Income Tax Appellate Tribunal - Mumbai
Oriental Seritech Ltd , Mumbai vs Assessee
Oriental Seritech Limited
vk;dj vihyh; vf/kdj.k ^^lh^^ U;k;ihB eqca bZ esAa
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI
Jh vkj- ds- xqIrk] U;kf;d lnL; ,oa Jh jktsunz flag ys[kk lnL; ds le{k
BEFORE SHRI R.K. GUPTA JUDICIAL MEMBER AND SHRI RAJENDRA SINGH
ACCOUNTANT MEMBER
vk;dj vihy la[;k/ITA NO.6505/Mum/2010
¼fu/kkZj.k o"kZ@Assessment year: - 2003-04
Oriental Seritech Limited Commissioner of Income Tax,
Devesh Kumar Shah & Co., cuke@ City 2,
Chartered Accountants, 106, Vs. Aaayakar Bhavan, M.K. Road
Banaji House, 361, Dr. D.N. Mumbai - 400 020.
Road, Flora Fountain,
Mumbai - 400001
PAN:- AAACO0596L
vihykFkhZ@Appellant izR;FkhZ@Respondent
vihykFkhZ dh vksj ls@Appellant by Shri R. Muralidhar.
izR;FkhZ dh vksj ls@Respondent by Ms. Tripura Sundari
lquokbZ dh rkjh[k@Date of hearing 4-09-2013
?kks"k.kk dh rkjh[k@Date of 20-09-2013
pronouncement
vkns'k@ORDER
PER RAJENDRA SINGH, AM
This appeal by the assessee is directed against the order dated 28.5.2010 of CIT(A) for the assessment years 2003-04. The only dispute raised by the assessee in this appeal is regarding disallowance of expenses.
2. The facts in brief are that the assessee who was engaged in manufacturing of silk and trading of textiles had declared loss of Rs. 14698548/- in assessment year 2003-04. AO noted that the assessee had claimed the following expenses in P&L Account.
-1-Oriental Seritech Limited
1. Farm Expenses Rs. 2,02,225
2. Legal and Professional Fees Rs. 2,46,900
3. R&D Cess Rs. 78,210
4. Communication expenses Rs. 1,709
5. Travelling and conveyance Rs. 13,005
6. Technology transfer fees Rs. 15,81,770
7. Interest paid on Custom Duty Rs. 1,23,25,000
8. Sales Tax Penalty Rs. 86,049
9. Sales Tax Rs. 57,191 Total Rs. 1,45,92,059 2.1 The AO further noted from the audit report that accounts of the assessee had been prepared as a non going concern and the assets had been valued at their net realizable value as estimated by the management of the company. In the notes to account, it was mentioned that company ceased to be a going concern. The auditors also mentioned that the management of the company had no intention to continue the business in foreseeable future. The AO, therefore, asked the assessee to explain as to why the expenses were claimed should not be disallowed. The assessee submitted that the expenses incurred for the purpose of business only and therefore, should be allowed. AO however did not accept the explanation given. It was observed by him that the expenses can be allowed only for purpose of carrying on the business and in this case the auditors report clearly mentioned that the assessee had discontinued the business and, therefore, the AO held that expenses were not allowable. In regard to interest of Rs. 1,23,25,000/- on custom duty, AO noted that the interest was for the period from 10.11997 to 31.03.2002 and therefore did not relate to the assessment year under consideration. It was also noted by him that out of the interest a sum of Rs. 1.10 crore had been paid on 27.03.2002 and the balance amount of Rs. 13,25,000/- had been paid on 20th Novemeber 2003. Thus the payment also did not relate to the assessment year under consideration. It was therefore held by him that the -2- Oriental Seritech Limited interest was not allowable as deduction. Similarly the penalty on delayed payment of sales tax of Rs. 86,049/- was also not allowable in terms of Explanation to section 37(i) of the Income Tax Act.
2.2 As regards the Technology transfer fees of Rs. 15,81,770/- was concerned, the assessee submitted that the same had been paid to Mitsubishi Corporation (MC) against the termination of agreement dated 25.10.1995 entered into by the assessee with the said party. The agreement had been terminated vide termination agreement dated 23.9.2002. The assessee pointed out that para 2 and 3 of the termination agreement clearly mentioned that certain disputes and differences had arisen between the parties and, therefore, the agreement had been terminated through compromise and settlement. AO however referred to para 9 of the agreement as per which MC and the assessee were entitled to terminate the agreement on happening of certain events, such as substantial breach of material term etc. AO observed that there was nothing to show that there was any breach of contract between the assessee and the Mitsubishi Corporation. When pointed out, the assessee submitted that para 9 of the agreement dealt with termination by any of the parties. In this case the termination had been done under mutual consent and compromise and, therefore, the said para was not applicable. The agreement had been terminated as the project had become unviable for various reasons and no for any breach of contract from either side. AO observed that in case of termination of agreement due to project becoming unviable, there was no attendant liability on any of the parties. Moreover it was also pointed out that the termination agreement clearly mentioned that there were certain disputes and differences between the parties. AO, therefore, held that the termination agreement was nothing but a self serving document and had no contractual value. He, therefore, held that the expenditure of Rs. 15,81,770/- was capital in nature and not incurred wholly and exclusively for the purpose of business and, therefore, the same was not allowable. AO, therefore, disallowed the expenses and added a sum of Rs. 1,45,92,059/- to the total income.
