Income Tax Appellate Tribunal - Chandigarh
Smithkline Beecham Consumer Health ... vs Department Of Income Tax on 5 April, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES, CHANDIGARH
BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT &
MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER
ITA No. 475/Chd/2002
Assessment Year: 1997-98
The AC IT, Circle 4(1), Vs. M/s Smithkline Beecham Consumer
Chandigarh Health Care, Ltd., Patiala Road,
Nabha
(Appellant) (Respondent)
Appellant By : Sh. S.K. Mittal
Respondent By : Sh. Rohit Jain
Date of hearing : 08.01.2016
Date of Pronouncement : 05.04.2016
ORDER
PER H.L.KARWA, VP This appeal filed by the Revenue is directed against the order of C IT(A)- II, Chandigarh dated 06.03.2002 relating to assessment year 1997-98.
2. Ground No.1 of the appeal, reads as under :-
1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 4.5 crore made on account of compensation received on account of termination of trade mark 'ENO and Fruit Salt'.
3. Briefl y stated, the facts of the case are that the assessee is an Indian Subsidiary of M/s Smithkline Beecham Plc, a company incorporated in United 2 Kingdom. M/s Smithkline Beecham Plc. is the owner of trade mark 'ENO" and 'Fruit Salt'. On 28.6.1979, a trademark user agreement was entered into between Beecham Group Plc. and the assessee company. M/s Smithkline Beecham Plc. U.K. had sole right to manufacture, pack and sell goods in respect of these trade marks granted the right to use these trademarks to the assessee company. The U.K. Company also granted other trademarks to the assessee, which are as under:-
Trade mark
1. ENO (word)
2. FRUIT SALT
3. SIL VIKRIN (Word)
4. SIL VIKRAN (Brand)
5. MACLEAN (brand)
6. MACLEANS (Word)
7. MACLEANS Signature
8. MACLEANS (Tooth paste carton)
9. BRYLCREEM (word)
10.BRYLCREEM (label) The Assessing officer noted that on re-organization of its business, M/s Smithkline Beechan Plc. transferred the trade mark use of 'ENO' and 'Fruit Salt' out of the above items to M/s Smithkline Beecham Asia(P) Ltd, New Delhi. The agreement terminating the ENO and Fruit Salt trade mark licence agreement reads as under:-
"I refer to the trade mark user agreement between Beecham Group Plc and Smithkline Beecham Consumer Healthcare dated 28 June 1979 as subsequently amended from time to time ("Agreement"). The rights relating to the trade mark ENO & FRUIT SALT, and all other rights and obligations specified in the agreement, were 3 transferred by Beecham Group Plc to Smithkline Beecham Pl c ("SB") The marks ENO and FRUIT SALT have been licensed to Smithkline Beecham Asia Pvt Ltd now by Smithline Beecham Plc. Therefore, , as agreed by and between us, ENO and FRUIT SALT shall be deleted from the schedule to the Agreement dated 28 June 1979 with effect from 22 September 1996 and therefore, you will have no right to manufacture and sell the products under the same trade mark from that date. All remaining terms of the Agreement shall remain in full force and effect.
Would you kindly sign and return the enclosed duplicate coy of this letter as evidence of your agreement to an acceptance of the above.
Yours faithfully Agreed and accepted for
Or and on behalf of and on behalf of
SMITHKILINE BEECHAN PLC. SMITHKLINE BEECHAM CONSUMER
HEALTHCARE LIMITED
Sd/- Sd/-
Position Deputy Secretary Director Legal & Corp. Affairs Position
13th June 1996
Date
As a consequence of this agreement, the assessee received a sum of Rs.4.5 crores from Ms Smithkline Beecham Asia Pvt. Ltd. The relevant documents showing the agreement on this behalf is given below:-
"As you are aware, Smithkline Beecham Pic (SB Pic) has licenced the use of the marks 'Eno' and 'Fruit Salt' to our company vide agreement dated January 18, 1996 and SB Pic's letter of May 30, 1996. We also understand that, SB Plc had earlier licenced the use of the said marks to Smithkline Beecham Consumer Healthcare Ltd.(SBCH) on a non-exclusive basis, which licence has since been revoked by SB pic.
We recognise that SBCH has been responsible for developing the brand over a long period and that SBCH has invested considerable effort and expense in this regard. We also recognise that this development has generated significant goodwill and valuable marketing, advertising and brand related information and that our 4 company would benefit from such goodwill and information in the manufacture and distribution of these brands in India and Nepal by you company.
In order to arrive at a fair market value for the goodwill and the marketing and advertising related information associated with SBCH's development effort, a valuation report from an independent and international firm of accountants has been obtained. The said independent valuation report recommends a one-time lump-sum consideration of Rs.45 Million as a fair and reasonable compensation for the said goodwill, and for transfer of all the marketing, advertising and brand related information generated by SBCH in its development effort. Accordingly we propose to pay SBCH a one-time lump sum consideration of Rs.45 Millions for the said goodwill and for transfer of all information associated with SBCH's development effort.
We would request you to signify your consent to the above terms by signing and returning a copy of this letter to us at the earliest".
Yours faithfully for and on behalf of Agreed and accepted for and on behalf of SMITHKLINE BEECHAM ASIA SMITHKLINE BEECHAM PRIVATE LIMITED CONSUMER HEALTHCARE LIMITED Sd/-
NANDAN DASGUPTA Sd/-
ALTERNATE DIRECTOR S.J. SCARFF
MANAGING DIRECTOR"
The Assessing officer observed that in the return of income, the assessee had treated Rs. 4.5 crores as non taxable capital receipt in its hands. In that background, the Assessing officer required the assessee to show cause as to how the amount of Rs. 4.5 cores was a capital receipt not liable to tax. In response to the above query, the assessee contended that the 'ENO' and 'Fruit Salt' trade mark were income producing assets in its hands. Accordingl y, the assessee 5 contended that the compensation received on termination of an income producing assets is a capital receipt not liable to tax. However, the Assessing officer observed that as per the agreement dated 28.6.1979 between Beecham Group Ltd and the assessee, it was evident that the assessee company was granted a non exclusive Licence to use trade mark owned by its patent company. According to Assessing officer, the U.K. Company did not take away from the assessee all the trade marks granted to it vide agreement dated 28.6.1979. As per the termination agreement dated 30.5.1996, the assessee's power to use trade mark of onl y 'ENO' and 'Fruit Salt' has been taken away. The Assessing officer has categoricall y mentioned that all the remaining trade marks user agreements are intact and all the remaining terms of the agreement between the assessee and the U.K Company remained in full force and effect. The Assessing officer took the view that the agreement entered into by the assessee with its patent company with regard to the 'ENO' and 'Fruit salt' was an agreement which was undertaken by it in its regular course of business. The Assessing officer further observed that the plea of the assessee was that the 'ENO' and 'Fruit Salt' trade marks were income producing assets in its hands was also misplaced. According to Assessing officer, these trademarks never vested with the assessee. He further opined that its right to use these trade marks was also a non exclusive right. The Assessing officer further pointed out that the language of the termination agreement dated 30.5.1996 also made it clear that it is merel y an agreement transferring to use the rights of these trademarks from the assessee company to M/s Smithkline Beecham Asia (P) Ltd, New Delhi in the course of regular business transactions of M/s Smithkline Beecham Plc U.K. The Assessing officer concluded that the compensation received by the assessee was not for termination of the business itself but it was a payment received for termination of a contract / agreement entered into by the assessee in the regular course of business. He therefore, held that the compensation received by the 6 assessee is s taxable Revenue receipt in the hands of the assessee. He, therefore, held that receipt of Rs. 4.5 cores is a taxable income of the assessee.
