Income Tax Appellate Tribunal - Chandigarh
Haryana Minor Irrigation & Tube-Well ... vs Department Of Income Tax on 22 November, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL: "A" BENCH: CHANDIGARH
BEFORE SHRI D K SRIVASTAVA, AM AND Ms. SUSHMA CHOWLA, JM
ITAs No. 91 and 92 /Chd/2010
Assessment Year: 2003-04 and 2004-05
D.C.I.T. Panchkula v. M/s Haryana Minor Irrigation &
Tubewell Corporation Ltd.,
SCO 66-67, Bank Square,
Sector 17-B, Chandigarh
PAN: AABFH 8314 F
Appellant by: Smt. Jyoti Kumari
Respondent by: Shri Tej Mohan Singh
Date of Hearing: 22.11.2011
Date of Pronouncement: 21.12.2011
ORDER
D K Srivastava: Both the appeals filed by the Department involve common issues. We therefore find it convenient to dispose of both of them by a consolidated order.
I.T.A. No. 91/Chd/2010: AY 2003-04
2. Return of income was filed by the assessee declaring total loss at Rs. 68,81,26,870/-. After processing, the return was taken up for scrutiny as a result of which total loss was assessed at Rs. 37,39,45,566/-. Aggrieved by the additions/disallowances made by the AO in the assessment order, the assessee carried the matter in appeal firstly before the ld. CIT(A) and thereafter before this Tribunal. The Tribunal by its order dated 18.3.2008 in the assessee's appeal bearing I.T.A. No. 91 and 1008/Chd/2007 for AY 2003-04 and 2004-05 restored the matter to the file of ld. CIT(A) for fresh decision pursuant to which the ld. CIT(A) has passed the appellate order on 3.11.2009 against which the Department is now in appeal before this Tribunal.
3. Grounds No. 1 and 2 taken by the Department read as under:-
"1 Whether on the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the disallowance made by the AO on account of retrenchment compensation and salary paid by the assessee after the closure of business?
2. Whether on the facts and in the circumstances of the case, the ld. CIT(A) has erred law in ignoring the judgment of Hon'ble Supreme Court reported in 65 ITR 643 (S.C) in view of which these payments are not deductible revenue expenditure as the business had already been closed?"
4. In the Statement of Facts submitted before the ld. CIT(A), the assessee has stated as under:-
DCIT V Haryana Minor Irrigation 2 and Tubewell Corporoation ITAs No. 91 and 92/Chd/2010 "The Haryana State Minor Irrigation and Tubewells Corporation Ltd., is fully owned by Haryana Government and its main activities were lining of watercourses, maintenance of watercourses, manufacturing of pumps, gates, installation of tubewells and maintenance of direct irrigation tubewells and augmentation tubewells.
The activities of the Corporation have been closed with the approval of the Appropriate Government under sub-section (I) of section 25-O of the Industrial Dispute Act, 1947 (14) of 1947 w.e.f. 30.7.2002, but the office of the HSMITC is still functioning for settlement of dues of employees, payment of the outstanding liabilities and various court cases."
5. It is quite apparent from the aforesaid Statement of Facts submitted by the assessee before the ld. CIT(A) that the assessee closed down its business w.e.f. 30.7.2002 with the approval of Appropriate Government as a result of which the retrenchment compensation was paid to the employees. The AO has disallowed the retrenchment compensation to the employees on closure of business on the ground that it was capital expenditure. The ld. CIT(A) has however held that retrenchment compensation was part of wages and therefore allowed the same as revenue expenditure.
6. Aggrieved by the order passed by the ld. CIT(A), the Department is now in appeal before this Tribunal. In support of appeal, it was submitted that the retrenchment compensation was paid on closure of business and therefore it was in the nature of capital expenditure. In this connection, reliance was placed on the judgment of the Hon'ble Supreme Court in CIT v. Gemini Cashew Sales Corporation, 65 ITR 643 (SC) and Nathalal Asharam v. CIT, 194 ITR 110 (Guj).
