Delhi High Court
Commissioner Of Income Tax vs Triveni Engineering & Industries ... on 5 August, 2010
Author: A.K.Sikri
* IN THE HIGH COURT OF DELHI AT NEW DELHI
ITA 235/2008,ITA 266/2009
ITA 258/2009,ITA 236/2008
ITA 280/2008
% Date of Decision: August 5,2010
(i) ITA 280/2008
COMMISSIONER OF INCOME TAX ..... Appellant
Through Ms. Rashmi Chopra, Advocate
Versus
TRIVENI ENGINEERING & INDUSTRIES LTD. ..... Respondent
Through Mr. Ajay Vohra, Advocate with
Mr. Kavita Jha, Advocate &
Ms.Akansha Aggarwal,
Advocate.
(ii) ITA 235/2008
COMMISSIONER OF INCOME TAX ..... Appellant
Through Ms. Rashmi Chopra, Advocate
Versus
TRIVENI ENGINEERING & INDUSTRIES LTD. ..... Respondent
Through Mr. Ajay Vohra, Advocate with
Mr. Kavita Jha, Advocate &
Ms.Akansha Aggarwal,
Advocate.
(iii) ITA 266/2009
COMMISSIONER OF INCOME TAX ..... Appellant
Through Ms. Rashmi Chopra, Advocate
Versus
TRIVENI ENGINEERING & INDUSTRIES LTD. ..... Respondent
Through Mr. Ajay Vohra, Advocate with
Mr. Kavita Jha, Advocate &
Ms.Akansha Aggarwal,
Advocate.
(iv) ITA 258/2009
COMMISSIONER OF INCOME TAX ..... Appellant
Through Ms. Rashmi Chopra, Advocate
Versus
TRIVENI ENGINEERING & INDUSTRIES LTD. ..... Respondent
Through Mr. Ajay Vohra, Advocate with
Mr. Kavita Jha, Advocate &
Ms.Akansha Aggarwal,
Advocate.
(v) ITA 236/2008
COMMISSIONER OF INCOME TAX ..... Appellant
Through Ms. Rashmi Chopra, Advocate
Versus
TRIVENI ENGINEERING & INDUSTRIES LTD. ..... Respondent
Through Mr. Ajay Vohra, Advocate with
Mr. Kavita Jha, Advocate &
Ms.Akansha Aggarwal,
Advocate.
CORAM :-
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MS. JUSTICE REVA KHETRAPAL
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J (Oral)
1. These appeals pertain to same assessee namely Triveni Engineering
and Industries Ltd. Most of the issues raised in these appeals are identical.
It is for this reason; these appeals were clubbed and heard together.
However, we propose to discuss the issues which were raised separately.
ITA 280/2008 ( Assessment Year 1995-96)
2. In this appeal we are concerned with the assessment year 1995-96.
Following issues are raised by the revenue in this appeal.
"1.Whether the ITAT was correct in deleting the
disallowance made by the AO u/S 37(2) by treating
the expenses of Rs.17,09,463/- due to hospitality
expenses and sale promotion expenditure to be in
the nature of entertainment?
2.Whether ITAT was correct in law in deleting the
addition of Rs. 7,87,389/- on account of selling
commission?
3.Whether the ITAT was correct in law in deleting
the disallowance of Rs.18,01,136 made by the IO
on account of provision made for contribution
towards approved gratuity fund u/s 40A (7) of the
Income Tax Act?
4.Whether the ITAT was correct in law in allowing
depreciation on assets in excess of 100% due to
amalgamation despite provisions of 4th proviso to
Section 32(1) which is clarificatory in nature having
retrospective effect?
5.Whether the order of ITAT was perverse as it has
ignored the relevant facts on records and provision
of law?
