Ita/266/2013 Of The Commissioner Of Income Tax v. M/S Bharat Fritz Werner Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 9 DAY OF FEBRUARY 2071.PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’‘’BLE MR. JUSTICE NATARAJ RANGASW A BETWEEN: ILT.A. NO.266 OF 2013 1.|THE COMMISSIONER OF INCOME-TA® C.R. BUILDING, QUEENS ROAD BANGALORE. 2.|THE JT. COMMISSIONER OF INCOME-TAX (OSD)CIRCLE-11(2), RASHTROTHANA BHAVANCIRCLE-11(2), RASHTROTHANA BHAVAN NRUPATHUNGA ROAD, BANGALORE. .., APPELLANTS~ (BY SRI. K.V. ARAVIND, ADV.,) AND* M/S. BHARAT FRITZ WERNER LITD.,OFF: TUMUKUR ROADYESHWANTHPUR P.O.BANGALORE-5600727. ~. RESPONDENT (BY SRI. T. SURYANARAYANA, ADV.) THIS I.T.A. IS FILED UNDER SEC. J6O0-A OF INCOME TAXACT 1961, ARISING OUT OF ORDER DATED 21.12.2012 PASSEDIN ITA NO.1185/BANG/2011 AND 1123/BANG/2011 FOR THE.ASSESSMENT YEAR 2008-09, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW,STATED THEREIN. | (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER.PASSED BY THE ITAT, BANGALORE IN ITA NO.1185/BANG/2011— AND 1123/BANG/2011 DATED 21.12.2012 AND CONFIRM THEORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE.ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX,CIRCLE-11(2), BANGALORE AND SET ASIDE ORDER IN ITA.NO.1123/BANG/2011CONFIRMINGTHE|ORDER|OF.THEAPPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED|BY THE ASSESSING OFFICER, BANGALORE. THIS I.T.A. COMING ON FOR’ HEARING, THIS’ DAY, | ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short).Nas been filed Dy the revenue. The subject matter ofthe appeal pertains to the Assessment Year 2008-09.The appeal was admitted by a Bench of this Court videorder dated 24.03.2014 on the following substantial|questions of law:| “(1)Whether the Tribunel wes|correct in holding that the write off ofexpenditure on purchase of tools has to beallowed as revenue expenditure, when theexpenditure was towards purchase of toolsconstituting|capitalandrecordeddperverse finding? (il)Whether the Tribunal wes|correct in holding that there is no nexusbetween the interest bearing funds andtheInterest.free.advances,|thepresumption to be drawn is that theadvances are out of non-interest bearingfunds without taking into considerationthat the assessee is paying huge financialChargesOf)theloanborrowals|and|recorded a perverse finding? (111)Whether the Tribunel on the|facts and circumstances of the case wascorrect in directing the Assessing Officer toallowtheSalariesdSal)allowableexpenditure without appreciating the factthat the salaries to the employees aretowards R & D for creating own design andtherefore it Is not in the nature of revenueexpenses? (iv)WhethertheAppellateAuthorities were correct in holding that thedepositofpropertytaxamountsioncrystallized liability without appreciatingthe difference between the taxes actuallypaid under Section 43B of the Act and taxes deposited as per the directions ofthe Court, when the TIiability to tax isdisputed by the assessee and recorded aperverse finding?’. 2. Facts leading to filing of this appeal brieflystated are that the assessee is a company which isengaged in the business of manufacture and sale of.machine tools. For the Assessment Year 2008-09, the)assessee filed its return of income declaring the incomeof Rs.27,56,74,120/-. The return was selected for.scrutiny and Assessing Officer, by an order dated|10.17.7010|inter aliadisallowed the claims made by theassessee with regard to the write off of expenditurerelating to loose tools, disallowance of interest on the.loans|given.CO.sisterCONCePnNnsdisallowanceOF expenditure debited under the head ‘design charges anddisallowance of expenditure claimed under Section 43B.of the Act. The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals), who. 2. Facts leading to filing of this appeal brieflystated are that the assessee is a company which isengaged in the business of manufacture and sale of.machine tools. For the Assessment Year 2008-09, the)assessee filed its return of income declaring the incomeof Rs.27,56,74,120/-. The return was selected for.scrutiny and Assessing Officer, by an order dated|10.17.7010|inter aliadisallowed the claims made by theassessee with regard to the write off of expenditurerelating to loose tools, disallowance of interest on the.loans|given.CO.sisterCONCePnNnsdisallowanceOF expenditure debited under the head ‘design charges anddisallowance of expenditure claimed under Section 43B.of the Act. The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals), who. by an order dated 10.12.2010, allowed the expenditureas Claimed by the assessee under Section 43B of the Act.and partly allowed the appeal. Being aggrieved by the|aforesaid order, the assessee as well as the revenue.preferred the appeals before the Income Tax AppellateTribunal (hereinafter referred to as ‘the Tribunal’ forshort). The Tribunal, by an order dated 21.12.2012,partly allowed the appeal preferred by the assessee and.dismissed the appeal preferred by the revenue. In theaforesaid factual background, the revenue Nas preferredthis appeal. 