Income Tax Appellate Tribunal - Mumbai
Metro Exporters P. Ltd., Mumbai vs Department Of Income Tax on 7 December, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" Bench, Mumbai
Before Shri D. Manmohan, Vice President
and Shri B. Ramakotaiah, Accountant Member
ITA No. 2027/Mum/2008
(Assessment Year: 2004-05)
M/s. Metro Exporters Pvt. Ltd. ACIT, Range 6(3)
Kakad Chambers, 132, Dr. A.B. Road Vs. Aayakar Bhavan, M.K. Road
Worli, Mumbai 400018 Mumbai 400020
PAN - AABCM 0349 J
Appellant Respondent
ITA No. 2095/Mum/2008
(Assessment Year: 2004-05)
ACIT, Range 6(3) M/s. Metro Exporters Pvt. Ltd.
Aayakar Bhavan, M.K. Road Vs. Kakad Chambers, 132, Dr. A.B. Road
Mumbai 400020 Worli, Mumbai 400018
PAN - AABCM 0349 J
Appellant Respondent
Assessee by: Shri H.N. Motiwalla
Revenue by: Shri Naresh Kumar Balodia
ORDER
Per B. Ramakotaiah, A.M.
These are cross appeals by the assessee and the Revenue for A.Y. 2004- 05 against the order of the CIT(A) XXVI, Mumbai dated 07.12.2007.
2. We have heard the learned counsel and the learned D.R. ITA No. 2027/Mum/2008
3. Ground No. 1 pertains to the issue of prior period expenditure disallowed by the A.O. at `3,32,671/- and confirmed by the CIT(A) and without prejudice that ground should have been allowed in the year to which it pertains to.
4. The A.O. noticed that the assessee has offered a prior period income of `3,06,889/- and claimed an expense of `3,19,780/- and debited net expenditure of `12,891/- which has claimed as deduction. Considering that 2 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
the assessee is maintaining mercantile system of accounting the A.O. was of the opinion that the expenditure claimed by the assessee should have been claimed in earlier years and so the same was not allowed. While doing so instead of disallowing the amount of `3,19,780/-, which was the prior period expense, the A.O. has considered the net debit also again and thus disallowed a total amount of `3,32,671/-. Following his orders for A.Y. 2003-04 the CIT(A) has confirmed the disallowance. It was submitted that in A.Y. 2003-04 the A.O. had disallowed only the net amount of claim and not the full expenses claimed as prior expenses. It was submitted that the assessee has no objection if the disallowance is restricted to the net amount of `12,891/- claimed in the P & L Account after setting off the prior period income.
5. The learned D.R., however, objected to stating that according to the principles of accountancy the expenditure claim has to be allowed in the year in which the expenditure pertains to. Even with reference to income also his objection was that the income should have been considered in the year of receipt. Accordingly he objected to netting of expenditure and submitted that the order of the CIT(A) should be upheld.
6. We have considered the issue. As seen from the orders for A.Y. 2003- 04 the A.O. has disallowed only the net claim after setting off the prior period income. The CIT(A) has confirmed the disallowance to the extent of the net amount only, which was contested. However, in this year, while accepting the prior period income, the A.O. without verifying whether the expenditure has been accrued during the year or not, whether the liability has crystallised during the year or not, simply disallowed the amount on the basis of the accounting principles. Eventhough the A.O. followed the decision of the ITAT in Eveready Industries India Ltd. 78 ITD 175 (TM) for the above principle, it is not in dispute that the assessee is following the mercantile system of accounting and under that principle the expenditure relatable to earlier years when crystallised in an year cannot be allowed as deduction in any other year. In the above referred case the issue was with reference to the year of allowability of expenditure/compensation payable in 3 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
the Bhopal Gas Leak tragedy case. Eventhough the incident of gas leak occurred in 1984 the issue was whether the compensation was to be allowed in 1989-90 when the award was granted or in the year when the order reached finality on disposal of writ petition in A.Y. 1992-93. After analysing the case law on the issue the Third Member has agreed that the liability has to be allowed when the same was crystallised in A.Y. 1992-93. This also indicates that even in mercantile system of accounting, year of crystallization of liability is important than nomenclature as prior period expenditure. There is no such finding by the A.O. with reference to the nature of expenditure and the year of crystallization. While accepting the income the A.O. not only disallowed the prior period expenditure of `3,19,780/- but also net debit of `12,891/- thereby making disallowance of `3,32,671/- more than the amount involved, which indicates that the A.O. has not applied his mind while considering the disallowance. Since the A.O. has disallowed only the net amount after accepting the prior period income in A.Y. 2003-04 and the assessee has no objection for similar treatment in this year, we direct the A.O. to disallow the amount of `12,891/- only, which is the net debit made to the P & L Account. With this direction the ground is considered partly allowed.
