Income Tax Appellate Tribunal - Mumbai
Mukund Engineers Ltd, Mumbai vs Assessee on 16 February, 2012
IN THE INCOME TAX APPELLAT E TRIBUNAL
MUMBAI BENCHES, 'B', MUMBAI
BEFORE HON'BLE PRESIDENT SHRI G.E.VEERABHADRAPPA
AND SHRI D.K.AGARW AL (JM)
ITA No.542/Mum/2009
(Assessment Year:2003-04)
Income Tax Officer M/s Mukund Engineers
3(2)(2, Ltd.,
Room No.673, 6th floor, Bajaj Bhavan, 3rd Floor,
Aayakar Bhavan, V/s 226, Nariman Point,
M K Road, Mumbai-400021
Mumbai-400020. PAN:AAACM4974G
APPELLANT RESPONDENT
ITA No.846/Mum/2009
(Assessment Year:2003-04)
M/s Mukund Engineers Ltd., Income Tax Officer
Bajaj Bhavan, 3rd Floor, 3(2)(2,
226, Nariman Point, Room No.673, 6th floor,
Mumbai-400021 V/s Aayakar Bhavan,
PAN:AAACM4974G M K Road,
New Marine Lines,
Mumbai-400020
APPELLANT RESPONDENT
Date of Hearing : 16. 2.2012
Date of Pronouncement : 27.3.2012
Revenue by : Shri Satbir Singh
Assessee by : Shri Percy Pardiwala and Smt.Vasantiben Patel
ORDER
PER D.K.AGARWAL (JM) These cross-appeals by the Revenue and assessee are directed against the order dated 21.11.2008 passed by the IT A N o .54 2/M um/ 2009 2 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) ld.CIT(A) for the assessment year 2003-04. Both these appeals are disposed of by this common order for the sake of convenience.
2. Briefly stated facts of the case are that the assessee company is engaged in the business of executing turnkey construction contracts and machinery fabrication contracts, filed return declaring loss of Rs.4,78,43,710/- for the assessment year 2003-04. However, the assessment was completed at an income of Rs.9,18,60,659/- including the disallowance of depreciation of Rs.1,25,64,412/- and premature credit in respect of gain on debt assignment transactions Rs.8,48,58,072/- vide order dated 28.3.2006 passed under section 143(3) of the Income Tax Act, 1961 (In short the Act). On appeal, the ld. CIT(A) partly allowed the appeal.
3. Being aggrieved by the order of the ld. CIT(A), the Revenue and assessee both are in appeal before us. ITA No.542/Mum/2009(Revenue's appeal)
4. The ground No.1 and 2 taken by the Revenue read as under :
IT A N o .54 2/M um/ 2009 3 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) "1. On the facts and in the circumstances of the case and in law the ld.CIT(A) has erred in deleting the addition made by disallowance of depreciation on EDP equipment, Application and System Software in running mode and Intellectual Property Rights comprising of technical skills.
2. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the AO be restored."
5. Brief facts of the above issue are that the AO observed that the assessee has carried forward unabsorbed depreciation of Rs.2,37,22,405/-. The assessment of the assessee for the assessment year 2002-03 was completed u/s 143(3) wherein the AO has disallowed the claim of depreciation on certain items. Keeping in tune with the same and for the reasons as discussed in the assessment orders for the assessment years 2001-02 and 2002-03, the AO has disallowed the depreciation amounting to Rs. 1,25,64,412/- on the following assets:
Sr.No. Particulars Amount
of depreciation
1 EDP Equipment (including 4,51,912
furniture and fixture)
2 Application and systems 48,00,000
software in running mode
3 Intellectual property rights 73,12,500
comprising of technical skills
(IPR)
TOTAL 1,25,64,412
IT A N o .54 2/M um/ 2009
4 IT A N o .84 6/M um/ 2009
( Assessment Yea r:2003- 04)
6. On appeal, the ld. CIT(A) following the appellate order for the assessment year 2001-02 directed the AO to grant depreciation in respect of furniture and equipment being computer and in respect of software pertaining to EDP division and confirmed the disallowance of depreciation on IPR.