7. In reply, the ld. counsel for the assessee relied upon the orders of the ld. CIT(A) and submitted that the ld. CIT(A) has rightly held, following the judgment of the Bombay High Court in A.D. Divekar v. Dinesh Mills Ltd., (1955) LLJ 501 that the retrenchment compensation was in the nature of wages and therefore allowable as revenue expenditure.
8. We have heard both the parties and carefully considered their submissions. There is no dispute that the retrenchment compensation was paid directly as a result of closure of business. It has been held in series of judgment, namely CIT v. Gemini Cashew Sales Corporation, 65 ITR 643 (SC); Nathalal Asharam v. CIT, 194 ITR 110 (Guj); Venkatesa Colour Works v. CIT, 108 ITR 309 (Mad); Intesco Raw Silk Company v. CIT, 117 ITR 315 (All); CIT v. Central Art Press, 189 ITR 618 (Mad); P.N. Ganesan Pvt. Ltd. v. CIT, 196 ITR 455 (Mad) and Modi Electric Supply Co. v. CIT, 126 ITR 403 (P&H) that retrenchment compensation payable on closure of business is in the nature of capital expenditure and not revenue expenditure. The issue is thus clearly covered by the aforesaid judgments. In this view of the matter, the impugned expenditure incurred by the assessee as a result DCIT V Haryana Minor Irrigation 3 and Tubewell Corporoation ITAs No. 91 and 92/Chd/2010 of closure of its business is held to be in the nature of capital expenditure and therefore liable to be disallowed u/s 37 of the Income-tax Act, 1961. Resultantly, the order of ld. CIT(A) in this behalf is reversed and that of the AO restored.
9. As regards payment of salary to the employees after closure of business, it cannot be said that the payment of salary after closure of business is not in the nature of revenue expenditure so long as the assessee-corporation functions for settlement of dues of its employees, discharge of liabilities and other miscellaneous expenditure. In this view of the matter, the order of ld. CIT(A) allowing payment of salary is in order and therefore it is confirmed.
10. Grounds No. 1 and 2 are partly allowed in terms of the aforesaid directions.
11. Ground No. 3 taken by the Department reads as under:
"3 Whether on the facts and in the circumstances of the case, the ld. CIT(A) has also erred in deleting the disallowance made by the AO on account of interest paid by the assessee to the nationalized banks on compromise settlements as the interest paid pertained to the period earlier than the year under consideration ?"
12 The ld. CIT(A) ha allowed the claim of the assessee with the following observations:-
"8 The third ground of appeal is regarding interest paid to banks after 30.6.2002. The ld. counsel has argued that the interest paid to the nationalized banks on account of compromised settlement scheme relates to the period of operation of the appellant and the same is allowable expenditure. I find force in the arguments of the counsel that since the interest paid relates to the period of operation of the assessee the same is an allowable expenditure. The disallowance made by the AO is ordered to be deleted and this ground of appeal is allowed."
13. We have heard both the parties and carefully considered their submissions. Both the parties agree that the interest paid to the nationalized banks was on account of settlement between the parties. Both the parties also agree that the interest liable to be paid as a result of compromise settlement relates to the period during which the business of the assessee was in operation. In this view of the matter, the payment of interest to nationalized banks cannot be held as capital expenditure. In our view, the ld. CIT(A) has rightly held the impugned expenditure to be in the nature of revenue expenditure. His order in this behalf is confirmed. Ground No. 3 taken by the Department is dismissed.
14. Grounds No. 4 and 5 taken by the Department are general in nature and do not require any adjudication.
15. Appeal filed by the Department is partly allowed.
DCIT V Haryana Minor Irrigation 4 and Tubewell Corporoation ITAs No. 91 and 92/Chd/2010 I.T.A. No. 92/Chd/2010: AY 2004-05
16. Ground No. 1 and 2 taken by the Department read as under:
"1 Whether on the facts and in the circumstances of the case, ld. CIT(A) is right in holding that the expenditures on account of salary, retrenchment compensation and interest are allowable business expenditures of the assessee when the business of the assessee stood completely closed down in the year preceding the year under consideration?
