Madras High Court
The Commissioner Of Income Tax-Ii vs M/S.Pricol Limited (Formerly ... on 2 August, 2021
T.C.A.No.418 of 2009
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 02.08.2021
CORAM :
THE HON'BLE MR. JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE MR. JUSTICE SATHI KUMAR SUKUMARA KURUP
T.C.A. No.418 of 2009
The Commissioner of Income Tax-II,
Coimbatore. ... Appellant
Vs.
M/s.Pricol Limited (Formerly known as
Premier Instruments & Controls Limited),
No.1087-A, Avanashi Road, Coimbatore – 641 037. ... Respondent
Tax Case Appeal preferred under Section 260A of the Income Tax
Act, 1961, against the order of the Income Tax Appellate Tribunal, Madras,
“A” Bench, dated 20.08.2008 in I.T.A.No.260/Mds/2007, Assessment Year
2003-04.
For Appellant : Ms.K.G.Usha Rani
Junior Standing Counsel
For Respondent : Mr.R.Meenakshi Sundaram
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T.C.A.No.418 of 2009
JUDGMENT
(Judgment was delivered by T.S. SIVAGNANAM, J.)
This Tax Case Appeal filed under Section 260-A of the Income Tax
Act, 1961 (“the Act”) is directed against the order passed by the Income Tax
Appellate Tribunal, Chennai “A” Bench, in I.T.A.No.260/Mds/2007 for the
Assessment Year 2003-04.
2.The Revenue is the appellant before us and the appeal was admitted
on 29.06.2009 on the following substantial questions of law :
“1.Whether on the facts and in the circumstance of the
case, the Appellate Tribunal was right in law in setting aside
the order of the Lower authorities, even though the amount
written off was incurred in the course of assessee's business
and it was a capital item shown in the assessee company's
balance sheet?
2.Whether on the facts and in the circumstance of the
case, the Income Tax Appellate Tribunal was right in law in
holding that the security deposit of Rs.6 crores written off as
irrecoverable was a revenue expenditure is valid?”
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3.We have heard Ms.K.G.Usha Rani, learned Standing Counsel for the
appellant/Department and Mr.R.Meenakshi Sundaram, learned counsel
appearing for the respondent/assessee.
4.The assessee is a company which was engaged in the business of
manufacturing Dash Board instruments, sensors accessories, auto
components, etc. The return of income for the Assessment Year under
consideration, AY 2003-04, was processed under Section 143(1) on
10.12.2003, and subsequently, the case was taken up for scrutiny and notice
under Section 143(2) was issued on 13.10.2004. On such scrutiny
assessment, the Assessing Officer pointed out that the assessee had deposited
a sum of Rs.6 Crores as security with M/s.Terra Agro Technologies Ltd. for
leave and license operations to take over the operations of M/s.Terra Agro
Technologies Ltd. for a period of 24 months with effect from January, 2001,
with monthly lease rent of Rs.50 Lakhs. The assessee was able to carry on
the business only for six months, i.e., upto July, 2001 only, and suffered loss
and business could not be continued thereafter. Hence, the assessee wrote
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T.C.A.No.418 of 2009
off the said security deposit paid to M/s.Terra Agro Technologies Ltd. as
irrecoverable security deposit for the previous Assessment Year relevant to
AY 2003-04. The Assessing Officer disallowed the return of income on the
ground that it was not incurred in the course of the assessee's business and it
was a capital item reflected in the assessee's balance sheet. Against such
order, the assessee preferred an appeal to the Commissioner of Income Tax
(Appeals)-I, Coimbatore, who dismissed the appeal by order dated
01.12.2006. Aggrieved by the same, the assessee preferred an appeal before
the Tribunal, which has been allowed by the impugned order.