7. At the time of hearing, both the parties have agreed that this issue is covered in favour of the assessee by the order of the Tribunal in assessee's own case in M/s Mukund Engineers Ltd. V/s ITO and vice-versa in ITA Nos. 1905 & 1810/Mum/2005 and ITA No.1081 & 1215/Mum/2006 for the assessment years 2001-02 and 2002-03 dated 8.10.2010 and in ITO V/s M/s Mukund Engineers Ltd. in ITA No.1524/Mum/2009 for the assessment year 2004-05 dated 30.12.2010. The ld. Counsel for the assessee has also placed on record the copy of the said orders of the Tribunal appearing at pages 70 to 129 of the assessee's paper book.
8. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the ld.CIT(A) has not allowed the depreciation on Intellectual Property Rights (IPR). It is very clearly written in the last sentence of paragraph 3 of his order. Therefore, to this extent, the ground raised by the Revenue is infructuous. As IT A N o .54 2/M um/ 2009 5 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) regards the depreciation on EDP Equipment (including furniture and fixture and Application and systems software in running mode, we find merit in the submissions of the parties that this issue is squarely covered in favour of the assessee by the orders of the Tribunal (supra), wherein the Tribunal vide paragraphs 18 and 19 of order dated 8.10.2010 has held as under as under :
"18. We have considered the rivals submissions. In our view the order of the CIT(A) on this issue deserves to be upheld. As far as the disallowance of depreciation on EDP Equipment including furniture and fixtures is concerned the main objection of the Assessing Officer appears to be that WDV of these assets as per the books of Mukund Ltd. should have been adopted as actual cost by the assessee while claiming depreciation. One of the reasons assigned by the Assessing Officer is that these assets were purchased by Mukund Ltd. under a lease and hire purchase agreement and the value as per this agreement should hold good for all purposes. In our view this was not the proper approach. The value adopted by the assessee is duly supported by the report of a valuer, who has certified that the value adopted by the assessee is the market value of the assets on the date of transfer. This valuation has not been found to be incorrect by the Assessing Officer. Besides the above, as far as the assessee is concerned, it was justified in adopting the value it paid for acquiring these assets from Mukund Limited because that was the actual cost which it had paid for acquiring these assets. The action of the assessee is in accordance with the provisions of section 43(1) of the Act. The Assessing Officer could have made out the case by invoking Explanation-3 to section 43(1) of the Act which he had not done. In these circumstances we are of the view that the CIT(A) was right in directing the Assessing Officer to allow depreciation on EDP Equipment including furniture and fixtures as claimed by the assessee.
19. As far as depreciation on application and system software is concerned we are of the view that the fact that the ERP package was licensed for used by Mukund Limited cannot be the reason to hold that the assessee is not a licensed user of the said software on which depreciation can be allowed.
IT A N o .54 2/M um/ 2009
6 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) The assessee by paying a sum of Rs. 5 crores for acquiring the right to use ERP package has used the said license and earned income. The said income was offered to tax by the assessee. But for the license to use ERP software the assessee would not have earned this income. The fact that these software were used by Mukund Limited and because of claim of depreciation over the year, their book value was nil as per the books of Mukund Limited, cannot be the reason to hold that the right acquired by the assessee to use these ERP package has no value. In our view the CIT(A) was, therefore, right in directing the Assessing Officer to allow depreciation on the value of the application and system software as claimed by the assessee. For the reasons stated above the ground No.2 raised by the revenue is dismissed."
9. The above order has been followed by the Tribunal in the Revenue's appeal for the assessment year 2004-05 (supra).
10. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the consistent view of the Tribunal decline to interfere with the order passed by the ld. CIT(A) on this account and accordingly, the grounds taken by the Revenue are rejected.
ITA No.846/Mum/2009(Assessee's appeal)
11. Ground Nos.1 and 2 taken by the assessee read as under:
"1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in not excluding from the total income, an amount of Rs.8,48,58,072/- on account of premature credit in respect of gain expected on debt assignment transaction.