2 Whether on the facts and in the circumstances of the case, ld. CIT(A) is rightly in allowing the expenditures claimed by the assessee by holding these as business expenditures when the incomes against which these expenditures had been claimed were income from house rent and interest income from FDRs?"
17. The ld. CIT(A) has allowed the claim of the assessee with the following observations:-
"7 I have carefully considered observations of the AO in the assessment order and also the arguments of the ld. counsel for the appellant and the case laws relied upon by him. The AO disallowed the expenditure claimed by the appellant on the ground that the business of the appellant stands closed on 30.7.2002 and the expenditure is not incidental to the running of the business of the assessee. The ld. counsel for the appellant on the other hands has argued that the expenditure has been incurred for payment of interest on loan utilized for payment of retrenchment compensation and also salary paid to the core staff retained for completion of post closure formalities including preparation of balance sheet etc which is very much within the ambit of business related activity of the company even after the closure of its operation. The ld. counsel has relied on the two case laws mentioned above. I find force in the argument of the ld. counsel that the interest expenditure and the salary paid to the core staff is an allowable expenditure since the same falls within the ambit of business related activity. The retrenchment compensation was business expenditure for payment of which the appellant raised loan from the State Government on which interest has been paid. The interest expenditure is therefore an allowable expenditure. Similarly, the salary paid to the core staff for post closure formalities is also business related activity and this expenditure is allowable. The AO is not justified in disallowing the expenditure claimed by the appellant. The disallowance of the business expenditure on account of interest and salary to core staff made by the AO is orders to be deleted. This ground of appeal is allowed."
18. We have heard both the parties and carefully considered their submissions. Perusal of assessment order shows that the assessee had claimed loss of Rs. 8,33,88,253/-. Perusal of assessment order further shows that the assessee had declared income of Rs. 3,23,13,262/- on account of interest and rent from house property. It is seen from the assessment order that the AO had disallowed the entire business expenses on the ground that the assessee had closed down its business w.e.f. 30.7.2002. The assessee challenged the disallowances/additions made by the AO before the ld. CIT(A). Perusal of the order passed by the ld. CIT(A) shows that he has allowed the appeal filed by the assessee. However para DCIT V Haryana Minor Irrigation 5 and Tubewell Corporoation ITAs No. 91 and 92/Chd/2010 7 of the order passed by the ld. CIT(A) shows that he has allowed retrenchment compensation, interest and salary. There is no discussion in the order of ld. CIT(A) on the issue of allowability of expenses other than retrenchment compensation, interest and salary. In the present appeal the case of the Department is that the ld. CIT(A) should not have allowed business expenditure against rental income and income from other sources i.e. interest income from FDRs. The ld. CIT(A) has not dealt with the issue of allowability of expenditure other than retrenchment compensation, salary and interest in his appellate order. In this view of the matter, the order of ld. CIT(A) is vacated and the matter is restored to his file for fresh decision in conformity with law on each ground of appeal taken before him after giving reasonable opportunity of hearing to both the parties.
19. Grounds No. 3 and 4 are general in nature and do not require any adjudication.
20. Appeal filed by the revenue is treated as allowed for statistical purposes.
Order pronounced on 21.12.2011
Sd/- Sd/-
(SUSHMA CHOWLA) (D K SRIVASTAVA)
JUDICIAL MEMBEER ACCOUNTANT MBMER
Chandigarh: the 21.12.2011
SURESH
Copy to:
1. The Appellant, D.C.I.T. Panchkula
2. The Respondent, M/s Haryana Minor Irrigation and Tubewell Corporation
3. The CIT(A), Panchkula
4. The ld. CIT, Panchkula
5. The D.R, Income-tax Department, Chandigarh Assistant Registrar, ITAT, Chandigarh True Copy Assistant Registrar, ITAT, Chandigarh