7. Ground No. 2 pertains to the issue of Club Membership Fees. During the year the assessee has spent Club Membership fees of `1,37,500/- as Corporate Membership. It was assessee's contention that a amount of `,15,00,000/- was paid on 27.07.2003 which was for a period of 10 years for utilization of the Willingdon Sports Club facilities and the assessee has claimed only proportionate amount of `1,37,500/- pertaining to A.Y. 2004- 05 and not the entire amount. The A.O. disallowed the amount holding that the same was capital in nature and for enduring benefit. The CIT(A) confirmed.
8. The learned counsel relied on the decision of the Hon'ble Bombay High Court in the case of Otis Elevators Co. (India) Ltd. 195 ITR 682 for the proposition that the expenditure is revenue in nature whereas the learned D.R. distinguished the case stating that the issue before the Hon'ble 4 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
Bombay High Court was with reference to subsequent fees reimbursement to the employees and not entrance fees, which is the issue before the Tribunal.
9. We have considered the issue. As seen from the details filed the Club Membership was taken in the name of the company for the benefit of Mrs. Smita P. Bhatia, Joint Managing Director as sole nominee for a period of 10 years. Eventhough the amount of ` 15,00,000/- was paid in lump sum for a period of 10 years the assessee has claimed only a proportionate amount during the year claiming only `1,37,500/-. The dispute is regarding allowability of expenditure on account of entrance fees towards membership of a club. The A.O. and CIT(A) has held the amount as capital in nature, however, there is no finding that this amount was not spent wholly and exclusively for the purpose of business. In order to allow the expenditure what is required to be seen is whether the expenditure has resulted into an advantage in the revenue field or in the capital field. In case the expenditure has not resulted in creation of any capital asset or any new source of income and it has not changed the capital structure of the company and had been incurred only for conduct of the business more efficiently and profitably then it will be revenue expenditure. The learned D.R. distinguished the judgement of Hon'ble Bombay High Court in the case of Otis Elevators Co. (India) Ltd. 195 ITR 682 where the issue was with reference to the reimbursement of expenditure spent in the club and not the fee paid for obtaining the membership. However, there is a judgement of the Hon'ble Gujarat High Court in the case of Gujarat State Export Corporation Ltd., 209 ITR 649 in which the lump sum entrance fees paid towards membership of the club has been held to be revenue expenditure. Similar view was also taken in the case of CIT vs. Samtel Color Ltd. 180 Taxman 82 (Del) wherein the Hon'ble Delhi High Court has allowed the expenditure holding that the admission fee paid towards corporate membership was an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitated smooth and efficient running of the business enterprise and did not add to profit earning apparatus of the business enterprise. However, the Hon'ble Kerala High Court in the case of 5 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
Framatone Connector Oen Ltd. vs. DCIT 294 ITR 559 considered similar payment paid to Cochin Yatch Club towards institutional membership fee and held that the expenditure effected by the assessee was capital in nature. Once the assessee paid the amount to a club for membership it was a payment once and for all resulting in an enduring benefit to the institution. The mere fact that assessee's representative, like the Managing Director's participation in the club promoted the assesse's business did not change the character of the payment which was made once and for all. The Hon'ble Kerala High Court followed the principles established by the Apex Court in Punjab State Industrial Development Corporation Ltd. vs. CIT 225 ITR 792 in arriving at the above decision.