3. In so far as question no.3 is concerned, learned counsel for the
assessee has drawn our attention to the judgment dated 7th November,
2007 passed by this Court in ITA 423/2007 titled CIT Vs. Be chtel India (P)
Ltd. In that case, while dealing with the interpretation of Section 40A (7)
and Section 43A of the Act, the court was of the opinion that no substantial
question of law arises as is clear from the following discussion:
"Further, we are in agreement with the Tribunal that
Section 40A (7) (b) of the Act will have an overriding
effect over Section 43B of the Act. In the first place
Section 40A (1) is an unequivocal non-obstante
clause and since Section 40A (7) (b) specifically
permits a deduction of a sum constituting the
provision towards an approved gratuity fund, the said
provision will take precedence over a comparatively
general provision like Section 43B. Secondly Section
40A (7) (a) which disallows deduction of any provision
of gratuity to employees on their retirement is itself
made subject to Section40A (7) (b) which allows such
deduction as long as it is made towards an approved
gratuity fund. There is no dispute that in the instant
case the provision made is towards contribution to an
approved gratuity fund. Therefore, the claim by the
Assessee for deduction on this score was clearly
justified. We are accordingly of the opinion that no
substantial question of law arises in this regard as
well."
Following that judgment we are of the opinion that this question of
law, as proposed by the revenue, does not call for any consideration.
4. In so far as question no.4 is concerned, the issue is as to whether two
companies can avail depreciation in respect of the same machinery, which
belonged to the first company for a certain period during the final year and
thereafter was sold to the other company which also used the same
machinery for the remaining period. Section 32 of the Act enables the
assessee to claim depreciation on the machinery used by it. Two conditions
are to be fulfilled namely; (a) the assessee was the owner of the plant and
machinery in question;( b) it had in fact used the same during the financial
year.
This provision further provides that in case the plant and machinery is
used for more than 180 days during the financial year, 100% depreciation at
the rates provided in the Act shall be admissible. If the period for which
machinery is used less than 180 days, then depreciation is allowable @
50% of the prescribed rate. In the instant case the plant and machinery on
which depreciation was claimed was initially owned by M/s Triveni
Engineering Works Ltd. in the relevant financial year w.e.f. 1 st April to 30th
September, 1994. This company was merged with the assessee company
on 1st October, 1994 and all the assets and liabilities of the said company
hitherto held became the assets and liabilities of the assessee company.
This amalgamation was the result of the scheme amalgamation propounded
and approved by the Company Judge of this Court. Erstwhile Ms/ Triveni
Engineering Works Ltd. claimed depreciation on plant and machinery for the
use of it from 1st April, 1994 to 30th September, 1994. Since the period was
more than 180 days, the deprecation was claimed at 100% of the rate
prescribed. Same very machinery came to be used by the assessee from
1st October, 1994 to 31st March, 1995. Since this period also exceeds 180
days, the assessee company also laid a claim for entire 100% . The
question in these circumstances which fell for consideration was as to
whether the total depreciation claimed by both the companies for the same
financial year could exceed 100%. The assessee submitted that since it
was fulfilling the twin conditions i.e. ownership of the machinery and its use
for more than 180 days, it was entitled to depreciation at the said rate
irrespective of the fact that the erstwhile owner which has used the same
plant and machinery upto 30th September, 1994 had made the claim in
similar manner. The Assessing Officer, however, did not accept this plea of
the assessee as he was of the opinion that total depreciation in a financial
year could not be in excess of 100 %. The Tribunal, however, has accepted
the contention of the assessee and allowed the depreciation at the rate
prescribed.
5. It cannot be disputed that both Triveni Engineering Works Ltd. and
the assessee company in their own respective rights made claim of
depreciation at the aforesaid rate and became eligible for that depreciation
after fulfilling the condition laid down in Section 32 of the Act. This Section,
in the relevant assessment year did not provide for the aforesaid
contingency which arises in the instant case namely whether there can be
depreciation of assets in excess of 100 per cent due to amalgamation.
However, fourth proviso to Section 32(1) was added by the Finance Act,
1996 w.e.f 1st April, 1997. This proviso reads as under:-
"Provided also that the aggregate deduction, in
respect of depreciation of buildings, machinery,
plant or furniture allowable to predecessor and the
successor in the case of succession, referred to in
section 170 or the amalgamating company and the
amalgamated company in the case of
amalgamation, as the case may be, shall not
exceed in any previous year the deduction
calculated at the prescribed rates as if the
succession or the amalgamation had not taken
place, and such deduction shall be apportioned
between the predecessor and the successor, or
the amalgamating company and the amalgamated
company, as the case may be, in the ratio of the
number of days for which the assets were used by
them."