3. Learned counsel for the revenue submitted tnat|the assessee nad failed to establisn tnat tools wnicn|were purcnased by it were used in the activity ofmanufacture and therefore, the Assessing Officer had|rightly disallowed the claim. However, the Tribunal Nas|allowed the claim of the assessee with regard to writeoff of expenditure relating to loose tools only on the ground that it is not revenue in nature but is capital in|nature which is factually incorrect as it is not the reason.recorded by the Assessing Officer. It is furthersubmitted that the burden was on the assessee to prove.that the amount was expended for the business which.the assessee in the facts of the case, has failed todischarge. Learned counsel for the revenue has further|submitted that the burden is on the assessee to provethe fact that the interest free loan whicn was given to.the sister concerns was from the assessee's own funds.However, the assessee has failed to discharge the|aforesaid burden and the aforesaid aspect of the matterNas not been appreciated by the Tribunal. It is also.urged that the salaries were paid by the assessee to itsemployeesWNnoWeTeEinvolvedIn|researcnanadevelopment and therefore, the commercial rights were|acquired by the assessee and the amount of salaries.which were paid to its employees towards research and.development activities was for the purpose of acquiring: the intangible asset and therefore, the same was rightly|treated as capital in nature by the Assessing Officer.However, the Tribunal, without assigning any reasons,|has held that the salaries of the employees of theassessee engaged in research and development are|revenue in nature. It is also submitted that the purposeof expenditure has to be looked into and purpose of.payment of money was to clear an intangible asset and.any expenditure incurred for intangible asset is capital in.nature. | 4. It is also urged that the benefit of deduction|Under Section 43B of tne Act Is available to an assesseeon actual payment. In this connection, our attentionNas been invited to paragraph 8 of the order passed bythe Assessing Officer as well as paragraph 29 of the|order passed by the Tribunal. It is submitted that theTribunal ought to nave appreciated tnat the liability in.the instant case is not crystalised as the assessee itself 4. It is also urged that the benefit of deduction|Under Section 43B of tne Act Is available to an assesseeon actual payment. In this connection, our attentionNas been invited to paragraph 8 of the order passed bythe Assessing Officer as well as paragraph 29 of the|order passed by the Tribunal. It is submitted that theTribunal ought to nave appreciated tnat the liability in.the instant case is not crystalised as the assessee itself was disputing the liability. It is further submitted that|the amount of Rs.37,50,000/- which was deposited by.the assessee, was subject to decisions of this Court andan amount would crystalise when the litigation ends andthe payment is made. In support of aforesaidsubmission, reliance has been placed on the decisions of.the"'BHARATHBEEDIWORKS(P)|LTD.Vs.ADDITIONAL COMMISSIONER OF INCOME-TAX,|RANGE-2, MANGALORE (2016) 74 TAXMANN.COMO5(KAR),'CHALLAPALLITSUGARSLTD.Vs.COMMISSIONER OF INCOME-TAX' (1975) 98 ITR167 (SC), ‘TUTICORIN ALKALI CHEMICALS &FERTILIZERSLTD.Vs.COMMISSTONER|OF|INCOME-TAX(1997)93|[TAXMAN502(SC),‘COMMISSIONEROFINCOME-TAX,CENTRALCIRCLE, BANGALORE Vs. L.SAMBASHIVA REDDY(2015)62TAXMANN,.COM1/4(KAR)AND‘COMMISSIONER OF INCOME-TAX-II Vs. MODIPON|LTD. (2017) 87 TAXMANN.COM 275 (SC). 5. On the other hand, learned counsel for the|assessee submitted that the revenue did not dispute theexpenditure incurred by the assessee and the claim ofthe assessee for deduction was not under Section 32|and therefore, it was not necessary for the assessee to.prove that the tools which were purchased by theassessee were used in the manufacturing activity. It is|further submitted that the claim for deduction of tne!assessee was under Section 372 and the assessee hadproved that it had expended the amount for the purposeof business which fact was not disputed by the revenue.Our attention Nas also been invited to paragraph 11 ofthe order of the Tribunal where the submission of the|assessee has been recorded that the assessee had|furnished the CD containing the details at the time of hearing to the Assessing Officer. It is also submitted|that for the past 14 years, the claim of the assessee forwrite off of expenditure relating to tools was followed. with consistency and therefore, bearing in mind the|principle of consistency, the same ought to have been.allowed for the relevant Assessment