9.1 In the case of Shah Rukh Khan in ITA No. 1489/Mum/2006 dated 23.07.2009 the Coordinate Bench of the ITAT held that "Though the Hon'ble High Court of Kerala in the case of Connector Oven Ltd. have taken a different view, we have to follow the view taken by Hon'ble High Court of Gujarat which is favourable to the assessee has to be taken into account in view of the judgement of the Hon'ble Supreme Court in the case of Vegetable Products 88 ITR 192." Various Coordinate Benches in the case of Sunithi Consultancy Services Ltd. vs. ACIT in ITA No. 3554/Mum/2007 dated 06.10.2010 and Jindal Dye Intermediate Pvt. Ltd. vs. DCIT 1 SOT 243 (Mum) and Vimal B. Shah ITA 1182/Mum/2006 dated 08.11.2008 and ACTI vs. Shri Ramesh M. Damani ITA No. 5143/Mum/2006 dated 13.08.2008 have taken a view that the admission fee paid was allowable as revenue expenditure.
9.2 Generally entrance fee was paid as onetime payment and the benefit is of enduring nature. There is no jurisdictional High Court judgement on this issue though the judgement in the case of Otis Elevators Co. (India) Ltd. (supra) is in the contest of reimbursement of membership fees of the employees paid by the company. Even in the case of Hon'ble Delhi High Court judgement in the case of Samtel Color Ltd. 180 Taxman 82 (Del) the facts indicate that the assessee company nominated employees who would avail the benefit of corporate membership given to the assessee. In those 6 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
circumstances the expenditure was allowed under section 37(1). We seldom come across any company allowing the employees to enjoy the benefits. In the present case the membership was restricted to only Jt. Managing Director and not to any other Directors or employees. This issue has to be resolved in appropriate case by the Hon'ble Bombay High Court. However, in view of the decisions of the Coordinate Benches, it is to be held that the membership fee paid to the Willingdon Sports Club, Mumbai does not result in any enduring benefit and accordingly the same is allowable deduction. The ground of the assessee is allowed.
10. Ground 3 pertains to the issue of disallowance of depreciation on car. Assessee claimed depreciation of `6,47,794/- on cars purchased in the name of Directors. It was assessee's contention that the beneficial owner is the assessee company and accordingly following the principles laid down by the Hon'ble Supreme Court in Mysore Minerals Ltd. vs. CIT 239 ITR 775 it was correctly claimed by the assessee company. It was submitted that the assessee company paid the money and the assets belong to the company and there is no dispute that the cars are in use for the purpose of business. The learned A.R. placed on record the order of the CIT(A) for A.Y. 2005-06 wherein the depreciation is allowed and the Department has not contested.
11. The learned D.R., however, objected to and referred to the findings of the A.O. that the ownership as well as usage are disputed by the A.O.