4. On appeal, the C IT(A) deleted the addition for the reasons stated in para 3 of the impugned order, which reads as under:-
"3. The submissions made by the appellant have been given careful consideration and I have also gone through the various decisions cited by the Assessing Officer as well as learned counsel for the assessee. I have also perused the agreements entered into by the appellant. The Assessing Officer has held that the solatium of Rs.4.5 crore was received by the appellant for termination of contract and was during the regular course of business, therefore, it represents a revenue receipt, whereas the appellant's contention is that by virtue of transfer and assignment of the trademark of 'ENO" and 'FRUIT SALT', the appellant had lost the valuable business of manufacturing and marketing the said products, and therefore, it was a loss of the source itself, hence the compensation received represented a capital receipt. Whether a compensation received represents a revenue receipt or capital receipt depends entirely upon the peculiarity of the facts and circumstances of each case. The Hon'ble Supreme Court in the case of CIT Vs Best & Company, 6O ITR 11 has laid down certain guidelines, which facilitate in determination of the nature of a receipt. The Court has observed as under:-
Whether the compensation received by an asscssee for the loss of agency is capital receipt or a revenue receipt depends on the circumstances of each case. Before coming to a conclusion one way or other, many questions have to be asked and answered; what was the scope of the earning apparatus or structure from Physcial, Financial commercial and administrative standpoint. What was the impact of giving up of an 7 agency on the structure of (lie entire business. Did it amount to a loss of an enduring asset causing an unabsorbed shock, dislocating the entire or part of the earning apparatus or structure or was it a loss due to an ordinary incident in the course of business. The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to the loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt; if it was the latter it would be a capital receipt".
The question which merits consideration is whether a solarium received by virtue of an agreement whereby a person agrees to refrain from manufacturing a product or forgive an activity, which was the primary activity, represents a capital or revenue receipt. The Bombay High Court in the case of Khushalbhai Patel & Sons, 118 ITR 656, has observed that the question whether a particular receipt a capital receipt or a revenue receipt ultimately depends upon the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the material that they had taken into account in reaching the decision. In one of the decisions of the Privy Council, in the case of CIT Vs. Shaw Wallace & Co. reported in AIR 1932 PC 138, it was observed that wherein the company was paid a certain sum by way of compensation, a sort of solatium, for termination of its agency with two other companies, the receipt has to be regarded as a capital receipt not chargeable to income tax. The council also held that the expression 'receipt arising from business' must mean receipts arising from the carrying on of business, In the case of C1T V. The Mills Store Co., 9 ITR 642. it was held that a restrictive covenant, whereby a person undertakes, for certain consideration to abstain from doing a particular act or from following a particular course or conduct, is something quite outside an ordinary contract of employment and the receipt is not taxable being a capital receipt. Further the Hon'ble Supreme Court in the case of CIT Vs. Best & Co. Ltd, Supra held that the compensation 8 agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period and the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of me compensation which was attributable to the restrictive covenant was a capital receipt and hence not taxable. Further in the case of Gilliinders Arbuthnot and Co. Ltd. Vs. CIT, 53 ITR 283 it was held that the compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of agency terminated or for loss of goodwill is prima facie of the nature of the capital receipt. The Hon'ble Madras High Court in the case of CIT vs. Saraswati Publications, reported in 132 ITR 207 has held that the receipt referable to the restrictive covenants was a capital receipt not liable to tax. The Madras High Court in another case of Blaze & Central Pvt. Ltd, Vs. CIT Madras, 120 ITU 33 has also held that the amount paid for acquiring the business of a company and refraining that company to carry on the said business for a specified lime is a capital receipt and not a business expenditure. Further the Hon'ble Supreme Court in Kettewell Bullun & Co Ltd Vs. CIT, 53 ITR 261 held that the payment for cancellation of the agency agreement is normally a capital receipt.
On analysis of the above cases, it follows that normally any amount received in the case of business or profession irrespective of its nature, would be taxable as income from business or profession, as the case may be. However, if a particular receipt does not arise in the regular course of business, but it is for, not to carry on the business or profession, the same is not taxable, being capital in nature. If a receipt arises not out of a source but for extinguishment of the source itself, the same will be a capital receipt. In the light of above, it is seen that the appellant had transferred its debarring the assessee to manufacture and market ''ENO and Fruit Salt. Therefore the appellant had lost an income earning apparatus which tantamounts to loss of an 9 'enduring asset. Further, the agreement hedged the business activities of the appellant with so many restrictions that the appellant was completely ousted from the business of manufacture of ENO and Fruit Salt. Hence, there is no doubt that the amount received by way of solatium is a capital receipt. The appellant hdd lost a source of income and had been deprived of an income earning apparatus, therefore, it amounts to loss of an enduring nature. Therefore, hi view of the tests laid down by the various decisions cited above, there can not doubt that the compensation received is in the nature of a capita! receipt. In. view of the foregoing discussion, it is held that the appellant had lost the source itself and the income earning apparatus and had abrogated the right to carry on a like business for all limes, therefore, the loss was of an enduring nature. The compensation received, therefore, is in the nature of a capital receipt."
