforementioned expenses had arisen in the very year they pertain to. Accordingly, as per the mercantile method of accounting, the said expenses were deductible in those very years. It was not accepted that the said expenses have crystallised only after the Hon'ble Court's orders, and Ld. AO held the rather consequent to the order, it is only that the already ascertained and due liability of the assessee had been discharged. Thus, what was deferred in the earlier years was the discharge of liability and not the accrual of the liability. Ld. AO held that each year is a self- contained period in regard to which profit or loss to be computed in cases where the accounts are kept on mercantile basis, allowance must be granted in the year in which the liability is incurred, irrespective of the question whether the disbursement has been made or not. Accordingly, the expenses amounting to Rs 573,802,128 were disallowed and added to the income of the assessee u/sec 37.

3.2 Further Ld. AO took the Notes to accounts, and observed that the assesseee has during the year written off the outstanding Govt. loan of Rs 68.51 cr, and the interest there of, amounting to Rs 83.20 cr. The assessee was asked to justify why the said amounts may not be added to its income. The assesse vide its letter dated 15.01.2014 submitted;

"In accordance with the scheme of revival, the assesse has written-off the outstanding Government loan of Rs.68.51 crore and interest thereon of Rs.83.20 crore as appeared in the books as on 31.03.2010. The interest expenses as booked in last 10-12 years were already added back in computation of income whjle filing the income tax returns of the last years."

3.3 Further, assessee had furnished details of the amounts of interest written off on this account in earlier years vide its letter dated 21.01.2014. The reply of the assessee was considered, but was not found tenable as Ld. AO was of opinion that the Loan sanctioned by the Govt. was for the purpose of Business. Accordingly, Interest payable on the same was deductible in earlier years, and on the cessation of liability of the same has itself been added back by the assesse. Ld. AO observed that the borrowings derive their nature from the purpose for which they have been put to use, and not from the treatment accorded to them in the books of accounts. In the instant case, the loan taken was as admitted, for the purpose of business, and was put to business use. Thus, accordingly, the cessation of liability to repay the principal amount also, ought to be treated as a Revenue Receipt. The same was held as value of benefit arising from business sec 28(iv) of the Act. Accordingly, the principal loan amount of Rs 68,51,00,000 was held to be taxable u/sec 28(iv).

“5.2.3 During the appellate hearing, the AR submitted that this ground relates to addition of Rs.57,38,02,128/- towards payment of salary, PF, Rent/licence fee paid to employees /staff, DA/ DSIDC/ Directorate of Estates, ignoring the submissions that the same actually crystallized during the previous year under consideration. It was explained before the Ld AO that the outstanding arrears of salary & wages of Rs. 42,87,92,840=70 paid to the staff was according to the scheme of revival. Arrear of wages as mentioned above and other expenses as detailed in the annexure VIII of the tax audit report was paid during the year under consideration. All expenses paid were reported by the audited as "expenditure of prior debited to the profit and loss account". These expenses were crystallized/ accrued during the year under consideration and were paid as per the direction /order of the Hon'ble Supreme Court of India dated 13.8.2010. Detail of the prior period expenses were shown as under:-

S HEAD Amount (Rs.) N 1 Arrear of Wages 42,87,92,840.70/- 2 PF 8,07,02,046.00 3 Rent 5,14,48,897.00 4 Licence Fee-DOE 58,62,647.00 5 Rent-DSDIC- KalyanPuri 25,54,052.00 6 Rent-DSDIC-Trilokpuri 24,87,892.00 7 Rent-DDA 17,35,788.00 8 Rent Nirman Vihar 8,202.00 9 Rent AnandNiketan 3,781.00 Total 57,38,02,128.70 It was also urged that the expenses claimed by the assessee are allowable in view of the following judicial pronouncements: CIT v/s Nagri Mills Co Ltd. 33 ITR 681 (Bom) 1. Gujrat High Court judgment in the case of Saurashtra Cement 2. 213 ITR 523 where their lordship held that though the expenditure relates to prior period if the liability has accrued during the year then the expenditure has to be allowed as deduction. CIT vs. Vishnu Industrial Gases New Delhi 3. Kellogg India Pvt. Ltd. V. ACIT 2012 (12) TMI 664-ITAT 4. MUMBAI! On the basis of such contentions it was argued that the claim made by the appellant in respect of discharge of liabilities, which crystallised during the year as per court order be allowed. 5.2.4 I have carefully considered the matter. From the legal position as enunciated by Hon'ble Courts and also the principle of accountancy, when the assessee is following mercantile system of accounting, deduction for liability can be allowed only when the year in which it arose or only in the year to which it pertained or during the year when it was crystallized or quantified or determined. The principle of following a particular system which is not as per the provision of accountancy and not as per the provisions of law cannot be allowed to persist. It was also held in the case of CIT v. British India Ltd. (1991) 188 ITR 44 (SC) that even if the assessee had adopted a regular system of accounting it was the duty of the AO to consider that the correct profits and gain could be deduced from the accounts so maintained. It was pointed out by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 that the liability which had accrued is allowable in the year of its accrual. Similar decision was rendered in Madras Fertilizers Ltd. 209ITR 174(Mad)(Para 27).