6. Learned counsel for the revenue submits that the aforesaid provision
clearly mandates that the total depreciation allowable to amalgamating
company and amalgamated company would not exceed the deduction
calculated at the prescribed rate in any previous year. Her submission is
that even if this proviso was inserted by amendment carried out w.e.f.1st
April, 1997 it was only clarificatory in nature, inasmuch as the grant of
depreciation more than the prescribed rates should not be permissible.
Learned Counsel for the assessee, on the other hand, has drawn our
attention to the memorandum explaining the provisions in the Finance (2)
Bill, 1996 qua this amendment namely insertion of proviso fourth to Section
32 (1). Following explanation/justification is provided therein vide clause
14(b):-
"(b) Depreciation in case of succession and
amalgamation:
The existing provisions provide for depreciation
allowance on assets acquired by an assessee during
the previous year and which are put to use for the
purposes of business or profession for a period of less
than one hundred and eighty days in a previous year.
It is provided that the depreciation allowance in such
cases will be restricted to fifty per cent of the amount
calculated at the prescribed rates. In the cases of
succession in business and amalgamation of
companies, the predecessor in business and the
successor or amalgamating company and
amalgamated company, as the case may be, are
entitled to depreciation allowance on the same assets,
which in aggregate exceeds the depreciation
allowance admissible for a previous year at the
prescribed rates. It is proposed to restrict the
aggregate deduction for this allowance in a year to the
deduction computed at the prescribed rates and
apportion the allowance in the ratio of the number of
days for which the assets were used by them."
The aforesaid explanation is a complete answer to the argument
raised by the learned counsel for the revenue and negates the submission
that the proviso was introduced only as a clarificatory measure.
7. It is clear from the reading of the aforesaid explanation that the
legislature accepted the position that as per the existing law, amalgamating
company and amalgamated company were entitled to depreciation on the
same assets which in aggregate exceeds the depreciation allowance
admissible for a previous year at the prescribed rates. The purpose of the
said proviso is to restrict the aggregate deduction at the prescribed rates
and apportion thereof between the amalgamating company and
amalgamated company in the ratio of the number of days for which the
assets were used by them. This explanation, thus, is a recognition of the
fact that in the given circumstances, as happened in the present case, there
could be a situation where in a given financial year, the total depreciation
allowance admissible in favour of amalgamating company and
amalgamated company could exceed the aggregate depreciation allowance
admissible for a previous year at the prescribed rate. Since this provision is
made applicable only w.e.f. 1st April, 1997, this will not apply to the case at
hand which relates to the assessment year 1995-96.
8. That fact that in the absence of fourth proviso this was the situation
prevailing would be clear from the judgment of Madras High Court in A.M.
Ponnurangam Mudaliar Vs. Commissioner of Income Tax And Another,
which is stated in the following words:-
"I have considered the rival submission I this regard.
There is no difficulty in accepting the contention of
learned counsel for the assessee. Though the term
"owned by the assessee" is used in Section 32(1) it
does not mean that the assessee should have
remained the owner of the asset in question for the
entire previous year in question. Admittedly, the
assessee, in this case was the owner of the
abovesaid buses during the previous year, that is,
from April, 1979, to June, 30, 1979, though not for 365
days for a year. In fact, since the business itself was
closed on June, 30th 1979, the assessee had been
fully using the asset for the business during the entire
accounting year of the abovesaid three months ending
with June 30, 1979.
The object of the Legislature in granting
depreciation allowance under section 32 of the Act is
to give due allowance to the assessee for wear and
tear suffered by the asset used by him in his business
so that the net income (total income) is duly arrived at.