5. We have heard Shri S.K .Mittal, Ld. DR and Shri Rohit Jain, Ld. Counsel for the assessee. The Ld. Counsel for the assessee pointed out that the agreement with U.K. Company entered into on 28.6.1979 whereby the assessee was granted licence to use, inter alia, the trade marks 'ENO' and 'Fruit Salt'. Shri Rohit Jain, Ld. Counsel for the assessee vehementl y argued that the assessee formed the foundation of carrying on of another line of business viz. producing and marketing 'ENO' and 'Fruit Salt'. According to Ld. Counsel for the assessee, termination of agreement dated 28.6.1979 in part by U.K. Company resulted in cessation of that line of business and the above sum of Rs. 4.5 crores received by the assessee under the arrangement of the aforesaid company was towards compensation of such loss of business / source of income. Shri Jain further submitted that it has been held by the Courts that compensation received on termination of an income producing asset is a capital receipt, and hence is not liable to tax. Before us, the assessment year involved is 1997-98. It is worthwhile to mention here that clause (va) to section 28 has 10 been inserted by Finance Act, 2002 w.e.f. 1.4.2003, which propose to tax compensation paid whether paid in cash or kind under an agreement entered into by tax payer whereby he gives up his right not carrying out any activit y in relation to any business; not sharing any know how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or information or technique likel y to assist in the manufacture or processing of goods or provision for services Thus, it is clear that the newl y added provisions of section 28 are applicable w.e.f. 1.4.2003 and not before the said period. In our opinion, the Ld. CIT(A) has correctl y observed that prior to 1.4.2003, such paym ents were to be treated as capital receipt and was not liable to tax. It is apparent from the records that the assessee was using the trademarks of two products namel y 'ENO' and 'Fruit Salt' from the year 1979 onwards and / or in the year 1996 by virtue of the transfer of the trade mark of two products, the assessee company had lost an income earning apparatus which certainl y amounts to loss of an enduring asset. In our opinion, the assessee had lost a source of income and had also been deprived of income earning apparatus; therefore, the loss incurred by the assessee is of enduring nature. It is crystal clear from the termination agreement that the assessee had lost the right to manufacture, market and sell the products namel y 'ENO' and ' Fruit Salt'. Shri Rohit Jain Ld. Counsel for the assessee pointed out that the assessee was earning crores of rupees yearl y from the sale of these two products. The U.K. Company had transferred its trademarks debarring the assessee to manufacture and market 'ENO' and 'Fruit Salt'. Thus, it can be safel y held that assessee had completel y lost an earning apparatus which tantamount to loss of an enduring asset. At this stage, we may refer to a decision of the Hon'ble Supreme Court in the case of Kettlewell Bullen and Co. Ltd v C IT (1964) 53 ITR 261 (SC), wherein their lordship of Supreme Court on the facts of the said case observed that the arrangement with Mugneeram Bangur was not in the nature of trading transaction but was one in which appellant-assessee parted with an asset 11 of an enduring value. The Hon'ble Supreme court held that what the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of the Revenue receipt. The Hon'ble Supreme Court at page 262 (head Note) held as under: -
"Held, on the facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co.
It cannot be said as general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue: where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.
(Emphasis supplied)
6. In the above decision, the Hon'ble Supreme Court has laid down the ratio that whereby the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normall y a capital receipt. In the instant 12 case, the agreement with U.K. Company to manufacture 'ENO' in India formed the very foundation of the business of the assessee of producing and marketing ENO. The contract with U.K. Company vested valuable trade mark rights in the assessee's company, which formed the very basis of business of manufacturing and marketing 'ENO'; and is of the nature of capital asset. The decision of the Hon'ble Supreme Court in the case of Kettlewell Bullen and Co. Ltd v CIT (supra) is squarel y applicable to the facts of the present case. Therefore, we hold that the compensation of Rs. 4.5 crores received by the assessee compan y for termination of the agreement for use of trademark of 'ENO' and 'Fruit Salt', with U.K. Company is a capital receipt not liable to tax.
7. At this stage, it would be worthwhile to refer to the decision of the Hon'ble Supreme Court in the case of CIT Vs. Vazir Sultan & Sons (1959) 36 ITR 175 (SC). The facts of the said case are that the assessee had appointed sole selling agent in the state of Hyderabad, and thereafter also extended to other states. Subsequentl y, agency of other states cancelled and the assessee was paid compensation for loss of agency. The Hon'ble Supreme Court held that the amount received by the assessee is capital receipt. The Hon'ble Supreme Court categoricall y held that it was immaterial that onl y one of the agency was cancelled. Similarl y, in the case of CIT Vs. Bombay Burmah Trading Corporation (1986) 161 ITR 386 (SC), the assessee held about 15 forest leases.
The forest leases were terminated by the Union of Burma and the assessee was paid compensation for the same. The Hon'ble Supreme Court held that the forest leases affected the very structure of the operations and, therefore, constituted capital assets and payment made for cancellation or sterilization of the right would be capital receipt. It is also relevant to mention here that the Hon'ble Supreme Court in the case of Oberoi Hotel (P) Limited (1999) 236 ITR 903 (SC) held that the amount received by the assessee for giving up right to purchase hotel and / or to operate the hotel resulting in loss of source of income is 13 capital receipt. In view of the above, we full y agree with the findings of the CIT(A) that the compensation received by the assessee amounting to Rs. 4.5 crores is capital receipt not exigible to tax.
8. Before parting, we may also observe there that in this case the right to produce, market and sell the products under each trade mark / brand name licence given by U.K. Company to the assessee constituted a separate source of income and the compensation received on termination of the licence agreement in respect of even one of the said trade marks constituted a capital receipt not liable to tax in the hands of the assessee In our opinion, the Ld. CIT(A) has correctl y decided the issue in favour of the assessee after anal yzing and considering the facts of the case and also the settled legal position. Therefore, we do not see any valid ground in interfering with the findings of the CIT(A) on this issue. Accordingl y, we uphold the order of CIT(A) and dismiss ground No.1 of the appeal.
8. Ground No.2 of the appeal, reads as under:-
2. On the facts and in law the Ld. CIT(A) has erred in directing the Assessing officer to recompute the deduction u/s 80HHC after excluding Excise Duty, Octroi and Sales-tax etc from the total turnover.
9. The assessee claimed deduction of Rs. 1,46,29,795/- u/s 80HHC of the Income-tax Act, 1961 (in short 'the Act'). While computing the deduction, the assessee excluded excise dut y, octroi, sales tax, freight and insurance from the total turnover of the business. However, the Assessing officer while computing deduction u/s 80HHC of the Act at Rs. 1,63,28,928/- took into account sales tax, 14 octroi and excise dut y as part of the total turn over. On appeal, the C IT(A) rel ying on the decision of Hon'ble Bombay High Court in the case of C IT Vs. Sudershan Chemical Industries Ltd vs (2000) 245 ITR 769 (Bom.), directed the Assessing officer to compute the deduction u/s 80HHC after excluding excise dut y, octroi, sales tax etc.