5.The Tribunal, in our considered view, has done thorough factual
exercise as to the nature of business activities of the appellant and this has
been brought out by the Tribunal in Para No.16 of the order, the operative
portion of which, reads as follows :
“16. ... As per the details mentioned in the assessment
order, the assessee suffered a loss of more than Rs.1.19 Crores
within 6 months of the operation taken over by the assessee. It
is clear that if the assessee continued the business, the assessee
had to pay at least Rs.12 Crores as license fee for the entire 24
months license term and at least Rs.5-6 Crores more loss
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T.C.A.No.418 of 2009
incurring as the operations under the leave and license for
dehydrated vegetables. The lower authorities have not disputed
the details regarding income and expenditure furnished by the
assessee. But, the A.O. has concluded that since the security
deposit is in the nature of capital, the same cannot be allowed
as revenue expenditure or business loss. Even the A.O. has not
disputed the genuineness of transaction between the parties
through the said agreement. We further note that when the
income and expenditure from the business was accepted by the
revenue authorities for the earlier years, then treating the
business activity of dehydrated vegetables as a separate and
discontinuation the business of the assessee is not a correct
view taken by the lower authorities when the assessee has
considered both business activities as its business and offered
the income and expenditure for the earlier years which was
accepted, then in the circumstances in which the continuation
with the operations was not possible for the assessee and the
assessee has taken the decision to discontinue the dehydrated
vegetables operations to avoid further loss, it cannot be termed
as closing or discontinuation of its business. As per the terms
of the agreement, the assessee was to continue with operations
for at least 24 months. But, when the assessee has discontinued
the operation before the expiry of terms of the agreement, that
would certainly disentitle the assessee for claiming the security
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T.C.A.No.418 of 2009
deposit which was made for performance of its obligation
under the agreement. Therefore, even otherwise, on the
foreclosing of the agreement by the assessee before the expiry
of its terms made the assessee disentitled from recovering the
deposit and the same stands forfeited in view of the terms and
conditions of the agreement. Though there is no such term
about the forfeiture but when assessee agreed to have no right
to terminate the agreement before the expiry of terms, then the
violation of the said condition automatically led to forfeiture of
the security. In these facts and circumstances, we have no
hesitation to hold that the security deposit made by the
assessee was for the purpose of business of the assessee. The
said business for getting the licence to run the operations was
only for 24 months - means that the assessee did not acquire
any capital asset of permanent nature by depositing such a
security or for a capital asset having enduring benefit of
permanent nature. Even the assessee has discontinued the
operations before the expiry of the terms of the agreement and
suffered loss in the shape of non-recovery of security deposit,
the same would be a business loss of the assessee and
allowable under Section 37 of the Act. It is an undisputed fact
that as per the Memorandum of Association of the assessee-
company, apart from other business, the business of
preservation, dehydration, freeze-drying, etc. and dealing with
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T.C.A.No.418 of 2009
export, import handle as a principal or as an agent of all kinds
of agro products with further objects of the company vide
amendment made by the assessee-company in the meeting held
on 10.5.1995 and confirmed by the Company Law Board on
18.12.95. Therefore, any expenditure made by the assessee to
carry out the business as per the objects of the assessee-
company would be treated as business expenditure of the
assessee.”
6.From the facts noted by the Tribunal as mentioned above, while
granting relief to the assessee by treating the expenditure as business
expenditure, the Tribunal took note of the fact that the Assessing Officer and
the Commissioner of Income Tax (Appeals) have not disputed the details
regarding the income and expenditure furnished by the assessee and the
Assessing Officer only concluded that, since the security deposit is in the
nature of a capital expenditure, the same cannot be allowed as a business
loss. Though the Commissioner of Income Tax (Appeals) had rendered a
finding that the transaction itself was a sham transaction, the Tribunal rightly
noted that the Assessing Officer has not disputed or doubted the genuineness
of the transaction. Furthermore, the Tribunal noted that the income and
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T.C.A.No.418 of 2009
expenditure from business was accepted by the Revenue authorities for the
earlier years treating the business activity of dehydrated vegetables as a
separate and discontinuation of the business of the assessee, is not a correct
view taken by the authorities when the assessee has considered both the
business activities as its business and offered the income and expenditure for
the earlier years, which was accepted.
7.In the light of the factual conclusion arrived at by the Tribunal, we
find there is no question of law much less substantial question of law arising
for consideration. Accordingly, the appeal filed by the Revenue is
dismissed. No costs.
(T.S.S., J.) (S.S.K., J.)
mkn 02.08.2021
Internet : Yes
Index : Yes / No
Speaking order / Nonspeaking order
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T.C.A.No.418 of 2009
To
1.The Income Tax Appellate Tribunal,
Chennai, “A” Bench.
2.The Commissioner of Income Tax-II,
Coimbatore.
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T.C.A.No.418 of 2009
T.S. SIVAGNANAM, J.
and
SATHI KUMAR SUKUMARA KURUP, J.
mkn
Tax Case Appeal No.418 of 2009
02.08.2021
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