Further, the enactment read with the abovesaid rule 5,
as it existed at the relevant point of time, goes to the
extent of granting such allowance even where the
asset in question is used for the purpose of the
business at any time "during the previous year". In
other words, at the relevant point of time, even if the
asset has been used for a single day, in the business
of the assessee, depreciation allowance, in full, was
given under Section 32(1) of the Act. When such is
the case, it cannot be said that the assessee cannot
be granted the said depreciation allowance if he is not
the owner for the entire period of the previous year or
if he is not the owner on the last day of the previous
year in question. There is no such stipulation in the
Act.
In CIT V. S.K. Sahana and Sons {1946} 14 ITR
106 (Pat), also, full depreciation was allowed even
though the assessee was the owner during the
previous year only for 5 ½ months. In the said
decision Fazl Ali C.J. and Manohar Lall J. made the
following significant observation (page 108).
" it is not disputed that the assessee was
the owner of the building, machinery, etc.
during the accounting year. I do not see
any provision in the Act which authorizes an
apportionment of depreciation on the
assessee having sold the machinery or
plant during the accounting period....I am of
the opinion that there is no such provision in
the Act as would justify the view that if the
machinery is not the property of the
assessee throughout the year then the
period for which it was the property of the
assessee should be calculated and
depreciation should be allowed in proportion
to such period... It was contended by the
learned standing counsel that the
acceptance of this view is mot inequitable
as it would enable both the transferor and
the transferee to claim full deduction for the
depreciation although the machinery, etc.,
have been used by either of them only for a
broken period in the same year. But it has
been rightly pointed out that equity and
taxation are as poles as under and the court
cannot invoke an equitable rule in the
construction of a taxing statute."
9. The High Court of Allahabad, in CIT Vs. Bombay Bhushan Press,
143 CTR 52 and the Kerala High Court in CIT Vs. GEO Tech Construction
Corporation, 244 ITR 45 held same view while interpreting the un-
amended provision. Therefore, we answer this question in affirmative i.e. in
favour of the assessee and against the revenue.
10. Coming to question no.1 as proposed by the Department in this
appeal relates to disallowing certain expenditures due to hospitality and sale
promotion expenses to be in the nature of entertainment. The facts show
that in the profit and loss accounts of the assessee, expenses of Rs.
3566178.08 towards hospitality were debited and in respect of sale
promotion, amounting to Rs.535471.13 expenses were debited. Against
this, the assessee had deducted a sum of Rs. 1231763.74 which were the
expenses under different heads but not in the nature of entertainment.
Thus, total expenses in the nature of entertainment were shown as
Rs.2869885.47, 35% of which amounting to Rs.990016.21 were
attributable towards employees participation were adjusted thus
leaving a balance of Rs. 1879869.26. Since an amount of Rs. 20222.2
which pertain to TBG Delhi was wrongly omitted to be considered in the
consolidated tax audit report, this amount was also deducted from the
aforesaid balance and thus net amount considered for disallowance for the
purpose of hospitality and sale promotion was worked out by the assessee
@ Rs. 1859647.06. This amount was offered by the assessee itself for
taxation. It appears that the mistake which was added by the Assessing
Officer was to make further deduction of Rs. 1111147.07. This is clear from
the following statement:-
"However A.O. has disallowed further in the following manner:
Total Expenses Debited to P & L A/c
Hospitality 3033633.00
Sales Promotion 535471.06
3569104.13
(Note: Amount of hospitality wrongly taken
as above instead of Rs. 3566178)
Less: Hospitality & States promotion 1859647.06
considered for disallowance by us
___________
Balance also considered as Entertainment by A.O.
1709457.07
Less: 35% attributable towards employee participation 598310.00
Allowed by A.O.
Additional Expenses Considered for disallowance
1111147.07
Note: As would be observed, the
expenses not considered by us are Rs.
1231764 and not Rs. 170945/- as
computed by the AO on erroneous
calculations. As against Rs. 1231764
not considered by us, except for Rs.
130153, the details of which are
presently not available for the rest details
and reasons are given as above."
11. The Income Tax Tribunal found the aforesaid error and thus deleted
this addition. It's a pure finding of fact which relates to calculation of the
amount offered for hospitality and sale promotion expenses as income and,
therefore, no question of law arises.
