Income Tax Appellate Tribunal - Mumbai
Integrated Technology Solutions P. ... vs Assessee on 14 January, 2011
आयकर अपीलीय अिधकरण "आई आई"
आई Ûयायपीठ मुंबई मɅ।
IN THE INCOME TAX APPELLATE TRIBUNAL "I" BENCH, MUMBAI ौी बी.आर.िमƣल, Ûयाियक सदःय एवं ौी संजय अरोड़ा,लेखा सदःय के सम¢ । BEFORE SHRI B. R. MITTAL, JM AND SHRI SANJAY ARORA, AM आयकर अपील सं./I.T.A. No.3695/Mum/2011 िनधा[रण वष[ / Assessment Year: 2006-07) (िनधा[ Integrated Technology Solutions Pvt. Income Tax Officer 6(1)(3), Ltd. Mumbai 4th Floor, Kalptaru Square, बनाम/ बनाम Kondivita Lane, Vs. Opp. Andheri Kurla Road, Mumbai ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACI 8627 B (अपीलाथȸ /Appellant) : (ू×यथȸ / Respondent) अपीलाथȸ ओर से / Appellant by : Shri Haresh G. Buch & Shri Harsh Kapadia ू×यथȸ कȧ ओर से/Respondent by : Shri Amit Kamat सुनवाई कȧ तारȣख / : 29.04.2013 Date of Hearing घोषणा कȧ तारȣख / : 28.06.2013 Date of Pronouncement आदे श / O R D E R Per Sanjay Arora, A. M.:
This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-14, Mumbai ('CIT(A)' for short) dated 14.01.2011, partly allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2006-07 vide order dated 24.12.2008.2 ITA No.3695/Mum/2011 (A.Y. 2006-07)
Integrated Technology Solutions Pvt. Ltd. Vs. ITO
2. The principal issue arising in the instant appeal concerns the validity in law of the assessee's claim for loss sustained on the write off of non-recoverable advances made for the purchase of machinery (at Rs.32.60 lacs) and that incurred due to the non-acceptance by it of the delivery of the machinery imported for its business (at Rs.57.50 lacs), claimed per its return of income for the current year.
3. The facts, in-so-far as are relevant, are that the assessee is a company engaged in the business of a sub-distributor to the sole selling agent (Best & Co.) for online lottery run by the State of Nagaland. Besides, it also provides professional services to various companies by way of consultancy and data processing. An advance of Rs.56.68 lacs was given to one M/s. CMC Ltd. for the purchase of 288 terminals during the financial year (f.y.) 2003-04, of which 128 terminals were supplied in the following month (October, 2003), adjusting the advance proportionately. As the assessee-company was since no longer interested in buying the balance terminals, the outstanding advance of Rs.32.60 lacs was forfeited by the supplier, M/s. CMC Ltd., which stands written off by the assessee in its books for the current year. The company had likewise placed an order for Rs.57,50,106/-, paying the entire cost in advance, for purchase of one Optical Mark Reader (OMR) from M/s. Chatsworth Data Corporation, USA. However, as the assessee did not require OMRs any more, the delivery of the same was not accepted; with, rather, the company requiring the custom authorities, in whose custody the same was lying, to auction the same and pay the proceeds in excess of the custom duty levied (Rs.20.25 lacs), if any, thereto. It is also claimed, and which is only understandable, that the company could not find any buyers so as to take the delivery of the machinery and dispose it off in the domestic market. These sums, as well as the custom duty as demanded by the custom authorities, debited to the account 'capital work-in-progress', were written off during the relevant year in accounts as irrecoverable, so that the same represented a loss (PB pg. 60).
4. We have heard the parties, and perused the material on record, including the case law cited by the parties.
3 ITA No.3695/Mum/2011 (A.Y. 2006-07)Integrated Technology Solutions Pvt. Ltd. Vs. ITO 4.1 Our first observation in the matter is that the primary facts are on record and undisputed.
4.2 We may proceed by first delineating the respective cases of both the parties. As regards the assessee's case, it claims the said loss as on account of bad debts u/s. 36(1)(vii); the same having been written off in its accounts for the current year. Alternatively, the assessee claims the said losses by way of business loss; the same being incidental to its trade. Reliance is placed on a host of case law in the matter. The Revenue's case, on the other hand, is that the question of the claim being exigible to deduction u/s. 36(1)(viii) does not arise, as the same is neither a debt going bad on revenue account nor is the condition of section 36(2)(i), i.e., that the same (debt) should have been taken into account in computing the income for any year, to which the deduction u/s.36(1)(vii) is subject, satisfied. Qua the claim of it being a trade or business loss, the same is purely capital in nature. Reliance is placed on the decision in the case of Indian Aluminium Co. Ltd. vs. CIT [1971] 79 ITR 514, 518 (SC) and CIT vs. Subramanya Pillai (S.R.) [1950] 18 ITR 85, 93 (Mad.), to the effect that only losses arising or springing directly from the carrying on of the trade or business and incidental thereto are deductible, while those not arising out of the operations of the trade or business are really losses of capital.