10. After hearing the Ld. representatives of both the parties, we observe that the issue is squarel y covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Supreme Court in the case of C IT v Laxmi Machine Works (2007) 290 ITR 667 (SC), wherein the Hon'ble Supreme Court held (head note) as under:-
'The principal reason for enacting a formula in section 80HHC of the Income-tax Act, 1961, is to disallow a part of the concession thereunder when the entire deduction claimed cannot be regarded as relating to exports. Therefore, while interpreting the words "total turnover" in the formula in section 80HHC one has to give a schematic interpretation. The various amendments made therein show that receipts by way of brokerage, commission, interest, rent, etc., do not form part of business profits as they have no nexus with the activity of export. The amendments made from time to time indicate that they became necessary in order to make the formula workable. If so, excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3) :
otherwise the formula becomes unworkable."
11. Respectfull y following the judgement of the Hon'ble Supreme Court in the case of C IT v Lakshmi Machine Works (supra), we do not find any infirmit y in the findings of the CIT(A) on this issue. Accordingl y, we uphold the order of CIT(A) on this issue and reject ground No.2 of the appeal.
12. Ground No.3 of the appeal reads as under:-
15
3. On the facts and circumstances of the case the Ld. CIT(A) has erred in directing the Assessing officer to allow 100% depreciation on Effluent Treatment Plant
13. The facts relating to this issue are that the assessee had claimed 100% depreciation on Effluent Treatment Plant (ETP), installed at Rajmundry on 15.3.1997. The Assessing officer disallowed the claim of the assessee stating that the ETP was not installed and commissioned before 31.3.1997. While holding so, the Assessing officer referred to the enquiry made from M/s Envirad Project (P) Ltd, the part y who had supplied and installed the ETP stated that most of the work relating to ETP was completed in the financial year 1997-
98. The Assessing officer observed that as against the total ETP contract value of 53 lakhs onl y, a sum of Rs. 37,60,000/- was paid upto 31.3.1997 and the final bill of EPT was raised on 16.4.1998. The assessee during the course of assessment proceedings, had submitted a copy of certificate from its manager certifying that ETP was in operation on from 15.3.1997. The Assessing officer has also conducted inquiries from M/s Envirad Project (P) Ltd and the part y informed that it had constructed the ETP for the assessee and the order for the plant had been placed on 6.5.1996 and most of the work was completed in Financial year 1997-98 and final bill was raised on 16.4.1998. On a perusal of the schedule of payment made by the assessee to M/s Envirad Project (P) Ltd, the Assessing officer noticed that the bills were spread from 20.5.1995 to 21.1.1999. The Assessing officer therefore, was of the opinion that the ETP was not installed and completed before 31.3.1997.
14. On appeal, the C IT(A) allowed the claim of the assessee, observing as under:-
"5.3 The submissions made by the appellant have been given careful consideration and I have also gone through the facts of the case. On going through the various documents filed, it is seen that the M/s Envirad Project (P) Limited was given a project on turnkey basis and final bill was to be raised after 16 the plant was commissioned/operated. On perusal of the various documents, bills and correspondence resting with the Assessing Officer and M/s Envirad Project (P) Limited, it is seen that M/s Envirad Project (P) Limited has raised a bill for Rs.52.90,000/-. 80% of .me payment was to be paid with the purchase order and the balance was to be paid after completion of the project. Final bill was issued on 16.4.1998 for Rs. 53 lakhs. As per the minutes of meeting with M/s Envirad Project (P) Limited held on 19.3.1997, it is clear that Effluent Treatment Plant had been put on continuous operation on 15.3.1997. The minutes of the meeting read as under-
"l) An assured during the previous minutes Mr. Venkat of M/s Envirad reached the site on 15.3.97 and after a review put the ETP on continue operations at 11AM,
15.3.97
2) The plan is being operated continuously since 11 AM, 15.3.97 barring a couple hours I between owing to inevitable circumstances.
3) Instead of grab samples, composite samples (2 Nos.) are being collected for evaluation since 17.3.97.
4) The result of composite samnples (2Nos) have shown COD levels to be 245 and 243 mg/lt at final out lets respectively. The BOD results are awaited as the same take longer time.
5) The EIP Plant shall be under continuous operation and manned by the staff of M/s Envirad, Once the desired output results arc achieved the plant shall be further operated under steady state condition for a duration of 2-3 weeks.
6) During this period M/s SBCH Ltd. shall
designate plant personnel in all the three shifts to
check and also train. themselves for ETP operation.
7) After steady state performance the ETP shall be
taken over by M/s SBCH Ltd.
17
8) In case M/s SBCH Ltd, desire that entire
plant be re-commissioned (to gain confidence level for restart the plant) the entire EXP/UASB shall be slushed and recharged. This re-commissioning shall be done by M/s SBCH Ltd., under the supervision/guidance of M/s Envirad till they gel (he desired results and confidence. After putting the plant into operation, certain defects were noticed and facts fax was sent on 20 t h March, 1997. The following defects were brought to the notice to Mr. Ventak, Managing Director of M/s Envirad Project (P) Limited, Kanpur. The fax message sent pointing out certain defects in the operation of plant is reproduced:-
" EFFULENT TREATMENT PLANT COMMISSIONG You had pleasant back journey to Kanpur. I am writing below the feedback on Effluent Treatment Plant working for your further action.
Full Effluent is being taken in to ETP with effect from 15.3.97 afternoon.
Ph and COD results are already faxed to you up to 23.3.97. For the benefit I am giving below the day's average BOD results of with effect from 17.3.1997.
COD BOD mg/Lit ..3/97 73 ..3/97 122 ..3/97 149 ..3/97 263 ..3/97 383 ..3/97 520 Aeration tank water has become black in colour and dissolved .......... nil w.e.f. 20.3,97 afternoon.
4) One of your chemist left the site on 24.3.97. Only one chemist is present.18
5) Above dale of COD and BOD coupled with dissolved oxygen in aeration tank water indicates that the performance of the ETP is unsatisfactory and far away from the desired agreed limits of discharged effluent.
This is for your necessary urgent action,"
It appears that when the Assessing Officer made inquiry from M/s Envirad Project'" (P) Limited regarding Effluent Treatment Plant, without understanding the implication. M/s Envirad Project (P) Limited gave a generic reply stating that they had commissioned the plant and the final amount was delivered in financial year 1997-98. However, the subsequent reply from M/s Envirad Project (P) Limited clarified that the plant had been put into operation and started functioning w.e.f. fj 15.3.1997 and as per the arrangements, the final payment was to be made after all modification/completion of all obligation of order and full satisfaction of the client i.e. appellant. It is only when the plant was put into operation, certain defects were noticed and as per agreement with M/s Envirad Project (P) Limited final payment was to be made after all the defects were removed and plant was put into perfect shape. Therefore, there is no doubt the appellant was owner of the plant and that it was commissioned before 15.3.1997. Some of the payments may have been made subsequent to the financial year under consideration but that cannot have the effect of negating the appellant's claim for depreciation. In the facts and circumstance of the case, it is held that the Effluent Treatment Plant had been commissioned and put to use during the year under reference, and the appellant is entitled to depreciation thereon. The Assessing Officer is accordingly directed to allow depreciation on Effluent Treatment Plant as per rules. Thus this ground of appeal is, therefore, allowed."