IT A N o .54 2/M um/ 2009 7 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04)
2. The Commissioner of Income-tax (Appeals) further erred in holding that the gain on debt assignment transaction is taxable under the head 'Income from Other Sources'."
12. Brief facts of the above issue are that the assessee company became a surety for a loan taken by another company under the same management, Mukund Ltd. from Commerz Bank AG. Over a period of time, Mukund Ltd. defaulted in the payment of loan taken by them from said bank. The bank filed a suit with Debt Recovery Tribunal and assessee being surety was made a party to this suit. The total amount of claim was of Rs.16.08 crores which included principal as well as interest. In the proceedings before the Debt Recovery Tribunal, a tripartite agreement was arrived at to settle the amount on payment of Rs.7.60 cores which the assessee undertook to pay the bank on the condition that the entire amount of outstanding loan and interest of Rs.16.08 crores will get assigned to the assessee. In this tripartite agreement, it was further agreed that on assumption of the loan to assessee, Mukund Ltd. shall repay to assessee over period of 12 years in monthly installments. The issue of interest payable by Mukund Ltd. to assessee is also an integral part of the agreement. In accordance with the agreement, debt of Rs.16.08 crores was assigned to assessee and in turn assessee IT A N o .54 2/M um/ 2009 8 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) paid Rs.7.6 crores to the bank. The entire amount of Rs.16.08 crores was credited by the assessee in its books of accounts as income. The Assessing Officer has held that the difference between debt amount assigned being Rs.16.08 crores and the amount of Rs.7.6 crores paid by assessee to the bank amounting to Rs. 8.48 crores is income of assessee for the current year.
13. On appeal before the ld. CIT(A), the ld. Counsel for the assessee has filed detailed written submissions on the issue. It was contended that the amount of Rs.8.48 crores was credited by the assessee company to its Profit and loss Account as 'Exceptional income'. It was further contended that auditors had qualified the report to the effect that the credit of Rs.8.48 crores as income was premature since the income had not yet become due nor accrued during the year under consideration. It was further contended that the assessee is going to receive payments from Mukund Ltd. in accordance with terms of agreement wherein it has been clearly specified that it shall be paid by Mukund Ltd. over a period of 12 years in monthly installments. Therefore, the income which has not been accrued cannot be taxed in the current year. It has also been contended that income shall accrue in the year in which the IT A N o .54 2/M um/ 2009 9 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) respective amounts are due to assessee in accordance with terms of the agreement.
14. The ld. CIT(A) while holding that the entire activity will have to be considered as an activity under the head income from other sources further held that since the appellant has been assigned debt of Rs.16.08 crores against the outright payment of Rs.7.60 crores to the bank, therefore, the difference of Rs.8.48 crores is a benefit to the appellant which has arisen during the year under consideration and hence the same is taxable under the head income from other sources.
15. At the time of hearing, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the AO and the ld.CIT(A) further submits that the amount of Rs.8.48 crores was credited by the assessee company to its Profit and loss Account as 'Exceptional income'. He further submits that auditors had qualified the report to the effect that the credit of Rs.8.48 crores as income was premature since the income had not yet become due. He further submits that the assessee shall receive payments from Mukund Ltd. in accordance with terms of agreement in which it is clearly specified that the amount shall be paid by Mukund Ltd. over a IT A N o .54 2/M um/ 2009 10 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) period of 12 years in monthly installments and in support the reference was made to the point No.4.6 of the Directors' Report and point No.6 of the Report of the Auditors to the Members of the Annual Report of the assessee Company for the Financial Year 2002-03 relevant to the assessment year 2003-04 appearing at pages 40 and 47 of the assessee's paper book. The reference was also made to the balance sheet and profit and loss account with relevant schedules at pages 50,51,52,55 and 61 of the assessee's paper book. He further submits that in view of the decree of admission dated 5.4.2002 and copy of deed of assignment dated 20.1.2003 appearing at pages 1 to 25 of the assessee's paper book, the debts of Rs.16.08 crores of Mukund Ltd. from Commerz Bank AG by payment is Rs.7.6 crores. The Commerz