12. Without going into the merits of the contentions whether the assessee has beneficial ownership on the assets, it is to be seen whether the said cars have been purchased by the Directors in their individual capacity or as a representative of the company. What is also required to be examined is the source of funds, whether the amounts are paid from the accounts of the Directors from their own sources and later transferred to the company or the company paid the amounts at the time of purchase eventhough they are registered in the name of the individual Directors. The A.O. simply disallowed the depreciation stating that the cars were registered in the names of the Directors. That alone cannot be a reason for disallowance unless it is examined whether the cars are purchased by the company but 7 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
registered in the name of the Director or it is Director's vehicles purchased from their source treated as companies assets. Further the usage also has not been examined. It is also noticed that the CIT (A) in the later year has given findings that that assets have been purchased by the company and accordingly the depreciation is allowable following the decision of the Hon'ble Supreme Court in the case of Mysore Minerals Ltd. 239 ITR 775. However, there is no finding with reference to the details of payments and ownership. For these reasons, we are of the opinion that the issue has to be re-examined by the A.O. in the light of the above observations for which purpose the issue is restored to the file of the A.O. to re-examine the nature of purchase of car, source thereof and claim of expenditure, etc. to decide whether the assessee company is a beneficial owner or not. If the assessee has beneficiary ownership of the assets then the A.O. is directed to allow the depreciation. The A.O. is to decide accordingly after giving proper opportunity to the assessee. The ground is restored to the file of the A.O.
13. Ground No. 4 pertains to the issue of disallowance under section 14A of `7,48,906/-. Both the counsels have agreed that the issue is to be restored back to the file of the A.O. to decide afresh in the light of the judgement of the Hon'ble Bombay High Court in the case of Godrej and Boyce Ltd. Accordingly the issue is restored to the file of the A.O. to decide afresh in the light of the Hon'ble Bombay High Court judgement with reference to the reasonable expenditure to be disallowed under section 14A.
14. Ground No. 5.1 pertains to the issue of claim of deduction under section 80HHC in respect of DEPB/DFRC. It was Assessing Officer's contention that the assessee has not justified the claim by placing evidences which was confirmed by the learned CIT(A). It was assessee's contention that they are eligible for deduction of both DEPB and DFRC and referred to the recent judgement of the Hon'ble Bombay High Court in the case of Kalpataru Colours and Chemicals 233 CTR 313. In the light of the judgement of the Hon'ble Bombay High Court we are of the opinion that the issue requires re-examination by the A.O. The assessee is free to submit further contentions/claims in the light of the judgement of the Hon'ble 8 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
Bombay High Court and the A.O. is directed to re-examine the issue and decide accordingly. The issue is restored to the file of the A.O.
15. Ground Nos. 5.2 & 5.3 with reference to 10% of the indirect expenses and supporting manufactures respectively are not pressed. Therefore these grounds are dismissed as not pressed.
16. Ground No. 5.4 is as under: -
"5.4 Erred in not adjudicating the following grounds of appeal:
i) erred in treating interest income in other sources accordingly reducing the 100% of the interest income as against the 90% provided in Explanation (baa) to Section 80HHC;
ii) erred in not allowing the appellants claim of netting of interest paid and interest income by considering the interest income as income from other sources without appreciating the fact that both are related to export business and without giving opportunity of being heard in this matter;
iii) erred in treating the Technology transfer as other sources without appreciating the fact that it is the export of the technology and without giving opportunity of bring heard in this matter;
iv) erred in treating the insurance claim as other sources without appreciating the fact that the same is business receipts;
v) erred in treating the miscellaneous income from the business of exports as other sources and accordingly denied the deduction under section 80HHC without appreciating the fact that these are from export business;
vi) without prejudice to the above, erred not applying the ratio established by the learned ACIT for section 14A/36(1)(iii) with respect to the above income;"
17. It was the submission of the assessee that these issues have not been adjudicated by the CIT(A) and accordingly to restore the issue back to the file of the CIT(A). Since these grounds raised by the assessee in ground No. 5 sub-ground (vi) with reference to treating interest, technology transfer, insurance claim and miscellaneous income raised in Form 35 before the CIT(A) has not been adjudicated, these issues are restored to the file of the 9 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
CIT(A) to consider them and pass necessary orders. Ground is considered allowed.
18. Ground No. 5.5 is with reference to write back of advance from debtors for the purpose of section 80HHC has not been pressed, hence, treated as withdrawn.