4.3 During the course of the hearing, after hearing the parties, it was observed by the Bench that it finds it difficult to accept as to how the impugned losses are not on capital account. That is, in the capital field and, therefore, not deductible in computing the business income either u/s. 36(1)(vii) or section 37(1) or even with reference to section
28. Reference was made to the decision in the case of Hasimara Industries Ltd. v. CIT [1998] 230 ITR 927 (SC), whereat, again, the claim of loss of deposit as a business loss u/s.28 of the Act was pressed. In the facts of that case, the assessee had deposited Rs.20 lacs with the licensor company for the purpose of securing a license under which the assessee had acquired to work the licensor's cotton mills. The deposit, it was held, was made, clearly, for acquisition of a profit-making asset, to carry on the business in cotton.
4 ITA No.3695/Mum/2011 (A.Y. 2006-07)Integrated Technology Solutions Pvt. Ltd. Vs. ITO The loss of such deposit, on it remaining unpaid, following the liquidation of the licensor company, was suffered on capital account and not on revenue account, so as to be treated as a business loss. Even as the ld. AR sought to distinguish the said case law, upon being confronted with the said decision - of course on the basis of facts, which would be specific and unique to the fact situation of each case, in our clear view, the same is squarely applicable in its ratio, even as observed during hearing. Rather, first principles admit of no difference, so that the said decision was put forth only to impress the unequivocal and the settled position of law in the matter, i.e., as an example of the application of those principles by the hon'ble apex court. In the case of Hasimara Industries Ltd vs. CIT [1998] 231 ITR 842 (SC), again, the loss qua irrecoverable advance to the lessor, on account of the latter's incapacity to repay, was held as a capital loss; the same having been made by the assessee-leasee to modernize the cotton mill under a leave and license agreement, obtaining operating rights in its respect with an intention to enter the cotton manufacturing business.
4.4 In the instant case, the loss suffered by the assessee is, in fact, not on account of factors extraneous to it, as in the two cases of Hasimara Industries Ltd. (supra), but due to its' rescinding the relevant contract/s for purchase of capital assets for which the impugned advances had been given. Further, as we see it, the assessee by foregoing its right to purchase the same by not paying the balance amount due, i.e., which it was required to pay (in respect of purchase of terminals), or by not taking the delivery of the machinery supplied, i.e., OMR, as the case may be, and consequently, allowing the amounts paid to be forfeited, is only reducing its loss - of course on capital account, i.e., by not acquiring the assets which it deems or considers no longer useful or profitable for its business by incurring additional (capital) expenditure, eschewing further investment. The decision is a business decision, taken in its interest. That would not, however, convert the character of the loss sustained on capital account to one on revenue account. The capital expenditure, it may be appreciated, is incurred as much for business as is the revenue expenditure. However, it is only the latter which is deductible in computing the 5 ITA No.3695/Mum/2011 (A.Y. 2006-07) Integrated Technology Solutions Pvt. Ltd. Vs. ITO business income, while specific allowances, as u/ss.32, 35, 35D, etc. are provided for under the Act in respect of the former. In the instant case, the transaction not fructifying has led to a loss of capital, so that the Revenue's stand is in agreement with the settled position of the law, which we have sought to emphasize with reference to the two decisions by the apex court, also enumerating their facts. In the case of CIT vs. Hindustan Times Ltd. [1998] 231 ITR 741 (SC), the dispute was not of depreciation on the new building constructed by the assessee on the lease-hold land, but on the additional charges paid by it to the lessor for it's commercial user. The said amount was held as forming part of the cost of new building, i.e., as on capital account. It is pertinent to note that the fact that the same did not constitute revenue expenditure was an admitted position between the parties, so that the only issue was the validity of the claim of depreciation qua the additional charges paid to the lessor for the commercial use of the building. That lease premium is a capital expenditure is also well settled, and for which we may refer to the decision in the case of CIT vs. Khimline Pumps Ltd. [2002] 258 ITR 459 (Bom).
4.5 Continuing further, there is another aspect to the matter. Even if, for the sake of argument, the assessee's plea of the same as being a business loss is considered as valid, the next question that would arise is the year of the allowability, as loss u/s.28 could be allowed only in the year it is sustained, and not in the year in which the assessee chooses to recognize the same in its books of accounts by writing it off. As such, even if held as allowable per se, the matter would require a further finding of fact as to the year of suffering the loss. As apparent, the advances have been paid, as well as the assessee's decision/s for not observing the terms of the relevant contract/s (due to the changed circumstances perhaps), forfeiting the balance amount which stands written off, taken place in the earlier years. The warehousing period, as per the notice u/s.72(1) of the Customs Act (which appears at PB pgs.1 & 2), stands expired on 15.10.2003, so that the Bond Department of the Customs issued notice for the levy of rent and interest, besides duty; the said notices being dated 30.11.2004 and 14.01.2005. The foregoing, however, is stated only by way of an alternate argument, without prejudice to our clear view of the 6 ITA No.3695/Mum/2011 (A.Y. 2006-07) Integrated Technology Solutions Pvt. Ltd. Vs. ITO loss suffered being only in the capital field, and which though would stand modified in the light of the same, so that the said loss cannot be said to have arisen in the relevant year in view of the relevant decisions having been taken by the assessee in an earlier year.
