Income Tax Appellate Tribunal - Mumbai
Essar Procurement Services Ltd ( ... vs Assessee on 29 June, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH 'E' MUMBAI BEFORE SHRI J. SUDHAKAR REDDY (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA No. 3851/Mum/2010 Assessment year -2005-06 M/s. Essar Procurement Services Ltd., (Formerly known as Essar Projects Ltd), Essar House, 11, Keshavrao Khadye Marg, Mahalaxmi,Mumbai-400 034 PAN-AAACE 0892R Vs. The Addl CIT, Range 5(1), Aayakar Bhavan, Mumbai-400 020 (Appellant) (Respondent) Appellant by: ShriVijay Mehta Respondent by: Shri B. Jaya Kumar Date of Hearing : 29.6.2011 Date of pronouncement: 12.08.2011 O R D E R
PER ASHA VIJAYARAGHAVAN (JM) This appeal preferred by the assessee is directed against the order dated 15.3.2010 passed by the ld. CIT(A)-9 for the Assessment Year 2005-06.
2. The relevant facts of the case are that the assessee company is engaged in the business of turnkey civil and mechanical construction contracts. The assessee is also making investment in shares and securities. During the year under consideration the assessee company had paid guarantee commission of Rs. 431,75,000/- to M/s Essar Investments Ltd in respect of the corporate guarantee given by the Essar Investment ltd for the mobilization advances received by the assessee from M/s Essar Oil Limited and M/s Essar Power Limited for executing certain projects. The assessee is following the completed contract method of accounting for accounting income from these projects. Hence various expenses are capitalized towards work in progress which was carried forward from year to year till the completion of project. The assessee is claiming that it has used part of the mobilization advances received by it in its business and making investments in securities and debentures. The assessee claimed that income from investments have been duly offered for taxation and therefore its expenses an account of guarantee commission relating to funds used for investments should be allowed as deduction. The Assessing Officer took the view that this expenditure would have been debited to the work in progress account since the assessee is showing the completed contract method of accounting. The Assessing Officer disallowed the claim of the assessee. The Assessing Officer also relied on the fact that similar claim of the assessee was not allowed in the assessment year 1997-98.
3. The Assessing Officer held as follows:
It will be seen from the above that guarantee commission has been paid for contracts with Essar Oil Ltd which is not yet complete. Considering the detailed discussion on this issue in AY 1997-98 the guarantee commission is not allowable as deduction. The various facts and judicial decisions mentioned in assessment order for AY 1997-98 hold good for this year also. The deduction of Rs. 4,31,75,000/- claimed in the revised return of income is not allowed. This amount will be allowable as expenditure at the time of working out profits from oil refinery project as and when the project is offered for taxation.
4. In the appellate proceeding the appellant submitted that the expenditure of Rs 431,75,000/- on account of guarantee commission has been rightly debited to the P&L account since the corresponding funds on account of mobilization advances have been utilized in its business for the purpose of making investments in shares etc. The income arising from such investments has also been offered for taxation .Therefore the expenditure of Rs 431,75,000/- has been rightly claimed as a revenue expenditure in the year under consideration. The Appellant submitted that guarantee commission being a finance cost and cost attributable to general activity of the company cannot be included in the cost of work in progress. The appellant further relied on the decision of CIT appeal for the assessment year 1997-98 where CIT appeal held that the proportionate expenditure relating to fund used for investment made is to be allowed as deduction in the profit and loss account. In that year CIT(A) held that expenditure of Rs.476.75 crore have been found to relating to fund utilized in investment and balance expenses were held to be relating to fund utilized for the purpose of projects. The appellant further relied on the order of the ITAT dated 28.7.2009 for the assessment year 1997-98 wherein finding of the CIT(A) was upheld.