19. Ground No. 5.6 is with reference to non-adjudication of ground of provision for doubtful debts written back from the profits of business without appreciating the fact that the same was reduced while computing business income. Eventhough the prayer is that this issue was not adjudicated by the CIT(A), since the issue require examination of computation of income filed by the assessee, in the interest of justice we restore this issue to the file of the A.O. to examine whether the provision for doubtful debts have already been adjusted by the assessee and if there is any double adjustment in the computation by the A.O. in the assessment order. In case the same is already adjusted by the assessee there is no need for considering the amount again while computing the profits of the business. This aspect requires examination from the record at the end of the A.O. Accordingly this issue is restored to the file of the A.O. to examine and decide accordingly.
20. Appeal is considered partly allowed.
ITA No. 2095/Mum/200821. Revenue has raised three grounds out of which ground Nos. 1 & 2 pertains to the issue of foreign exchange gain of `16,05,915/- from total turnover and also considering the same under Explanation (baa) for exclusion of 90% of the foreign exchange gain. While computing deduction under section 80HHC the A.O. excluded foreign exchange gain from the total turnover and at the same time also excluded 90% of exchange difference under Explanation (baa) to section 80HHC thereby restricting the 80HHC deduction. The CIT(A), consequent to directions given in A.Y. 2003-04; has giving similar instructions for this assessment year and accordingly the Revenue is in appeal.
10 ITA Nos. 2027 & 2095/Mum/2008M/s. Metro Exporters Pvt. Ltd.
22. We do not see any reason to interfere with the directions of the learned CIT(A) as foreign exchange gain is on export proceeds only and the CIT(A) has correctly considered them as business receipt and also directed to include both export turnover as well as total turnover being operational income. This decision is also in line with the decision of the Special Bench in the case of Prakash L. Shah 115 ITD 167 (Mum) (B) and also the decision of the ITAT in the case of Kiran Exports 10 SOT 584.
23. The learned D.R., however, tried to distinguish the claim on the basis of the decision of the Hon'ble Bombay High Court in the case of CIT vs. Shah Originals 327 ITR 19. The issue before the Hon'ble Bombay High Court in the above stated case is with reference to receipts on account of foreign exchange fluctuations on EEFC account and interest on EEFC account. The Hon'ble Bombay High Court has held that there is no proximate and direct nexus with the export transactions and hence deduction under section 80HHC does not arise. However, the facts in this case are different. The foreign exchange fluctuation arose on account of late receipt of sale proceeds and the assessee has valued the sale proceeds on the day of sale as per the exchange norms and subsequently the increase or decrease in value received has been accounted as foreign exchange gain. In view of this since there is direct proximity to the sale proceeds the amount is rightly considered for deduction under section 80HHC. We are of the opinion that the said principles established by the Hon'ble Bombay High Court does not apply to the facts of the case.
24. Ground No. 3 pertains to the issue of directing the A.O. not to exclude 90% of sundry credit balance written back and provisions of doubtful debts written back within the meaning of Explanation (baa) to section 80HHC. It was the contention of the assessee in assessee's appeal that these issues have not been adjudicated as part of other incomes considered in ground No. 5.4 and accordingly the issue of sundry credit balance as part of miscellaneous income is restored to the file of the CIT(A) for adjudication. With reference to provisions of doubtful debts written back, this issue is restored to the file of the A.O. for examination of facts vide ground No. 5.6 of 11 ITA Nos. 2027 & 2095/Mum/2008 M/s. Metro Exporters Pvt. Ltd.
the other appeal. Accordingly, since these issues are restored to the file of the CIT(A)/A.O. the ground is considered allowed for statistical purposes.
25. In the result, both the appeals are allowed partly.
Order pronounced in the open court on 4th November 2010.
Sd/- Sd/-
(D. Manmohan) (B. Ramakotaiah)
Vice President Accountant Member
Mumbai, Dated: 4th November 2010
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - XXVI, Mumbai
4. The CIT- VI, Mumbai City
5. The DR, "B" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.