Year in question. Itis further submitted that whether the assessee is able to.establish that it has its own funds and interest free loans|are given to the sister concerns, then the burden shifts|on the revenue to show that advances were given fromthe borrowed funds. In this connection, our attention.Nas been invited to ground 3(il) of the grounds takenbefore the Commissioner and it has been pointed outthat the assessee has its own funds to the tune otfRs.125 crores whereas it had advanced only a sum of.Rs.64,00,000/- as advances to interest free loans to its)sister concerns. It Is also pointed out that similarSUDMISSIONS were made pefore the Tribunal wnhnicn irecorded in paragraph 16 of the order and the aforesaidfactWaSNoTdisputedbythedepartmentalrepresentative before the Tribunal. It is also pointed outthat in case the assessee has its own funds, the legal presumption arises that the assessee has advancedinterest free loans to its sister concerns from its own.funds and therefore, the question of discharging the|Onus does not arise. It is further submitted that the|nature of expenditure has to be determined in order to.decide whether the same is revenue or capital in nature.In this connection, our attention has been invited to.paragraph 22.1 of the memorandum of appeal which.was filed before tne Commissioner of Income Tax'(Appeals) in which it is pointed out that a sum of.Rs.1,31,05,337/- was paid by the assessee on account.of salaries due to the employees and only a sum of.Rs.40,00,000/- was paid to a Singapore Company which.was Its subsidiary concern. presumption arises that the assessee has advancedinterest free loans to its sister concerns from its own.funds and therefore, the question of discharging the|Onus does not arise. It is further submitted that the|nature of expenditure has to be determined in order to.decide whether the same is revenue or capital in nature.In this connection, our attention has been invited to.paragraph 22.1 of the memorandum of appeal which.was filed before tne Commissioner of Income Tax'(Appeals) in which it is pointed out that a sum of.Rs.1,31,05,337/- was paid by the assessee on account.of salaries due to the employees and only a sum of.Rs.40,00,000/- was paid to a Singapore Company which.was Its subsidiary concern. 6. While referring to the third substantial questionof law, it is pointed out that the revenue has onlyquestioned the claim of the assessee in respect of an.amount of Rs.1,31,05,337/- and not on account of procuring the design for an extent of Rs.61,00,000/-|while making a reference to paragraph 19a and 22 of.the order passed by the Tribunal. It is contended thatthe matter has been remitted to the Assessing Officer to verify the claim of the assessee and thereafter, to decidethe entitlement of the assessee to claim deduction. It Iis'also urged that the judgments with regard to third|substantial question of law relied on by the revenue do.not apply to the fact situation of tne case as tneaforesaid judgment relate to prior legal expenses|whereas the assessee has incurred the expenses afterthe business commenced. It Is contended that the'§assessee adopted the merchantile system of accounting:and expenditure is incurred and then subsequently, it is.crystalised. It is further submitted that the dispute in.the instant case, is not with regard to liability of the|assessee but quantification of the amount. It is furtherSubmitted that the assessee is entitled to deduction|Under Section 43B of the Act as tne amount wnicn Is. deposited is in the nature of the tax and the liability is.crystallised as soon as the Bruhat Bengaluru MahanagaraPalike had issued the notice but the amount has not.been ascertained. In this connection, our attention has|been invited to paragraphs 16 and 19 of the order|passed by the Commissioner of Income Tax (Appeals)and the Tribunal. In support of aforesaid submission,reliance has been placed on the decisions of the‘COMMISIONER OF INCOME-TAX, LUDHIANA Vs.METAILMANAUTO(P)|LTD.’|(2011)17TAXMANN,.COM51|(PUNJAB&|HARYANA),'RADHASOAMI SATSANG Vs. COMMISSIONER OF.INCOME-TAX (1992) 60 TAXMAN 248 (SC), THECOMMISSIONER OF INCOME TAX & ANR. Vs. M/s.BRIGADE ENTERPRISES LTD. IN ITA NO.373/2014DECIDED ON 22.10.2020, ‘COMMISSIONER OFINCOME TAX, CENTRAL CIRCLE, BANGALORE Vs.BRINDAVAN BEVERAGES (P) LTD. (2017) 88&TAXMANN,.COM4 f/(KAR),"HINDUSTAN AERONAUTICS|LIMITEDVs.ASSISTANTCOMMISSIONER OF INCOME TAX & ANR.' IN ITA|NO.404/2016 C/W ITA NO.468/2016 DECIDED ON09.12.2020,'BHARATEARTHMOVERSYs.COMMISSIONER OF INCOME-TAX' (2000) 112TAXMAN 61 (SC), “KEDARNATH JUTE MFG. CO. LTD. Vs. COMMISSIONER OF INCOME-TAX (CENTRAL),|CALCUTTA’(1971)82ITR36.3(SC)AND‘COMMISSIONER OF INCOME-TAX Vs. MODIPON|LTD. & ANR. (2018) 400 ITR 1 (SC). 