Income Tax Appellate Tribunal - Amritsar
Assistant Commissioner Of Income Tax vs Anil Alums (P) Ltd. [Alongwith Ita Nos. ... on 30 June, 2005
Equivalent citations: (2005)98TTJ(ASR)56
ORDER
1. This order shall dispose of all the above appeals because the issue is almost identical in all the appeals filed by the Revenue and the assessee.
2. We have heard the learned representatives of both the parties and gone through the observations of the authorities below and details submitted in the paper book by the counsel for the assessee. For the sake of convenience, we take up ITA No. 325/Asr/1995 as leading appeal for the purpose of disposal of the remaining appeals on the identical issues.
3. ITA No. 325/Asr/l995--Revenue's appeal (Asst. yr. 1991-92):
This appeal by the Revenue is directed against the order of the CIT(A), Jammu, with headquarters at Amritsar dt. 2nd Jan., 1995 for the asst. yr. 1991-92.
4. Issue No. 1 : The first issue on ground No. 1 relates to the deletion of addition of Rs. 2,35,958 on account of lease rent on trucks. The facts as taken from the records are that the assessee company derives income from manufacturing of alums from bauxite and sulphuric acid and sales thereof with other trading items. During the course of scrutiny of accounts, it was found that the assessee had acquired 12 trucks from M/s Ashok Leyland Finance Ltd. on lease financing. The assessee had debited the amount of Rs. 2,35,938 as revenue expenditure and had shown deferred capital to the extent of Rs. 15,43,644. The assessee was asked to explain the reasons that the claim of Rs. 2,35,938 as revenue expenditure and was also directed to file copy of agreement with M/s Ashok Leyland Finance Ltd. The assessee explained the basis and assumptions made for the purpose of accounting on lease finance entries in the books of the lessee with regard to the arrangement made with M/s Ashok Leyland, lessors. It was claimed that as per agreement, the depreciation is to be claimed by the lessor and agreement prohibits capitalisation of the asset value by lessee during the tenure of lease agreement being made initially for a period of 36 months and thereafter the ownership of asset shall get transferred to lessee on payment of amount calculated at 1 per cent of the cost. The depreciation rate of 50 per cent is adopted WDV of truck after 3 years works out to 12.5 per cent and as against it realisable and fair value on that date i.e. after 3 years is accepted at 50 per cent of cost and on that basis split-up of entries of rentals for revenue purpose and realisable and fair value are based. The details are noted by the AO in the assessment order, assessee ultimately treated the expenditure that 50 per cent of the claim as revenue expenditure and 50 per cent was treated as deferred capital expenditure. The AO, however, did not agree with the view of the assessee and accordingly disallowed Rs. 2,35,938. It was claimed before the CIT(A) as per terms of the agreement, gross lease rent of Rs. 4,81,909 was payable in respect of each truck. The security of Rs. 1,04,872 was deposited in respect of each truck leaving a net lease rental of Rs. 3,77,037 per truck to be paid over a period of 36 months with six monthly pauses and with the right for the company to purchase the truck after the expiry of lease at a residual value of Rs. 4,048. The company sought an expert view from their auditors, who gave their opinion on the recommendation of the guidance note on accounting for lease financing, issued by the Institute of Chartered Accountants of India, New Delhi. The AO did not agree with the view of the Institute for splitting up the cost of vehicles into two limbs i.e., 50 per cent to be claimed as revenue expenditure and 50 per cent to be claimed as capital expenditure. The AO held that the depreciation and other allowance shall follow only on the contingencies of the assets having been lawfully possessed by the lessee and, therefore, till that limb of the agreement being fulfilled, any payment made to the lessor was to be an instalment paid in advance for the purchase of the vehicles. Thus, the AO did not allow the claim of the assessee treating it to be revenue expenditure and treated the same as capital expenditure. It was explained before the CIT(A) that the observation of the AO is far from the accounting point of view read with the agreement in this regard. The assessee filed written submissions before the CIT(A), which reads as under :