5. The Ld. CIT(A) held as follows:
"I have considered the submissions of the appellant. The appellant has received mobilization advances in the A.Y. 1997-98 and the appellant filed no evidence that funds, for which corporate guarantee was given by the Essar Investment Ltd., continues to be invested in investment. Admittedly the appellant has given guarantee commission for raising funds for carrying out projects and not for investments. Therefore, part of the guarantee commission can be allowed as deduction while computing the income of the appellant only if the appellant is able to establish that it used such funds for investments in the current year. The decision of earlier years can be applied only if facts remain the same. Further, no ratio can be laid down on question of facts. Principle of res judicata is not applicable to income tax proceedings. Since the appellant has not established that any part of the guarantee commission expenses relates to fund used for investment, no relief can be given. The AO was justified in holding that these expenses are required to be capitalized. The action of the AO is upheld. This ground of appeal is not allowed."
6. Aggrieved assessee preferred an appeal before us and raised the following ground:
On the facts and circumstances of the case and in law the learned CIT(A) -( Mumbai hereinafter referred to as CIT(A) erred in confirming the disallowance of Guarantee commission amounting to Rs 4,31,75,000/-
7. The Ld. Counsel for the assessee Shri Vijay Mehta submitted that the expenditure of Rs 431,75,000/- on account of guarantee commission has been rightly debited to the P& L account since the corresponding funds on account of mobilization advances have been utilized in its business for the purpose of making investments in shares etc. The income arising from such investments has also been offered for taxation. Therefore the expenditure of Rs 431,75,000/- has been rightly claimed as a revenue expenditure for the assessment year under consideration.
8. The Tribunal in A.Y. 1997-98 held as follows:
"The first common issue in the assessee's appeal as well as the Revenue's appeal relates to guarantee commission claimed as expenses. The assessee paid a sum of Rs 13,66,44,492/- as guarantee charges in respect of the guarantee procured by it from M/s Essar Investments Ltd in connection with two contracts entered into with M/s Essar Oil Ltd and M/s Essar Power Ltd., The facts relating to procurement of advance is elaborately discussed in page 3 of the assessment order. There is no dispute relating to this ground. The assessee was executing two large projects and took mobilization of advance from M/s Essar Oil Ltd and M/s Essar power Ltd. As per the assessee these advances were used for purchasing of shares debentures and other securities the fact which is not disputed by the assessing officer. The guarantor raised a debit note during the year under appeal to the aforesaid extent and the assessee claimed the entire amount as expenditure for the year. The assessing Officer disallowed the entire guarantee commission. According to the Assessing Officer the commission should have been debited to the contract work in progress and he disallowed the entire commission expenses. The assessee made a detailed submissions before the learned CIT(A) and he considered all the submissions including the end utilization of the advance and directed the assessing officer to allow Rs 12.62 crores. , as expenditure being the guarantee charges proportionate to amount utilised for investment purpose claimed by the assessee company by effecting change in the method of accounting and confirmed the disallowance of Rs 1.04 crores.
We have heard the learned counsel for the assessee and gone through the records. The learned CIT(A) has considered all aspects of the matter and has correctly bifurcated he guarantee commission on the basis of utilization for investments on the projects and has correctly directed the Assessing officer to allow the sum of Rs 12.62 crores and disallow the sum of Rs 1.04 crores on the same reasoning. Having regard to the discussions in pages 2 to 8 of the impugned order of the learned CIT(A), we do not find any infirmity therein and we decline to interfere on this issue".
9. We find that in the year under appeal the Ld. CIT(A) has observed that the assessee has not established that any part of the guarantee commission expenses relates to fund used for investment. The CIT(A) opined that part of the guarantee commission can be allowed as deduction while computing the income of the assessee only if the assessee is able to establish that it used such funds for investment in the current year. The AO is therefore directed to consider all aspects of the matter and correctly bifurcate the guarantee commission on the basis of utilization for investments on the projects and allow the proportionate expendkiture relating to fund used for investment, following the ratio of decision for A.Y. 1997-98.
10. The second ground raised by the assessee reads as follows:
" On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of an expenditure/ reversal of income of Rs.54,69,399/- claimed by the appellant company under the head of prior period expenses."
11. The facts are that in the year under consideration the assessee has claimed deduction of Rs. 74,64,807/- on account of prior period expenses. The details of these expenses are as under:
S. No. Particulars Amount (Rs) 1 Depreciation on commercial vehicle for 2003-04 541,022
2.