15. We have considered the rival submissions. It is apparent from the record that the assessee had produced the minutes of meeting held with Envirad on 19.3.1997, which revealed that the ETP was being operated continuousl y since 19 15.3.1997. The said minutes were given by one Mr Venkat of Envirad. The minutes of meeting are available at page 136 of the assessee's paper book. The assessee had also produced the copies of fax massages dated 24.3.1997 and 28.3.1997 sent by the assessee to Mr Venkat of Envirad intimating him about the results obtained under operation of the ETP on the various dates. The copies of fax messages dated 24.3.1997 and 28.3.1997 are available at pages 137 to 140 of the assessee's paper book. Besides above documents, the assessee had also submitted a certificate of the assessee's manager (Engg.), asset installation form of the assessee, running invoice dated 12.11.1996 of Envirad, and copy of the purchase order dated 6.5.1996 issued by the assessee to Envirad. We find that the Ld. C IT(A) has dul y considered the documentary evidence produced b y the assessee and rightl y reached at the conclusion on the basis of the evidence brought on record that the assessee was the owner of the ETP and it was commissioned before 15.3.1997. The Assessing officer denied the claim of the assessee merel y on the ground that final bill was raised by M/s Envirad Project (P) Limited on 16.4.1998. In this regard, the subsequent repl y submitted by M/s Envirad Project (P) Limited to the Assessing officer clarified that the plant had been put in the operation and started functioning w.e.f. 15.3.1997 and as per the arrangement, final payment was to be made after all modifications / completion of all obligation of order and full satisfaction of the assessee. It is true that some of the bills were made subsequent to the financial year under consideration but that cannot be a ground for rejecting the claim of the assessee. Thus, considering the entire facts and circumstances of the present case, we are of the opinion that the C IT(A) has passed a well reasoned order after appreciating the facts of the case and also the relevant documentary evidence submitted by the assessee, therefore, we do not see any valid ground in interfering with the findings of the C IT(A) on this issue. Consequentl y, we reject ground No.3 of the appeal raised by the Revenue. 20
16. Ground No.4 of the appeal, reads as under:-
4. On the facts and circumstances of the case the Ld. CIT(A) has erred in allowing assessee' claim of deduction u/s 80-I of the Act, 1961.
17. The issue relates to deduction u/s 80-I of the Act amounting to Rs. 7,08,59,578/-. The Assessing officer denied the claim of the assessee. On appeal, the C IT(A) allowed the claim of the assessee for the reasons stated in para 6.3 of the order.
18. After hearing Ld. Representatives of both the parties we find that the issue is squarel y covered in favour of the assessee and against the Revenue by the decision of the Tribunal dated 31.1.2005 passed in assessee's case in ITA Nos. 301/Chandi/2001, 17, 274 & 1243/Chandi/98 & 233/Chandi/99 and 302/Chd/2001 relating to assessment years 1991-92, 92-93, 93-94, 94-95 & 95- 96 and 1996-97. A similar view has also been taken by the Tribunal in Revenue's appeal in ITA No. 345/Chandi/2001 in assessee's own case relating to assessment year 1996-97 vide its order dated 28.2.2005. The Tribunal following its earlier orders passed in assessee's case held as under:-
"The second ground of appeal of the Revenue is as under:-
"2. On the facts and in the circumstances of the case, the Ld. CIT(A) allowing the claim of deduction u/s 80-I of the Income-Tax Act, 1961 after verification of facts in view of ITAT's order passed in assessee's case for earlier years."
The relevant facts relating to this issue are that the assessee had claimed deduction under section 80-1 of Rs.6,32,90.368/- which was disallowed by the Assessing Officer on the basis of assessment order for assessment year 1989-90 to 1995-96. In the said assessment years, the claim was disallowed on the ground that all the machines were installed in the existing factory premises and according to the 21 Assessing Officer the same could be treated as routine replacements with better capacity. The Assessing Officer also mentioned that neither in the annual report of the company, there was any mention about the expansion of business of the assessee, nor was any project report' prepared for the same and that the assessee also did not maintain separate accounts or other details for the new unit. Similar claim had been disallowed u/s 80-1 in-assessment year 1979- 80 and when the matter came up before the Tribunal, deduction under section 80-J was held to be permissible to the assessee. The matter again traveled upto the Tribunal in assessment years 1989-90 and in 1991-92 to 1995-96 and the issue was decided in favour of the assessee. Since the basis for the disallowance are same as in earlier years, we respectfully following the orders of the Tribunal in assessee's own case for assessment years 1991-92-to 1995-96 (supra) dismiss this ground of appeal raised by the Revenue."
19. The facts of the present year are similar to that of earlier years referred to above. Respectfull y following the order of the Tribunal, we reject ground No.4 of the appeal.
20. Ground No.5 of the appeal, reads as under:-
5. On the facts and in the circumstances of the case the Ld. CIT has erred in deleting the addition of Rs. 1,41,58,549/- by excluding the Excise Duty in the valuation of closing stock.
21. After hearing Ld. Representatives of both the parties, we find that the issue is squarel y covered in favour of the assessee and against the Revenue by the decision of Tribunal dated 31.1.2005 for assessment years 1991-92 to 1995- 96 referred to above. While deciding a similar issue, the Tribunal held as under:-
"15. The relevant facts relating to this issue are that assessee had been including excise duty paid in the value of the closing stock up 22 to assessment year 82-83. The Tribunal had also directed the inclusion of the excise duty in the valuation of closing stock. However, from assessment year 83-84, the assessee excluded the excise duty paid in respect of goods lying in the closing stock from the valuation of such stock on direct cost basis. The AO as well as the CIT(A) did not accept the contention of the assessee for the assessment years 83-84 & 85-86. The Tribunal also confirmed the view of the revenue that the excise duty paid has necessarily to be included in the valuation of closing stock on direct cost basis. In assessment year 85-86, the assessee had raised an alternate submission that if excise duty paid had to be included as part of the valuation of closing stock, the same had to be excluded after the insertion of section 43B w.e.f. 1.4.84, in order to give full effect to the said provisions. The Tribunal in assessment year 85-86, while deciding the issue, in principle, against the assessee directed the AO to decide the issue afresh in accordance with the decision of the Special Bench of the Tribunal constituted in the case of Indian Communication Network Ltd. Subsequently, the Special Bench of the Tribunal in the case of ITO vs. Food Specialties Ltd.. 206 ITR (AT) 119, held that excise duty paid is not a part of direct cost while valuing the closing stock In the case of Indian Communications Network P. Ltd. vs I A C 206 ITR (AT) 96, the Special Bench held that it was necessary to remove the amount of excise duty from the value of the closing stock in order to give full effect to the provisions of section 438 of the Act.