"As far as Ashok Leyland Finance Ltd. are concerned the only accounting limitation which they have put on use is that we cannot capitalise the cost of truck for the purpose of claiming the depreciation which will be claimed by them. There is no restraint put by them on us for the purpose of proper accounting treatment of the transaction in our books of account in accordance with law and the agreement with them except that the depreciation will be claimed by them. Therefore, we after seeking expert advice, debited 50 per cent of the lease rental to the revenue account and put the balance amount to deferred capital expenditure which would be capitalised on the termination of the lease financing agreement after 36 months and then depreciation claimed by us at its fair estimated market value in accordance with the suggestion of the expert opinion. Then the AO states that we shall capitalise the cost of truck at the end of the lease financing agreement as per WDV in the books of Ashok Leyland Finance Ltd. This is against all accepted cannons of accountancy because the residual value of the trucks after claiming depreciation in the books of Ashok Leyland Finance Ltd. shall be only Rs. 4,048 as given by them in the agreement. It is not understood as to where the balance of amount paid by our company i.e., Rs. 4,81,909 minus Rs. 4,048 = Rs. 4,77,861 will go in the books of account of our company and under what head they will be charged. The aforesaid copy of the agreement along with the annexures entered into by us with Ashok Leyland Finance Ltd. is annexed herewith, for your records and kind perusal. The issue has now been clinched by the expert opinion of Expert Advisory Committee of the Institute of Chartered Accountants of India."
5. The counsel for the assessee also filed the contents of the query and the opinion given by the Institute on this issue before the CIT(A). The learned Counsel for the assessee submitted that the opinion of the Institute of Chartered Accountants of India is a stamp of finality in such matter. Even the highest Court of the country while deciding the legal issue based on accounting practices approved such an information. The assessee's counsel relied upon the decision of the Hon'ble Supreme Court in the matter of Challapalli Sugars Ltd. v. CIT . The learned Counsel for the assessee submitted that in this case an issue before the Hon'ble Supreme Court was as to whether the interest paid on the amounts borrowed for acquiring and installing machinery and plant for a period prior to commencement of production was to be part of the actual cost or not. At p. 174 of the decision, the Hon'ble Supreme Court reproduced the opinion of the Institute of Chartered Accountants of India from its publication "Statement on Audit Practices". After reproducing the opinion of the Institute of Chartered Accountants of India, the Hon'ble Supreme Court upheld the view of the Institute on the ground of accepted accountancy rule. The assessee, therefore, submitted that the accounting treatment given by it to the lease financing transaction is strictly in accordance with the expert opinion of a firm of chartered accountants, which is corroborated and approved by the Expert Committee of the Institute of Chartered Accountants of India. Therefore, the amount of Rs. 2,35,938 should be allowed as revenue expenditure.
6. It was further clarified that the total sum paid to Ashok Leyland Finance Ltd. during this year under this contract of lease agreement was comprised of Rs. 15,43,644 as deferred capital expenditure in receipt of these lease-financed vehicles plus Rs. 2,35,938 charged to revenue out of lease rental, making a total of Rs. 17,79,582 paid to them. The AO was present before the CIT(A) and has relied upon the findings given in the assessment order.
7. The CIT(A) after considering the facts and the circumstances of the case and considering the opinion of the Institute of Chartered Accountants of India, was of the view that the contention of the assessee is liable to be accepted. The CIT(A) accordingly allowed the appeal of the assessee and deleted the addition.
8. The Revenue is in appeal before us. The learned Departmental Representative relied upon the order of the AO and submitted that since the truck was not in the name of the assessee and, therefore, there was no basis for charging any expenditure in the P&L a/c, therefore, the AO rightly disallowed the revenue expenditure. The learned Departmental Representative submitted that the CIT(A) without any basis deleted the addition in the matter.
9. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee paid the lease rental to M/s Ashok Leyland Finance Ltd. through lease agreement which includes the cost of chassis and cost of cabin and the remaining charges are service charges, management fund, financial charges and residual value of 1 per cent of the total cost of truck. The learned Counsel for the assessee submitted that the assessee on the basis of expert view based upon the opinion of the Institute of Chartered Accountants of India made the entries in the books of account by treating 50 per cent to be deferred capital expenditure and 50 per cent lease rental was treated as revenue expenditure. He has submitted that though according to Section 145 of the IT Act, the CBDT may notify primary accounting standard to be followed but no guidelines have been fixed in this regard, therefore, the opinion of the Institute of Chartered Accountants of India is relevant and admissible. He has submitted that the auditor's report relied upon the CIT(A) and allowed the appeal of the assessee.
He has relied upon the decision of the Hon'ble Supreme Court in the matter of Challapalli Sugars Ltd. (supra) and submitted that the same submission is adopted by the Hon'ble Supreme Court in the matter of CIT v. U.P. State Industrial Development Corporation (1997) 225 ITR 703 (SC). The learned Counsel for the assessee submitted that as per the lease agreement, the lessor M/s Ashok Leyland Finance Ltd. was entitled for depreciation, therefore, the assessee could not capitalise the amount of the rental. however, on completion of the terms of the lease agreement in the asst. yr. 1994-95, the assessee became entitled for ownership of the lease property on payment of the amount calculated @ 1 per cent of the cost and accordingly the assessee claimed depreciation in full amount, which was not granted by the AO in the asst. yr. 1994-95. However, the CIT(A) allowed the appeal of the assessee on this issue with regard to the claim of the assessee on the deferred capital expenditure vide order dt. 3rd June, 1997 upon which though the Revenue filed the appeal in ITA No. 475/1997 but the ground of depreciation was not challenged before the Tribunal, Amritsar Bench. Copy of the order of the CIT(A) dt. 3rd June, 1997 and grounds of appeal taken by the Revenue in ITA No. 475/1997 are filed in the paper book. The learned Counsel for the assessee submitted that now the issue on the identical facts has been decided by the Hon'ble Rajasthan High Court in the matter of Rajshree Roadways v. Union of India and Ors. and the appeal of the assessee on the identical facts has been allowed.
10. We have heard the rival submissions and material available on record. The facts as regards the agreement between the assessee and M/s Ashok Leyland Finance Ltd. is not in dispute. As per lease agreement, the assessee was to pay certain amount by way of instalments for the purpose of acquiring the trucks. According to Clause 15(b) of the agreement, the lessor was entitled to claim depreciation relating to the equipment covered by the schedule as an owner thereof and the lessee is not entitled for any claim from the lessor in this regard. The assessee was entitled to the ownership of the asset on payment of 1 per cent of the cost after making the complete payment on lease rental. The assessee on payment of whole of the amount became entitled to the ownership of the asset in the asst. yr. 1994-95. The assessee accordingly claimed depreciation on the asset i.e. the amount on deferred capital expenditure. The CIT(A) vide order dt. 3rd June, 1997 allowed the claim of the assessee for depreciation in favour of the assessee on the amount of deferred capital expenditure. The Revenue though filed the appeal before us in ITA No. 475/1997 but the deduction allowed by way of depreciation was not challenged in appeal. Therefore, it became final that the assessee (was) entitled for depreciation on the deferred capital expenditure. The Hon'ble Rajasthan High Court in the matter of Rajshree Roadways (supra) held as under :
"Held, that under the agreement there was a clause that after completion of lease period, if one per cent of the total consideration of the trucks was paid, the lessee would be the owner of those trucks. However, agreement dealt with the ownership of the trucks under the agreement. There was a clear provision that the said machinery shall at all times remain sole and exclusive property of the lessor and the lessee shall have no right, title or interest thereon. It further provided the irrevocable undertaking of the lessee that at no time during the currency of the lease agreement, which shall be non-cancellable, would the lessee attempt to capitalise the leased assets in its balance sheet. As per Clause 8, it had been agreed that the ownership of the said assets during the tenure of the lease and inclusive of any renewal options that the lessor may concur undisputedly rested with the lessor. So in clear terms, the agreement provided that during the lease period, only the lessor shall be treated as the owner of the trucks and not the lessee. Moreover, the lessor had been allowed depreciation on the trucks. Therefore, considering the terms and conditions of the lease agreement and the fact that depreciation on these trucks had been allowed to the lessor, the lease rent was deductible as revenue expenditure."