Bank AG, thereafter, has assigned the debt of Mukund Ltd. to the assessee company. The difference between the amount paid by the company and the amount of the debt assigned by the Commerz Bank AG as per consent terms signed between the Commerz Bank AG, Mukund Ltd. and the assessee-company, has been considered in the books of account as an 'exceptional income', however while filing the return of income, the assessee has reduced the amount of Rs.8.48 crores from its total income of the assessee vide statement of computation of IT A N o .54 2/M um/ 2009 11 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) income appearing at pages 26 and 27 of the assessee's paper book. He further submits that even otherwise, the question has to be decided according to the principle of law and not in accordance with the accounting practice as held by the Hon'ble Apex Court in. Tuticorin Alkali Chemicals and Fertilizers Ltd. V/s CIT (1997) 227 ITR 172 (SC). He further submits that according to the Accounting standard A4 and 6 notified u/s 145(2) dated 25.1.1996 the difference amount of Rs.8.48 corers cannot added to the income of the assessee. The reliance was also placed on the decision of the Special Bench of the Tribunal in Sulzer India Ltd. V/s Jt. CIT(2010) 42 SOT 457 (Mum.) (SB), wherein it has been held that the payment of net present value of future liability could not be regarded as remission or cessation of liability so as to attract provisions of section 41(1)(a) of the Act. He further submit that the ld. CIT(A) has assessed the income under the head income from other sources. However, such income cannot be taxed even under the head income from other sources as there is no such provisions to tax the difference of Rs.8.48 crores to the income of the assessee. He further submits that even the clause (viia) of sub-section (2) of section 56 of the Act has been inserted by the Finance Act 2010 with effect from 1.6.2010 wherein it has been provided that after 1.6.2010 IT A N o .54 2/M um/ 2009 12 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) where the company receives any property being shares of a company not being a company in which the public are substantially interested (i) without consideration the aggregated fair market value of which exceeds Rs.50,000/-, whole of the aggregate fair market value of such property, (ii) for a consideration which is less than fair market value of the property by an amount exceeding Rs.50,000/-, the aggregate fair market value of such property as exceeds such consideration shall be added to the income of the assessee, therefore, the ld. CIT(A) has erred in adding the income of Rs.8.48 crores under the head income from other sources without any such provisions of law. The ld. Counsel for the assessee at this stage also refers to the definition of income and the provisions of section 17(2) of the Act for the proposition that such income is not assessable under the Act. He further submits that the assessee has shown the gain on assignment of debts on proportionate basis from the assessment year 2007-08 onwards and there is no appeal on this issue by the assessee against the addition of the said income for the assessment year 2007-08 onwards. He, therefore, submits that the amount of Rs.8.48 crores credited by the assessee company to its Profit and loss Account as 'Exceptional income' is not assessable under the Act in the IT A N o .54 2/M um/ 2009 13 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) year under consideration as the income has not been accrued to the assessee. He, therefore, submits that the addition made by the AO and sustained by the ld. CIT(A) be deleted.
16. On the other hand, the ld. DR while relying on the order of he AO and the ld. CIT(A) further submits that the assessee company and M/s Mukund Ltd are sister concerns, the directors are common, therefore, the arrangement made by the assessee way of decree of admission and deed of assignment is an arrangement not to pay any tax on the said amount which is otherwise taxable, therefore, the order passed by the AO and confirmed by the CIT(A) on this account be upheld.
17. In the rejoinder, the ld. Counsel for the assessee submits that there is no dispute that M/s Mukund Ltd. is a sister concern of the assessee but the fact is that the assessee as per surety u/s 145 of the Civil Procedure Code, 1908 and deed of assignment has made payment of Rs.7,60,00,000/- to the Commerz Bank AG and debited the outstanding debt of Rs.16.08 crores in the account of M/s Mukund Ltd, payable by Mukund Ltd. in 144 installments from April 2006 to March 2018, therefore, the difference of Rs.8.48 crores did not accrue to the assessee in the year under IT A N o .54 2/M um/ 2009 14 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) consideration and hence it cannot be taxed in the hands of the assessee.
18. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute.