16. In assessment year 86-87 in 1 T A No........ , the Tribunal relying upon the Special Bench decision in the case of Food Specialties Ltd and Indian Communications Network (P) Ltd (supra) held that (i) change in the method of valuation of closing stock to exclude excise duty paid from the cost was bona fide &( ii) in any case, excise duty paid had to be reduced from the value of the closing stock in order to give full effect to the provisions of section 43B of the Act The Tribunal followed its own decision for the assessment year 86-87 in assessment years 87-88 & 88-89
17. In the meanwhile, section 145A has been inserted by the Finance (No. 2) Act, 1998 w.e.f 1.499 The said section reads as under -23
"145A --Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "profits and gains of business or profession" shall be --
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further adjusted to include the amount of any tax duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.
Explanation. - For the purposes of this section, any tax. duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment."
It is evident from the provisions of section 145A that excise duty is to be included tn the valuation of closing stock The said section, however, has been held to be applicable only w.e.f. 1 4.99 by the Bombay High Court in the case of CIT vs. Indo Nippon Chemical Co.L td., 245 ITR 384 The said decision of the Bombay High Court has been affirmed by the Hon'ble Supreme Court in the case of C1T vs. Indo Nippon Chemicals Ltd., 261 ITR 275. In assessment year 89-90, the Tribunal relying upon the decision of the Bombay High Court in the case of Indo Nippon Chemicals Ltd. (supra), directed the AO to exclude excise duly m valuation of closing stock
18. Since the assessment years involved before us are prior to 1 .4.99 and section 145A not being applicable, we do not find any infirmity in the order of the CIT(A) in directing to exclude the excise duty component from the valuation of closing stock We, therefore, find no justification to interfere with the order of the CIT(A). The grounds of appeals raised by the revenue in the respective assessment years are accordingly dismissed."
24
22. The above decision is squarel y applicable to the facts of the present case and therefore, we do not see any merit in this ground of appeal. Accordingl y, the same is dismissed.
23. Ground No.6 of the appeal, reads as under:-
6. On the facts and in the circumstances of the case the Ld. CIT(A) has erred in allowing relief of Rs. 83,97,899/- by directing the Assessing officer to value the closing stock on the direct cost method as adopted by the assessee subject to inclusion of certain expenses.
24. After hearing Ld. Representatives of both the parties, we find that the issue is squarel y covered in favour of the assessee and against the Revenue by the decision of the Tribunal for assessment years 1991-92 to 1995 & 1996-97 referred to above. While deciding a similar issue in earlier years, the Tribunal held as under:-
"3. The relevant facts relating to the above-mentioned grounds of appeals are that in assessment year 1982-83, the assessee had changed the method of valuation of closing stock from "total cost basis" to "direct cost basis". It was claimed on behalf of the assessee that it had valued the finished goods in hand at total cost till assessment year 1981- 82 not realizing the fact that there are various expenses incurred after the finished goods had come into its present form and location. According to the assessee it was though proper to limit the valuation of closing stock of the finished goods to "the extent of the cost that was incurred in producing them and bringing these to the present stage of commodity ready for sale. The Tribunal decided the issue partly in favour and partly against the assessee. The operative portion of the order of the Tribunal dated 18.6.93 for the assessment year 82-83 in I.T.A.No.986/Chandi/87 as contained in para 15 & 16 of the order is reproduced as under :-25
"15. The rival contentions in regard to the above issue have been very carefully considered In so far as the principle of valuation of stock by or under the direct cost is concerned, so long as it was a proper method and could be termed as direct cost and included all elements of direct cost, the system or the change of the system for adoption of the direct cost has to be necessarily held as for bona fide reasons.
The AO would be justified to enquire into the valuation i.e whether it could be truly stated to be value under the direct cost basis, because the ultimate objective is to deduce the proper and right
taxable income. The basis of valuation of the stocks is basically dependent on the factor that contributes to bringing the stock to its present condition and location The expenses that are incurred on administration, sales, distribution etc. do not have any hand in bringing into existence of the product itself, but these elements are used subsequent to the products being manufactured. Therefore, the expenses that are incurred after coming into existence of the product in the condition it was saleable or marketable, have necessarily to be treated as expenses incurred after the products are manufactured and, therefore, could not be made part of the value of the stocks, especially when they are to be valid at cost or market prices, whichever is lower. The - product- that is manufactured by the assessee is extracted out of milk and milk is the main raw material followed by Malt extract, wheat flour, coca powder etc. The fresh milk is collected at various milk collection centres located in the State of Punjab.
Thereafter it is processed and made into a product
called horlicks and other products which are
packed in drums and dispatched to various
packing stations that are located in different
26
regions. At these packing stations, which have
their own machines required for packing, filling the product in various bottles, placing of cocks, fixing of lids and labels. The components of direct cost according to the assessee, are prime cost comprising of raw-materials, packing materials, direct labour of factory workers concerned with the production and the packing stations, direct expenses
-of (he factory and of the packing stations.
The direct overhead comprising of workers, electricity, coal, oil and lubricants, other oils and water are taken into closing stock on the basis of
tonnage of stock on hand, divided by the total tonnage produced in the year, applying that ratio to the total tonnage direct, overheads as stated above. Similarly, the milk collection cent4res have direct overheads an wages, vehicles, depreciation on milk chilling plants, truck hire, ice expenses, ice expenses, pension cost of the staff in the factory, are also considered in the same proportion as the tonnage in hand to the total tonnage produced. The elements of excise duty on the stocks is taken into account and the total of the above is treated as the value of the finished goods as well as the work in progress which would also include the value of ghee that is taken at the selling price. In the above valuation, idle time of the machinery, which is due to the stages of production is treated as part of the direct cost. Machinery for regular maintenances when it is shut down, the expenses thereon are excluded from the consideration of the direct cost but treated as indirect overheads. The indirect labour at works, watch and ward that of stores etc are stated to be on employees who are kept in readiness in case of any short fall in the available staff for work. Similarly, the milk transportation expenses on direct staff like accountants, managers etc. are excluded. The staff in the laboratory concerned with the quality 27 control, those for the purposes of administration, are considered as indirect overheads cost. Similarly, in the works, there are factory manager, personal and administration staff, production manager, milk procurement development manager, purchase manager, stores manager and the accounts manager together with the field executives, covering all the above, and veterinary executives and other general staff covering assistants, supervisors, centre incharge of milk collection centre, clerk, peon etc. have been excluded from the consideration of direct labour. The insurance of the machinery is treated as indirect overhead cost. The travelling that is related to milk collection is treated as direct cost, but travelling relating to other suppliers and far other factory work is treated as indirect overheads. The material handling expenses aggregating to Rs.1 ,68,000/- incurred on direct labour for shifting of raw materials, packing materials, stores, capital items, coal etc. from stores to production site, from production site to despatch bay or stores, unloading them within the factory and. shifting of various other record are treated as indirect overheads. The assessee had stated that the above is proper direct cost, valuation of the products, the selling overheads, distribution overheads, market overheads, administration and that relating to exports have been totally excluded from the above valuation because they have no contribution, whatsoever, towards the bringing the product to its p-physical condition and location.