11. The assessee on the basis of opinion of the Institute of the Chartered Accountants of India claimed 50 per cent of the amount as deferred capital and 50 per cent was claimed as deduction on lease rental being revenue expenditure. The learned Departmental Representative could not produce any material before us to show that if any contrary circular has been issued by the CBDT in this regard disapproving the claim of the assessee. The Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra) upheld the view of the Institute of Chartered Accountants of India and held that the rules of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.
The Hon'ble Supreme Court in the matter of U.P. State Industrial Development Corporation (supra) held that the principle of commercial accountancy should ordinarily be applied in ascertaining profits and gains. The CIT(A) considered the opinion of the Institute of Chartered Accountants of India in favour of the assessee. This fact is also supported by the fact that in subsequent year the assessee was granted deduction on account of depreciation on the deferred capital expenditure. The AO, in case, would have treated the lease rent to be capital expenditure then the depreciation should have been allowed to the assessee. Since there was a clause in the lease agreement that only lessor would have entitled for depreciation then the AO should have allowed deduction as revenue expenditure in favour of the assessee. In the case decided by the Hon'ble Rajasthan High Court, the entire amount was allowed as revenue expenditure but in the case before us, the assessee only claimed 50 per cent of the payment to be as revenue expenditure and remaining was treated as deferred capital expenditure upon which subsequently depreciation has been allowed by the CIT(A). These factors would clearly prove that the assessee has been rightly allowed the deduction on account of revenue expenditure of the amount in question upon which Revenue is in appeal. We do not find any infirmity in the order of the CIT(A). We accordingly confirm the same order and dismiss the appeal of the Revenue on this issue.
12. Issue No. 2 : This issue relates to the deletion of the addition of Rs. 23,640 made on account of festival expenses. It was submitted that the amount of Rs. 58,108 was spent on the occasion of Diwali for ceremonial distribution of the sweets to the employees and to the important customers. The assessee relied upon certain decisions of the Tribunal in support of the contention. The CIT(A) accordingly deleted the addition. The learned Departmental Representative submitted that the amount spent was entertainment in nature. However, the learned Counsel for the assessee submitted that the amount was spent wholly and exclusively for the business of the assessee and to improve business relation.
12.1 On consideration of the above facts, we are of the view that no interference is called for in the matter. The Diwali gifts are generally given for the benefit of the business relation which is otherwise for the betterment of the business of the assessee. The Diwali gifts are allowable as business expenditure. We are fortified in our view by the order of the Tribunal, Delhi Bench, Mrs. Maya J. Daryani v. IAC (1994) 50 TTJ (Del) 510 and, order of the Tribunal, Ahmedabad Bench in ITO v. SLM Maneklal Industries Ltd. (1986) 17 ITD 515 (Ahd). Accordingly, we do not find any justification to interfere in the order of the CIT(A). This ground is accordingly dismissed.
13. No other ground is argued or pressed.
14. As a result, the appeal of the Revenue is dismissed.
15. ITA No. 260/Asr/1995 (Assessee's appeal-- Asst. yr. 1991-92):
The assessee claimed deletion of addition of Rs. 11,032 in respect of anniversary of the company at Dera Bassi Factory. The AO made disallowance being entertainment in nature. The CIT(A) confirmed the same. The learned Counsel for the assessee submitted that Full Bench of the Hon'ble Gujarat High Court in the matter of Karjan Co-operative Cotton Sales Ginning & Pressing Factory v. CIT (FB) allowed the deduction of the business expenditure which amount was spent by the cooperative society in giving presents to its members on its silver jubilee. The Hon'ble Gujarat High Court held that the expenditure incurred with a view to preserving and augmenting business and amount is allowed deductible. The AO in the assessment order without pointing out anything on this issue disallowed the amount by merely stating that the amount is paid for lunch, tea and coffee and gift items to employees on the annual day of the company. Therefore, the amount is spent on the employees on the occasion of annual day. No reason has been given whatsoever to make addition on the same. The details itself proved that the assessee incurred the expenses on account of annual day of business upon the employees. Such action would always strengthen the relation between the employees and the employer and for the betterment of the business institution. The same is, therefore, laid down wholly and exclusively for the business of the assessee. We accordingly set aside the orders of the authorities below. The addition is, therefore, deleted and the appeal of the assessee is allowed.