6. We have considered the submissions made onpoth sides and nave perused the record. We mayproceed to deal with the substantial questions of law adseriatum. So far as the claim of the assessee for write|off of expenditure relating to loose tools, the Assessing|Officer has disallowed the claim for expenditure of theassessee amounting to Rs.4,41,08,588/- on the groundthat despite opportunity being given, the assessee hasfailed to produce tne complete details of the materials. 6. We have considered the submissions made onpoth sides and nave perused the record. We mayproceed to deal with the substantial questions of law adseriatum. So far as the claim of the assessee for write|off of expenditure relating to loose tools, the Assessing|Officer has disallowed the claim for expenditure of theassessee amounting to Rs.4,41,08,588/- on the groundthat despite opportunity being given, the assessee hasfailed to produce tne complete details of the materials. received including inventory of materials, date, time anddelivery of the loose tools. The assessee company has—also failed to produce the material receipt register.|Though it has been contended by the assessee before|the tribunal as recorded in parall of the order passedby the tribunal that assessee had produced the C.D.containing the details as requested by the Assessing|Officer at the time of hearing. However, the tribunal Nas|not recorded any finding witn regard to aforesaidcontention of the assessee and in para 14 has recordedthe finding in favour of the assessee. In view of the|reasoning assigned by the Assessing Officer in his order|for disallowing the claim and in view of the assertion.made by the assessee that it nad furnisned the details,the tridunal ougnt to Nave ascertained whether or notthe assessee had furnished the details as contended byhim. Therefore, in our opinion the matter requires.adjudication afresh by the tribunal so far as first substantial question of law is concerned. Therefore, thefirst substantial question of law is answered accordingly.7So far as second substantial question of lawis concerned, the Assessing Officer in his order has heldthat the assessee Nas given interest free loan to two of its subsidiaries company and the aforesaid amount was.paid from the borrowed funds. The assessee once again|has contended before the Commissioner of Income Tax.(Appeals) as is evident from para 3(ii) of the orderpassed by the tribunal that the assessee’s own funds.were Rs.124 Crores whereas, the loan advanced is to.the tune of Rs.64 Crores. However, in this regard also,we find that the tribunal has not recorded the anyfinding whether or not the interest free loans were given.from the borrowed funds or from the assessee's own|funds. Therefore, the aforesaid issue also requires.adjudication afresh by the tribunal. Accordingly, thesecond substantial question of law is answered. 8 _So far as third substantial question of law isconcerned, the tribunal has directed the Assessing.Officer to verify the claim of the assessee whether an.amount of Rs.1,31,05,337/- towards salaries is paid to.the employees and if it is found to be correct, the same.has to be allowed. Therefore, in view of the order of)remand, the substantial question of law as framed by.this court in fact, does not arise for consideration at this.stage. oiSo far as last substantial question of law isconcerned, from perusal of Section 43B of the Actprovides that any sum payable by way of tax, duty, cess.or fee shall De allowed in the year in wnich it is actuallypaid. It is not in dispute that on account of directions.issued by the court, the assessee paid a sum of.Rs.8/7,50,000/- towards property tax. Therefore, theassessee is entitled to deduction to tne extent otfproperty tax which was paid by it. The Commissioner of.Income Tax (Appeals) appeal as well as the tribunal have rightly held that the liability was certain and Nas|rightly deleted the disallowance. Reference in thisconnection may be made to decision of the Supreme.Court in BHARAT EARTH MOVERS supra. Therefore, thefourth substantial question of law is answered against|the revenue and in favour of the assessee. have rightly held that the liability was certain and Nas|rightly deleted the disallowance. Reference in thisconnection may be made to decision of the Supreme.Court in BHARAT EARTH MOVERS supra. Therefore, thefourth substantial question of law is answered against|the revenue and in favour of the assessee. In view of preceding analysis, the order of thetribunal dated 21.12.2012 insofar as it contains findings|with regard to substantial questions of law 1 and 2 is|hereby quashed and the matter is remitted to thetribunal to decide the aforesaid issues arising from.substantial question of law No.1 and 2 afresn. Needless.to sate that it will De open for the parties to raise allsucn contentions, which are admissible to them under.the law. �"*��� %������������#������������������������ ����������������������