16. In our view, in the above classification, exclusion of managerial staff of the factory i.e. various managers, executive and other staff and also exclusion of works, maintenance, watch and ward staff that are kept in readiness is not proper, because they directly 'are related to the 28 production as such, as they are involved in the planning, procurement, actual production, manner of production and the like. They also are concerned with the quality of the milk as such for which veterinary executives are also made part. Therefore, the entire direct labour should be included of not only of the workers operating the machines but also the managers of factory, personnel and administration who control law and order as far as the staff goes, production managers concerned with the quality produced, milk procurement development manager, purchase manager, stores and accounts manager are inseparable in so far as the production of product is concerned. The same is the case of the staff, such as supervisors. Centre incharge. The concept of direct labour as is understood by the assessee, to mean only that cost of labour which is involved in actual production, in our view, is restricting it to a small section while the production involves the managerial, supervisory and other executives who control the entire production activity. The maintenance staff, stated to be kept in readiness in other words, are always necessary for production and. therefore, their cost cannot be excluded. The cost of quality control is a very small element and including it would require considerable calculation and, therefore, for the sake of convenience, they could be taken as indirect cost. In so far as the milk transportation, that is concerned with the procurement and transportation of the milk to the factory, is stated to have been included.
But there are other indirect labour for movement etc strictly speaking, which form part of the direct cost The AO is, therefore, directed to
check up the calculation of the direct cost of the products to include the following elements-29
a) Cost of raw materials,
b) Cost of packing materials
c) Direct labour of the factory with no exception,
i.e. Managerial staff, other executives
attached to the factory and other supervisory and other staff directly concerned with factory already directly attached.
d) Direct labour on packing stations including managers and other supervisory staff.
e) Direct expenses of the factory and packing
stations.
f) Overheads - direct -- expenses incurred on the
factory, milk collection centers, packing stations,
appointment-on the basis of tonnage produced i.e. quantity in hand divided by total quantity produced and the resultant figure multiplied by the total direct overheads.
g) Direct overheads of milk collection centres covering wages, vehicle depreciation hire, ice expenses.
h) Element of excise duty
i) Ghee at selling price"
4. The CIT(A) has decided the issue in accord with the direction of the Tribunal for the assessment year 82-83 (supra) We respectfully following the aforesaid decision of the Tribunal in assessee's own case for the assessment year 82-83 (supra), uphold the order of the ClT(A) in regard to valuation of closing stock and dismiss the above common grounds of appeals raised by the assessee as well the revenue."
25. The facts of the present year are similar to that of earlier years. Respectfull y following the order of the Tribunal passed in assessee's case for earlier years, we do not see any infirmity in the findings of the C IT(A) on this issue. Accordingl y, we uphold the order of C IT(A) and dismiss ground No.6 of the appeal.
30
26. Ground No.7 of the appeal, reads as under:-
7. On the facts and in the circumstance of the case the Ld. CIT(A) has erred in deleing the addition of Rs. 54,74,522/- on account of MODVAT element not reflected in the value of closing stock.
27. This issue is also covered in favour of the assessee and against the Revenue by the decision of the Tribunal passed in assessee's case for earlier years referred to above. While deciding a similar issue, the Tribunal held as under:-
"25. The relevant facts relating to this issue are that the Assessing officer had included the modvat credit in the valuation of closing stock. The CIT(A) has recorded a finding of fact that the assessee had decided the purchases not of modvat credit and accordingly has not included the modvat credit in the valuation of closing stock and has accordingly deleted the addition for the respective assessment year.
26. The parties before us agreed that the issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Curt in the case of Indo Nippon 261 ITR 271. Respectfully following the said decision of the Hon'ble Supreme Court in the case of Indo Nippon, this common ground raised by the Revenue in respective assessment years is hereby dismissed."
28. Respectfull y following the order of the Tribunal referred to above, we reject ground No.7 of the appeal.
29. Ground No.8 of the appeal reads as under:-
8. On the facts and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 11,94,97,875/- made on account of 31 disallowance of assessee's claim of deduction of advance Excise Duty paid.
30. At the very outset, Sh. Shri Rohit Jain, Ld. Counsel for the assessee also pointed out that a similar issue has already been considered by the ITAT Chandigarh Bench (Special Bench) in assessee's case relating to assessment year 2001-02 and the decision is reported in (2007) 107 ITD 343 (CHD) (SB), wherein the question raised was as under:-
"Whether deduction for tax, duty etc. is allowable under section 43B of the Income-tax Act, 1961, on payment basis before incurring the liability to pay such amounts?"
31. The Tribunal, on consideration (majority view) held (head note) as under:-
"As regards the first question relating to deduction on payments of excise duty, it could be seen that provisions Section 43B has brought in a change in the normal rule of deduction of expense based on the accounting method followed by an assessee. The normal principles and practices are done away. Accordingly, there is no force in the argument of the revenue that the deduction can be granted only if the liability has incurred during the previous year, even when the payment was made by the assessee. The point coming out of the above discussion is that the rule of deduction under section 43B is the actual payment of the liability. The nature of the Account-Current already examined brings home the point that the advance payment of excise duties are actual payments of duties. Therefore, when the payments are understood as actual payments, those payments even if mentioned as advance payments need to be allowed as deduction under section 43B.
The above position is emerging out of the language of the statute itself. Section 43B provides for the deduction of sums payable mentioned in clauses (a) to (f), only if actually paid;32
but shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. The intention of the Legislature is apparent in the above language used in section 43B, that the deduction in respect of tax or duty, which was actually paid by the assessee has to be allowed as deduction without looking into the year of incurring liability.
Further the expression "irrespective of the previous year"
dispenses with the concept of previous year, in the matter of the sums covered by section 43B. The expression "irrespective" means lacking relation, regardless of what is mentioned. Here the subject-mentioned is "previous year". It means the deduction has to be allowed regardless of the previous year. Any reference to the time of incurring or accruing of the liability is dispensed with by the statute while concentration is made on the point of actual payment of the sum to the Treasury of the Government.