Custom duty on spares for leibherr crane procured in 2003-04.
47,800
3. Custom duty on spares for speco Hot Mix Plant procured in 2003-04 19,930
4. Depreciation on P&M accounted less in earlier years 1,454,366
5. Refund of lease tax wrongly taken as income in previous year passed on 5,342,400
6. Interest paid on Sales tax 59,269 Total 7,464,787
12. The AO held that the assessee was following the mercantile system of accounting and therefore the expenses relating to prior period cannot be allowed as deduction. The AO disallowed the expenses.
13. In the appellate proceedings, the assessee relied on the decision of the ITAT dt. 28.7.2009 for A.Y. 2002-03 wherein the claim of the assessee was allowed. However, the AO held that the assessee is entitled to depreciation for earlier years when it has been allowed depreciation as per the provisions of Sec. 32 of I.T. Act. In response, the assessee admitted that claim for depreciation of Rs. 19,95,388/- which is included in prior period expenses, is not allowable. The assessee has claimed that the balance expenses should be allowed.
14. The Ld. CIT(A) held as follows:
"I have considered the submission of the appellant. I find that the expenses of prior period include expenses on account of Custom Duty paid and interest on sales tax paid. The appellant has not filed any evidence that it paid custom duty and interest on sales tax in the current year. For allowability of these expenses, provisions of Sec. 43B of the I.T. Act are applicable. Even if expenses are crystallized in the current year, deduction cannot be allowed unless the taxes are also paid. Therefore these expenses are not allowable. As regards the refund of lease tax received by the appellant in the previous year is concerned, this refund was received by the appellant has wrongly shown these receipts as income in the earlier year, in which refund was received by the appellant, the appellant cannot claim deduction in the current year under the head 'Prior Period Expenses'. These are not expenses of the appellant in the current year. Income shown by mistake in the earlier year cannot be claimed as expenses under the head prior period expenses. The appellant has itself admitted that it is not entitled to claim depreciation expenses in the current as prior period expenses because the appellant has been allowed depreciation as per Sec. 32 under the I.T. Act. In view of these facts, the decision relied by the appellant for A.Y. 2002-03 cannot be applied to the facts of the present case. All expenses claimed by the appellant are not allowable as deduction in the current year as prior period expenses. This ground of appeal is not allowed."
15. Aggrieved, assessee is in appeal before us. We find that for the A.Y. 2000-01, the I.T.A.T 'D' Bench in ITA No. 5736/M/04 held as follows:
One of the issues in the assessee's appeal for the assessment year 1998-99 and 1999-2000 relates to prior period expenses of Rs. 15,34,777/- and Rs 14,36,035/- The short submission of the learned counsel for the assessee in this regard is that in the year in which they have claimed, the Assessing Officer has treated them as prior period expenses not allowable. But all the appeals for the earlier years are before the Tribunal and therefore the Tribunal may give a direction to the Assessing Officer to allow in any year in which the expenditure pertains to based on the evidence produced.
We have considered the submissions of the assessee and we direct the Assessing Officer to allow the expenditure in that year for which he considers it as allowable if that assessment year is before him for giving effect of any appellate order for that year. The Assessing Officer is directed accordingly.
16. We set aside the issue to the file of the Assessing Officer and direct the AO to allow prior period expenses in the year in which the expenditure pertains to based on the evidence produced by the assessee.
17. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced on this 12th day of August, 2011 Sd/- Sd/-
(J. SUDHAKAR REDDY) (ASHA VIJAYARAGHAVAN)
Judicial Member Accountant Member
Mumbai, Dated 12th August, 2011
Rj
Copy to :
The Appellant
The Respondent
The CIT-concerned
The CIT(A)-concerned
The DR 'E ' Bench
True Copy
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Asstt. Registrar, I.T.A.T, Mumbai
Date
Initials
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Draft dictated on:
9.8.2011
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Draft placed before author:
10.08.2011
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JM/AM
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JM/AM
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Order pronounced on:
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File sent to the Bench Clerk:
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Date on which file goes to the Head Clerk:
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ITA No.3851/M/2010