19. Section 14 of the Income Tax Act, 1961 as it stood at the relevant time similarly provided that "All income shall for the purposes of charge of income-tax and computation of total income be classified under six heads of income," namely :
(A) Salaries;
(B) Interest on securities;
(C) Income from house property;
(D) Profits and gains of business or profession;
(E) Capital gains;
(F) Income from other sources unless otherwise, provided in the Act.
20. Section 56 provides for the chargeability of income of every kind which has not to be excluded from the total income under the Act, only if it is not chargeable to income-tax under any of the heads specified in section 14 items A to E. IT A N o .54 2/M um/ 2009 15 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) Therefore, if the income is included under any one of the heads, it cannot be brought to tax under the residuary provisions of section 56.
21. In Airports Authority of India V/s CIT (2012) 340 ITR 407 (Del) (FB) it has been observed (page 419):
"...The question is as to whether there is a "real income"
which has accrued to the assessee. This "real income"
theory is accepted by the Apex Court in State Bank of Travancore V/s CIT (1986)158 ITR 102 (SC). As per this judgment, the concept of real income is applicable in judging whether there has been income or not. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income which does not materialized. This principle is applicable whether the accounts are maintained on the cash system or under mercantile system. If the accounts are maintained under the mercantile system, what has to be seen whether income can be said to have been really accrued to the assessee-company. (see Godhara Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC)...."
22. It is also settled law that when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. (see Tuticorin Alkali Chemicals & Fertilizers Ltd. V/s CIT (1997) 227 ITR 172 (SC).
IT A N o .54 2/M um/ 2009 16 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04)
23. According to Sampath Iyengar's Law of Income Tax, 2011 Edition at page 1312 of Vol 1, the concept of accrual of income is discussed as under :
"The time of accrual or arisal is of significance in taxation, since, in order to be chargeable, the income should have accrued or arisen to the assessee during the accounting year, i.e., the 'previous year'. In order that income may be said to have accrued at a particular point of time, it must have ripened into a debt at that moment, that is to say the assessee should have acquired a right to receive payment at that moment, though the receipt itself may take place later. There must be a debt owed to the assessee by somebody at that moment or as is otherwise expressed, debitum in praesenti, solvendum in futuro'. Until, there is created in favour of the assessee a debt due by somebody, it cannot be said that any income has 'accrued' to him." (see Sassoon & Co. Ltd.(ED) V/s CIT (1954)26 ITR 27, 52 (SC).
24. Applying the above provision of law and the ratio of the above decisions to the facts of the present case, we observe that the accrual of the income depends upon the continuance of the agreement and the performance of the respective obligation by both the parties. In the case before us, in fact, there is no material on record to show that the said income has accrued to the assessee. As per the consent terms dated 5.4.2002 and copy of deed of assignment dated 20.1.2003, between Commerz Bank AG and Mukund Ltd, the principal amount is to be received by the assessee company from Mukund Ltd. in 144 monthly installments payable from April 2006 to March 2018, therefore, during the year i.e. the assessment year 2003-04 the income does not accrue/arise to IT A N o .54 2/M um/ 2009 17 IT A N o .84 6/M um/ 2009 ( Assessment Yea r:2003- 04) the assessee. In this view of the matter and keeping in view that the assessee has shown proportionate income from the assessment year 2007-08 and onwards, accepted by the Revenue, we are of the view that the addition of Rs.8,48,58,072/- made by the AO and sustained by the ld. CIT(A) is not sustainable in law and accordingly the same is deleted. The grounds taken by the assessee are, therefore, allowed.
25. In the result, the Revenue's appeal stands dismissed and assessee's appeal is allowed.
Order pronounced in the open court on 27th March,2012.
Sd sd
(G.E.VEERABHADRAPPA) (D.K.AGARWAL)
PRESIDENT JUDICIAL MEMBER
Mumbai, Dated 27th March,2012.
SRL:
Copy to:
1. Appellant
2. Respondent
3. CIT Concerned
4. CIT(A) concerned
5. DR concerned Bench
6. Guard file.
BY ORDER
True copy
ASSTT. REGISTRAR,
ITAT, MUMBAI