12. The second question of law which is raised by the revenue is as
under:-
"Whether ITAT was correct in law in deleting the
addition of Rs.7,87,389/- on account of selling
commission?"
13. The genesis of this question of law is rooted in the following factual
back ground. The assessee had claimed deduction amounting to Rs.
70,45,627/- on the ground that this was the amount paid by it as
commission to various agents. Out of this amount, a sum of Rs. 18,59,846/-
was the payment towards Sugar Unit-brokerage to Sugar Artiyas and
there was no dispute about the same. Thus the dispute arose in respect of
balance amount of commission allegedly paid by the assessee i.e. Rs.
51,17,889/-, details of which are as under:-
"Engg. Unit, Naini Rs. 28,938/-
Engg. Unit, Bangalore Rs. 2,90,250/-
Engg. Unit, Mysore Rs. 12,077/-
SPM Division Rs. 44,32,250/-
REBG Division Rs. 2,96,752/-
TSSD, Bangalore Rs. 57,622/- Rs. 51,17,889/-"
14. The Assessing Officer disallowed this payment as the assessee had
failed to produce the confirmation from the various parties to whom this
commission was paid.
15. Before the CIT (A), the assessee could produce the confirmation
letters from one M/s Om Refrigeration Pvt. Ltd. to whom commission of Rs.
41,30,500/- was paid. It also produced confirmation from M/s Pentagon
Sales Corporation to whom commission of Rs. 2,00,000/- had been paid. In
view of this confirmatory letters filed by the assessee, the CIT (A) allowed
the payment of commission to the extent of Rs.41,30,500/- and balance
commission of Rs. 7,87,389/- was disallowed on the ground that it was not
verifiable in the absence of confirmation. The Income Tax Appellate Tribunal
has allowed the balance commission also. A perusal of the order of the
Income Tax Appellate Tribunal would show that the assessee had given all
the relevant details such as names and addresses of the concerned five
agents as well as their GIR numbers before the Assessing Officer and also
the documentary evidence in the form of agreements as well as invoices
issued by the said agents. The Tribunal also took note of the argument of
the assessee that the payment of commission to these agents was made by
account payee cheques. On this basis, the Tribunal was of the view that the
assessee was able to substantiate the payment from relevant documents
and merely because confirmatory letters could not be filed by the assessee
was not a valid ground to reject the claim. We may reproduce the relevant
discussion in the order of the Tribunal on this aspect:-
"After considering the rival submissions and
perusing the relevant material on record, it is
observed that all the relevant details such as names
and addresses of the concerned five agents as well
as their GIR numbers were furnished by the
assessee before the authorities below and even the
documentary evidence in the form of copies of
agreements as well as invoices issued by the said
agents was also filed by the assessee. It was also
pointed out on behalf of the assessee company
before the authorities below that all the payments
on account of commission were paid to the said
agents by account payee cheques and the practice
of availing series of such agents on commission
basis to procure the business prevalent in the trade
was also brought to the notice of the authorities
below. The claim of the assessee of having paid
the commission to the said five agents for the
purpose of its business thus was clearly supported
and substantiated by the relevant evidence and
without finding any fault with the same or without
making any enquiry whatsoever with the concerned
partiers, the Assessing Officer appears to have
made the disallowance of commission amounting to
Rs.51,17,889/- for want of confirmation letters
which was sustained by the learned CIT(A) to the
extent of Rs. 7,87,389/- for the same reasons. In
our opinion, when its claim for expenditure incurred
on account of payment of commission was duly
supported and substantiated by the assessee
company by furnishing the relevant details as well
as by producing the relevant documentary
evidence, there was no justification in the action of
the learned CIT (A) to sustain the disallowance
made by the AO on this count merely because the
confirmation letters of the concerned three agents
could not be filed by the assessee. We, therefore,
delete the disallowance made by the AO and
sustained by the learned CIT (a) on account of
commission expenses and allow ground no.5 of the
assessee's appeal."