“5.3.18 Even in face of such conflicting view, I would go by the following judgments (apart from logitronics) from Hon’ble Delhi HC, being binding on me. In CIT vs. Tosha International Ltd. 331 ITR 440 (Del), the HC held; We see no reason to interfere with the conclusion of the Tribunal as the same have been rendered on a correct appreciation of law. The principles enunciated in Mahindra & Mahindra Ltd. vs. CIT [2003] 261 ITr 501 (Bom) are fully applicable and we see no reason to take a different view. In the said case of Mahindra & Mahindra Ltd. vs. CIT [2003] 261 ITr 501 (Bom), as is seen, where loan was to purchase plant and machinery- dies, tools, etc., i.e., capital assets, the waiver of principal amount of loan was held to be neither covered by section 28(iv) nor section 41(1) of the Act. (See para 7) 5.3.19 Further when one goes through the judgment of Madras HC in Ramaniyam Homes case, this is what was observed therein at para 36, which reads: 36. Therefore, the law as expounded by the Delhi High Court appears to be that if a loan had been taken for acquiring a capital asset, waiver thereof would not amount to any income exigible to tax. If the loan is taken for trading purposes and was also treated as such from the beginning in the books of account, the waiver thereof may result in the income, more so when it is transferred to the profit and loss account. 5.3.20 Thus even if there is a judgment of Hon’ble Madras HC in favour of revenue, I would abide by the jurisdictional HC view, s.t. the following observations ; 5.3.21 As per the AO, admittedly the loan sanctioned by the Govt was for the purpose of Business. The appellant on the contrary says that it is for capital purpose. The copies of loan agreements has not been submitted before me. The judgments in the case of Tosha International, logistronics and others from jurisdictional HC (following Mahindra and Mahindra case) holds that the waiver of loan for trading purpose is taxable, while that for acquiring capital assets is not taxable. [The latest decision from Madras HC says in case of Ramaniyam is in apparent conflict with the same holding that it is taxable irrespective of whether it is for trading purpose or for capital purpose.] Since the basic facts need to be investigated, the AO may examine the nature of loan before granting relief as per law. 5.3.22 The ground is disposed off in the light of the above observation.”

“1. Whether the Ld. CIT(A) has erred in issuing directions to the AO that, subject to verification, entail providing relief on the claim made by the assessee of prior period expenses amounting to Rs. 57, 38,02,128/- when Mercantile method of accounting was being followed by the assessee.

2. Whether the Ld. CIT(A) has erred in giving directions to the AO which entail provision of relief of Rs. 68,51,00,000/- on the loan amount sanctioned by the Government for the purpose of business.

3. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of hearing of the appeal.”

8.1 On the other hand relying judgment of Hon’ble Supreme Court dated 07.05.2008 and 13.08.2010, Ld. AR submitted that the quantum of amount payable to workers on account of wages/ salaries / PF etc. and sums payable to other authorities was not a liability of the assessee till it was determined by Hon’ble Supreme Court. This aspect has been rightly relied by Ld. CIT(A) to benefit the assessee.

8.2 In regard to issue of written off unsecured loans receipt from the Central Government, Ld. AR submitted that Hon’ble Supreme Court of India in the case of Commissioner vs. Mahindra and Mahindra Ltd. (2018) 404 ITR 1(SC) has held that waiver of loan cannot be taxed as perquisites u/s 28(iv) as receipt in hands of debtor/assessee are in the form of cash/money and it also cannot be taxed as remission of liability u/s 41(1) as waiver of loan does not amount to cessation of liability.