4.6 We may next take up the decisions relied upon by the assessee, all of which have, as afore-stated, been perused by us. The decisions in the case of CIT vs. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC) and Chenab Forest Co. vs. CIT [1974] 96 ITR 568 (J&K) are clearly distinguishable as the advances in those cases are on trade account. Similarly, in the case of Gulf Oil Corporation Ltd. vs. Asst. CIT [2012] 24 taxmann.com 325 (Hyd), the advance, which stands claimed, was found on facts to be for protecting the assessee's business. It is well settled that any expenditure incurred in maintaining or protecting the existing capital structure or assets is on revenue account, so that the same was rightly allowed as a business loss u/s.28(1) r.w.s. 36(1)(vii). The decision in the case of CIT vs. Gujarat Mineral Development Corporation Limited [2009] 314 ITR 322 (Guj), again, cannot be relied upon as the Revenue's appeal in that case stood denied admission by the hon'ble court in view of the same not raising any substantial question of law. The solitary decision in favour of the assessee, i.e., CIT vs. Anjani Kumar Co. Limited [2003] 259 ITR 114 (Raj), again, cannot be considered as a binding precedent, being, as would be apparent from the perusal of the said judgment, without reference to and de hors the judicial precedents in the form of the binding decisions by the apex court, to three of which reference has been made by us in the preceding paragraphs of this order (refer paras 4.3 & 4.4), besides to two others by the Revenue (refer para 4.2 supra). The decisions by the tribunal in the case of Pik Pen Private Limited vs. ITO (in ITA No.6847/Mum/2008) and Dy. CIT vs. Edelweiss Capital Limited (in ITA No.3971/Mum/2009) stand rendered following the decision in the case of Anjani Kumar Co. Limited (supra), which we have found as being contrary and inconsistent to the binding decisions by the hon'ble apex court. The said reliance would thus be of little moment. The decision in the case of CIT vs. Triveni Engg. & Industries Ltd. [2012] 343 7 ITA No.3695/Mum/2011 (A.Y. 2006-07) Integrated Technology Solutions Pvt. Ltd. Vs. ITO ITR 245 (Del.) is in respect of advance to employees, which is on a different footing altogether, so that the said advances would stand to qualify as on trade account, even as also clarified per decisions as in the case of Mysore Sugar Co. Ltd. and Chenab Forest Co. (supra).
4.7 Finally, the assessee's ground before us is for an amount of Rs.92,12,968/-, while the two sums referred to add up to Rs.90,10,106/-, leaving a balance of Rs.2,02,862/-. Even though no arguments in its respect were advanced before us, we find the assessee to have furnished the details in respect thereof (vide its letter dated 08.12.2008/copy on record at PB pg.61), and which, as it appears, are in respect of prepaid expenses, as by way of advances paid to the employees, who had subsequently left their employment with the assessee. No findings in the matter have been issued by the authorities below. We have already indicated that the same to be on a different footing altogether, so that subject to the necessary verification as to the nature of the advance as well as the year in which the said loss stands incurred by the Assessing Officer (AO), we hold the same as deductible as business loss u/s.28(i) of the Act. Though it is the satisfaction of the assessing authority that is paramount, as the nature of the material signifying the period of incurring the loss would depend on the facts and circumstances of each case, the AO shall adopt a holistic approach in the matter. We decide accordingly.
5. In the result, the assessee's appeal is partly allowed for statistical purposes.
Order pronounced in the open court on June 28, 2013 आदे श कȧ घोषणा खुले Ûयायालय मɅ Ǒदनांकः 28 जून, 2013 को कȧ गई ।
Sd/- Sd/-
( B. R. MITTAL ) ( SANJAY ARORA )
Ûयाियक सदःय / JUDICIAL MEMBER लेखा सदःय / ACCOUNTANT MEMBER
मुंबई Mumbai; ǑदनांकDated : 28.06.2013
व.िन.स./Roshani , Sr. PS
8
ITA No.3695/Mum/2011 (A.Y. 2006-07)
Integrated Technology Solutions Pvt. Ltd. Vs. ITO
आदे श कȧ ूितिलǒप अमेǒषत/
षत Copy of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. आयकर आयुƠ(अपील) / The CIT(A)
4. आयकर आयुƠ / CIT - concerned
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई /
DR, ITAT, Mumbai
6. गाड[ फाईल / Guard File
आदे शानुसार/
ार BY ORDER,
उप/
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपीलीय अिधकरण,
अिधकरण, मुंबई / ITAT, Mumbai