16. The Tribunal may be right to the extent that the fact that confirmatory
letters from the parties were not produced could not be a ground to reject
the claim of payment of commission if there was otherwise sufficient
evidence to substantiate and proved that the payment was actually made.
The Tribunal may also be right in observing that the names and addresses
of the concerned agents, their GIR numbers as well as the plea that the
payments were made by account payee cheques could form sufficient
material to substantiate the payment. However, merely by taking note of
this contention of the assessee, the Tribunal could not have itself allowed
the claim of the assessee.
17. As pointed out above, the Assessing Officer did not go into the
veracity of the aforesaid documents produced by the assessee as the
Assessing Officer rejected the claim only on the ground that confirmation
letters were not filed. If that approach of the Assessing Officer was
incorrect, after stating that principle it was incumbent upon the Tribunal to
remit back the matter to the Assessing Officer for proper verification of the
details and the documents which were furnished by the assessee before the
Assessing Officer. In the absence of said exercise and also the satisfaction
about the fact as to whether circumstances were rendered by these agents
or not, claim could not have been allowed straightway. We are, therefore, of
the opinion that in so far as this issue is concerned, matter needs to be
remitted back to the Assessing Officer for verification of the details of
names and addresses of the agents furnished by the assessee including
their GIR numbers and also to verify as to whether payments were made by
account payee cheques and the services were availed of. We make it clear
that the Assessing Officer was not right in rejecting the claim merely
because confirmatory letters were not filed. We also make it clear that if the
assessee is able to prove the genuineness of the aforesaid documents, the
Assessing Officer shall allow the claim.
ITA 236/2008 (Assessment Year 1996-97)
18. Three substantial questions of law are raised in this appeal which are
as under:-
"(i) Whether the ITAT was correct in deleting the
addition of Rs. 4,71,109/- by the Assessing Officer
and disallowing expenditure allegedly incurred by
the Assessee company on gifts and presents?
(ii) Whether the ITAT was correct in law in
deleting the disallowance of Rs. 45,25,002/- made
by the Assessing Officer on account of provisions
made for contribution towards approved gratuity
fund u/S 40A (7) of the Income Tax Act, 1961?
(iii) Whether the ITAT was correct in law in
deleting the addition of Rs. 4,42,27,272/- account
of selling commission?"
19. It is conceded by the learned counsel for the revenue that first
question stands answered against the revenue in ITA 126/2008 which
pertains to the assessment year 1994-95 in respect of the same assessee
and the aforesaid appeal was dismissed by this Court vide orders dated
21.8.2009 holding that no substantial question of law arises.
20. Second question is the same as question no.3 of ITA 280/2008 which
has been answered against the revenue.
21. Third question is the same as question no.2 of ITA 280/2008. This is
also remitted back to the Assessing Officer for conducting the same kind of
verification as directed in ITA 280/2008.
ITA 235/2008 (Assessment Year 1997-98)
22. Following four substantial question of law are proposed in this appeal
by the revenue. The first question is the same as question no.1 of ITA
280/2008 in respect of which it is already opined that this question does not
arise as stands covered by the earlier judgment.
23. In so far as question no.2 is concerned, it is the same as question
no.1 of ITA 236/2008 and is covered by orders dated 21.8.2009 passed in
the ITA 126/2008, in favour of the assessee.
24. Question no.3 as proposed is the same as question no.3 of ITA
280/2008 and is covered by the earlier judgment of this Court as noted
therein. We thus rendered that no such question of law arises.
25. Question no.4 is the same as question no. 2 of ITA 280/2008 and this
question of law is disposed of in terms of same directions as given in
question no.2 of the said appeal.
ITA 258/2009 & ITA 266/2009 (Assessment Year 1998-99)
26. Both these appeals relate to the same assessment year. Though
three questions of law are formulated, all these three questions pertain to
the payment of commission which is the question of law no.2 in ITA
280/2008. The decision therein shall govern these appeals as well.
27. These appeals are disposed of accordingly.
(A.K. SIKRI)
JUDGE
(REVA KHETRAPAL)
JUDGE
AUGUST 5, 2010
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