-3-Oriental Seritech Limited
3. In appeal CIT(A) agreed with the finding of AO that the business of the assesse had discontinued. In regard to interest on custom duty CIT(A) observed that the same did not relate to the assessment year under reference. It was also observed by him that the expenditure was not allowable even otherwise on the ground that no business activity had been carried out by the assessee and the business had closed. Similarly the interest paid on delayed payment of Sales Tax was not allowable as deduction. As regards the technology transfer fees, the assessee submitted that in terms of the agreement, MC was required to advise the assessee in the purchase of capital equipment, training of personnel and for suggesting ways for improving the quality for reducing the cost of production. Thus the agreement for technical know how was to facilitate manufacturing of silk yarn for smooth conduct of business. There was no reference to setting up of new business. Moreover the ownership of technical know how had not been transferred to the assessee. It was, therefore, requested that the claim should be allowed. CIT(A) did not accept the explanation given. It was observed by him that the payment was in respect of technical know how for purchase of capital equipment etc. which had no element of revenue expenditure. Moreover the assessee had not carried out any business activity and had incurred the expenditure in relation to new project and not the existing business of the assessee. CIT(A), therefore held that the technical know how fees was capital in nature. He also agreed with the AO for disallowance of other expenses as the business had discontinued. Aggrieved by the decision of CIT(A) the assessee is in appeal before Tribunal.
4. Before us, the learned AR for the assessee submitted that the assessee had not closed down the business. The assessee no doubt had decided to close down the operations but due to pending claims of creditors and certain other claims of Government, the assessee had not been able to commence the procedure for winding up the business which was clear from the written submission made before CIT(A), a copy of which was placed at page 72 of the paper book. Thus the business had not closed this year and the expenses were allowable. It was also submitted that similar expenses -4- Oriental Seritech Limited had been allowed in the immediate preceding year i.e. assessment year 2003-04 and also in subsequent year. It was further submitted that interest on custom duty was not penalty and was of the nature of duty which was allowable as deduction. Similarly the technology transfer fees had been paid in connection with the business of the assessee and was allowable. Therefore, it was submitted that disallowance of entire expenses by the AO except the miscellaneous expenses of Rs. 5,26/-, office expenses of Rs. 66/-, and legal and professional expenses of Rs. 1,17,000/- was not justified. It was accordingly urged that the order of CIT(A) should be set aside. The learned DR on the other hand supported the orders of authorities below and submitted that the claim had been rightly disallowed by the authorities below. He placed reliance on the findings given in the orders of authorities below.
5. We have perused the records and considered the rival contentions carefully. The dispute is regarding the allowability of various expenses claimed by the assessee. The expenses had been disallowed on the ground that the assessee had closed down the business. In addition it has also been held that expenses on custom duty did not relate to the year under consideration as the assessee was following the mercantile system of accounting and the technology transfer fees was capital in nature, sales tax of Rs. 86,049/- was not allowable as the same was penalt in nature. We have considered the various aspects of the matter. The auditors have prepared the accounts as a non going concern and have also mentioned that the management had no intention to continue the business in the unforeseeable future. The assessee in the written submission filed before CIT(A), placed at page 72 of the paper book also mentioned that the assessee had decided to close down the operation as the project was not viable. It is, therefore, clear that the assessee had closed down the business and, therefore, only the expenses required for maintaining the corporate identity of the company could be allowed. Such expenses such as office expenses of Rs. 66/-, miscellaneous expenses of Rs. 5,26/- which included the ROC fees and legal and professional fees of Rs. 1,17,000/- have already been allowed by the AO. Out of the remaining expenses, the -5- Oriental Seritech Limited major expense is interest on custom duty of Rs. 1,23,25,000/-. This expenditure related to the period 10.1.1997 to 31.3.2002 which, therefore, does not relate to this year. Moreover the interest on custom duty has the same nature as custom duty and therefore it could be allowed on payment basis, but the details filed on record show that the payment had not been made this year. The payment had been made in the immediate preceding year and in the subsequent year. Therefore, the interest of Rs. 1,23,25,000/- is not allowable even otherwise. As regards the technology transfer fees, the assessee has entered into the technical collaboration agreement with MC for production of International grade bivoltine silk cocoons. The agreement dated 25.10.1995 shows that the technical collaboration agreement had been entered into for starting a nursery of 125 acres and going upto 1,000 acres for commercial production of bivoltine silk cocoons in India. The project ultimately became unviable and never started. Therefore, any expenditure incurred in connection with the project such as technical fees etc, has been rightly considered as capital expenditure by CIT(A). Other expenses which are quite insignificant have also been rightly disallowed as the business has discontinued. Considering the facts and circumstances of the case, we see no infirmity in the order of CIT(A) confirming the disallowance made by AO. The order of CITA) is, therefore, upheld
6. In the result appeal of the assessee is dismissed.
Order pronounced on 20-9-2013
Sd/- Sd/-
(R.K. Gupta) (Rajendra Singh)
Judicial Member Accountant Member
SKS Sr. P.S, Mumbai dated 20.9.2013
-6-
Oriental Seritech Limited
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "C" Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
-7-