16. ITA Nos. 922/Asr/1995 and 536/Asr/1996 (Asst. yrs. 1992-93 and 1993-94--Departmental appeals):
Both the Departmental appeals are filed against deleting the additions of Rs. 13,32,024 and Rs. 15,17,851 on account of lease rent on trucks. The CIT(A) following his earlier order dt. 2nd Jan., 1995 allowed the appeal of the assessee and deleted the addition. We have dismissed the Departmental appeal in ITA No. 325/Asr/1995 above. Accordingly, both the appeals of the Revenue are dismissed being a covered issue in favour of the assessee.
17. ITA No. 475/Asr/1997 (Departmental appeal-- Asst. yr. 1994-95):
The Revenue has filed this appeal for deletion of addition of Rs. 10,14,365 on account of lease rent on trucks. The CIT(A) followed his order dt. 2nd Jan., 1995 in which we have dismissed the Departmental appeal. As a result, this appeal of the Revenue is dismissed.
18. ITA No. 368/Asr/1999 (Departmental appeal-- Asst. yr. 1995-96) and ITA No. 358/Asr/1999 (Assessee's appeal--Asst. yr. 1995-96):
The learned representatives of both the parties agreed that the issue is covered in favour of the assessee on the issue of lease rent upon which we have dismissed the Departmental appeal in ITA No. 325/Asr/1995. The authorities below shall follow our order as above in this year also in which we have upheld the claim of the assessee and dismiss the Departmental appeal. It is also stated that the facts are identical with regard to the lease agreement upon which the CIT(A) has taken it to be hire-purchase agreement and restore the matter to the file of the AO. Considering the submissions of the assessee and facts already considered by us above, we are of the view that the issue is covered in favour of the assessee. It is also explained before us that the assessee M/s Anil Alums (P) Ltd. is the same assessee M/s MSD Industrial Enterprises Ltd., therefore, the facts are identical. Considering the above discussion, the orders of the authorities below are set aside and the AO is directed to allow relief to the assessee on this issue by following our earlier order in ITA No. 325/Asr/1995.
19. As a result, the appeal of the assessee is allowed and the appeal of the Revenue is dismissed.
20. ITA Nos. 534/Asr/1996 and 535/Asr/1996 (Departmental appeals-- Asst. yrs. 1992-93 and 1993-94) :
In both the appeals, the deletion of addition on account of lease rent on trucks is challenged. The CIT(A) following his earlier order dt. 2nd Jan., 1995 in the case of M/s Anil Alums (P) Ltd. allowed the appeal of the assessee. We have dismissed the Departmental appeal in ITA No. 325/Asr/1995 confirmed the order of the CIT(A) dt. 2nd Jan., 1995. We accordingly dismiss both the appeals of the Revenue.
21. ITA No. 367/Asr/1999 (Departmental appeal-- Asst. yr. 1995-96):
In this Departmental appeal, the Revenue is in appeal for direction to the AO on the issue of lease charges paid to the financiers. The CIT(A) following Addl. CIT v. General Industries Corporation directed the AO to recompute the income as per the above decision. However, we find that in ITA Nos. 358/Asr/1999 and 368/Asr/1999, the same issue was considered as regards issuing directions to the AO as per (supra). We have allowed the appeal of the assessee in ITA No. 358/Asr/1999 above. Considering the same, we set aside the orders of the authorities below and direct the AO to follow our order in ITA No. 325/Asr/1995.
22. As a result, the appeal of the Revenue is dismissed.
23. As a result, all the appeals are disposed of in terms above.