The Supreme Court had an occasion to consider the very same issue of payment of duty vis-a-vis deduction under section 43B in Berger Paints (India) Ltd. V CIT [2004] 255 ITR 99/135 Taxman 586 (SC). In fact the decision of the Supreme Court in the case of Berger Paints (India) Ltd. (supra), settles the issue raised before the Special Bench which has upheld the view advanced by the assessee that deduction on payment basis should be allowed under section 43B irrespective of the previous year to which the corresponding liability related to. The Supreme Court has approved the judgments of the High Courts of Gujarat, Mumbai and Madras not only on the rule of consistency but also on the merits of the issue. The Supreme Court has held that the entire amount of excise duty/customs duty paid by the assessee in a particular accounting year is allowable under section 43B of the Income-tax Act, 1961, as a deduction in respect of that year, irrespective of the amount of excise duty/customs duty included in the valuation of the assessee's closing stock at the end of the accounting year.
33The Revenue had also relied on Circular No. 550, dated 1-1- 1990 issued by CBDT in the context of Explanation 2 to section 43B. The Finance Act, 1989 has brought in the Explanation 2 to section 43B, according to which "any sum payable" shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable. In fact, the circular deals with the short question of the distinction between liability incurred and payment due. It clarifies that even if the sum is not due for payment during the previous year deduction would be available. It created a difficult situation for assessees; especially like payments of sales tax etc. In order to remove the difficulties, Explanation 2 was brought in, along with proviso to section 43B. Proviso has made the Explanation practicable and workable by stating that the payments made even after the close of the previous year but made before the due date of filing of the return, will be deductible. It could be seen that the circular deals with the extended period of time by which certain belated payments could be claimed by the assessee as deduction. The circular nowhere deals with the patent question of advance payment of duties and taxes and deduction thereof.
Generally the advance payments of excise duty are not provisional or refundable. They are actually payments of Central Excise duty. We have examined the legislative intent and purpose of section 43B. The assessees in the past were not paying taxes, duties and other dues to the Government in time. At the same time, they were booking those items as expenses in their accounts on accrual basis on the ground that they are following mercantile system of accounting. By doing so, they were claiming deduction and reducing the taxable income. Concurrently in many cases, the assessees were challenging the very liability itself before the Courts and Tribunals, finally resulting the payments belated, deferred, and sometimes never made. In order to stop such exploitation practised by the assessees, section 43B has been brought in the statute declaring that "well you claim the 34 deduction, but only on actual payment." The law has made it clear that such payments are to be allowed as deductions in the year of payment. Section 43B does not lay down any sequence or order of events in which the liability has to be incurred and the payment has to be made by the assessee. Section 43B does not laid down any rule that the liability to pay the duty must incur first and only thereafter the payment of such duty to be made so as to claim the deduction under section 43B. But the Revenue tries to make out a case that the statute has prescribed such an order of events. In fact there is no such prescription in the statute. We have seen that the expression "otherwise allowable" refers to a declaration of permission in law that which are available as deductions on payment under section 43B, are those expenses which are usually allowed by the Income-tax Act for the purpose of computing income. Further the expression "any sum payable" does not mean "payment outstanding".
Therefore,for the purpose of section 43B the proviso there- under and Explanation 2 have to be read an d construed together.
Therefore, the deduction for tax, duty etc. is allowable under section 43B of the Income-tax Act, 1961 on payment basis before incurring the liability to pay such amounts."
32. In view of the decision of the ITAT, Chandigarh Bench (Special Bench) referred to above, we set aside the order the order of CIT(A) on this issue and remand the matter to the Assessing officer with a direction to decide the issue afresh in view of the decision of the ITAT, Chandigarh Bench (Special Bench) passed in assessee's case relating to assessment year 2001-02, referred to above. The Assessing officer is also directed to give an opportunit y of being heard to the assessee. This ground of appeal is allowed for statistical purposes.
33. Ground No. 9 of the appeal, reads as under:-
35
9. On the facts and in law, the Ld. CIT(A) has erred in allowing the expenditure of Rs. 1,89,000/- on account of rent paid for guest house.
34. At the very outset, Shri Rohit Jain, Ld. Counsel for the assessee pointed out that the issue is covered asgainst the assessee by the decision of the Hon'ble Supreme Court in the case of Britannia Industries Ltd. V C IT and Another (2005) 278 ITR 546 (SC), wherein the Hon'ble Supreme Court has held that the intention of the Legislature was to exclude from deduction the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purpose of a guest house of the nature indicated in sub-section (4) of section
37. The Hon'ble Supreme Court further held that if the Legislature had intended that deduction would be allowable in respect of all t ypes of buildings/accommodation used for the purpose of the business or profession, then the Legislature would not have felt the need to amend the provisions of section 37 so as to make a definite distinction with regard to buildings used as guest houses as defined in section 37(5) and the provisions of sections 31 and 32 would have been sufficient for that purpose. In view of the judgement of the Hon'ble Supreme Court, we decide this issue against the assessee and in favour of the Revenue. Resultantl y, this ground of appeal is allowed.
35. Ground No. 10 of the appeal, reads as under:-
10. On the facts and in law, the Ld. CIT(A) has erred in directing the Assessing officer to delete the interest charges u/s 234B of the Act.
36. At the time of hearing of the appeal, Shri Rohit Jain, Ld. Counsel for the assessee was fair enough to concede that this issue is covered against the assessee by the decision of the Hon'ble Supreme Court in the case of C IT v M/s 36 Bhagat Construction in Civil Appeal No. 1169 of 2006 dated 6.8.2015 reported in 235 Taxman 135, wherein the Hon'ble Supreme Court has observed as under:-
"We are of the view that the facts of the present case are squarely covered by the decision contained in Kalyankumar Ray's case in as much as it is undisputed that Form I.T.N.S. 150 contained a calculation of interest payable on the tax assessed. This being the case, it is clear that as per the said judgment, the Form must be treated as part of the assessment order in the wider sense in which the expression has to be understood in the context of Section1 43, which is referred t in Explanation1 to Section 234B.
This being the case, we set aside the judgement of the High Court and allow the appeal of the Revenue."
37. In view of the judgement of the Hon'ble Supreme Court referred to above, we decide this issue against the assessee. Consequentl y, we allow this ground of appeal of the Revenue.
38. In the result, the appeal of the Revenue is allowed partl y and partl y for statistical purposes.
Order pronounced in the Open Court on 05.04.2016.
Sd/- Sd/- (ANNAPURNA MEHROTRA) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT Dated : 5 t h April, 2016 Rkk Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR