Ita/90/2012 Of Parisons Milling Company Pvt Ltd v. Commissioner Of Income Tax,Central Revenue Building

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON FRIDAY ,THE 18TH DAY OF JANUARY 2019 / 28TH POUSHA, 1940 ITA.No. 90 of 2012 AGAINST THE ORDER/JUDGMENT IN ITA NO.22/2010 OF I.T.A.TRIBUNAL, COCHIN BENCH DATED 06.01.2012 APPELLANT/S: PARISONS MILLING COMPANY PVT LTD6/1183, CHEROOTTY ROAD, KOZHIKODE. BY ADVS.SRI.P.GOPINATH (SR.)SRI.M.GOPIKRISHNAN NAMBIARSMT.PREETHA S.NAIRSRI.K.JOHN MATHAISRI.P.BENNY THOMAS RESPONDENT/S: COMMISSIONER OF INCOME TAX,CENTRAL REVENUE BUILDING,I S PRESS ROAD, KOCHI-682018. OTHER PRESENT: SRI PKR MENON, SR COUNSEL FOR GOI TAXESSRI JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 18.01.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: JUDGMENT Ashok Menon, J. The assessee is in appeal before us challenging theorder of the Income Tax Appellate Tribunal, CochinBench in I.T.A.No.22/(Coch)/2010 dated 06.01.2012 atAnnexure C, relating to assessment year 2006-07. 2.The challenge pertains to the addition ofRs.23,19,547/- by the Assessing Officer (A.O.) atAnnexure A, on the ground that the said payment is notrelated to the business of the assessee, which onchallenge, before the Commissioner of Income Tax(Appeals) was sustained vide Annexure B. The Tribunaltoo dismissed the appeal concurring with the finding ofthe A.O. and CIT (Appeals). 3.The question of law that arises for consideration, as re-framed by us, are thus: i)Whether the Tribunal was justified in comingto the conclusion that the expenditureclaimed by the appellant is not by way ofcommercial expediency ? ii) Whether the Tribunal was justified indisallowing the expenditure claimed by theassessee on the ground that it was not wholly and exclusively for the purpose ofthe business ? 4.The assessee-company is involved in the business of manufacturing of wheat products. Though it had not started commercial production during thesubject year, it has indulged in the activity oftrading in wheat during the period. It procured wheatfrom a company named M/s Cargill India Pvt.Ltd., atrading company. The contract for purchase was notwith the assessee, but with its sister concern, namely,M/s Parisons Estate and Industries Pvt.Ltd. (PEIPL).It so happened that PEIPL could not lift the contracted quantity of wheat in full, and part of it, was therefore, lifted by the assessee. M/s Cargill IndiaPvt.Ltd. debited the warehousing and other connectedexpenses incurred in pursuance of the supply contractin the name of PEIPL; which in turn was passed over tothe assessee. 5.A sum of Rs.23,19,547/- expended by the assessee was directly connected with the quantitypurchased as per the agreement. The assessee would therefore, contend that there is justification in claiming the aforesaid amount as expenditure, being thepenal charges raised in the debit note by M/s CargillIndia Pvt.Ltd., the supplier. 6.The A.O. observed that the assessee had notentered into any agreement with the supplier andtherefore, concluded that the penal charges referred toabove was not a liability relating to the business ofthe assessee and therefore disallowed it. The CIT (Appeals) also concurred with the finding of the A.O. 7.In appeal before the Tribunal, it was attempted tobe impressed upon by the assessee that the claim was genuine and properly accounted for. The argument raised by the Revenue was that the expenditure does notpertain to the assessee and was not its liability. Theassessee therefore, could not claim that amount asexpenditure. It is pointed out that as per Annexure Dagreement, which is between the supplier M/s CargillIndia Pvt.Ltd. and PEIPL, there was a penal clause at3.9.3, 3.9.4 and 3.9.5 pertaining to warehousing (Appeals) also concurred with the finding of the A.O. 7.In appeal before the Tribunal, it was attempted tobe impressed upon by the assessee that the claim was genuine and properly accounted for. The argument raised by the Revenue was that the expenditure does notpertain to the assessee and was not its liability. Theassessee therefore, could not claim that amount asexpenditure. It is pointed out that as per Annexure Dagreement, which is between the supplier M/s CargillIndia Pvt.Ltd. and PEIPL, there was a penal clause at3.9.3, 3.9.4 and 3.9.5 pertaining to warehousing charges, etc. The fact that the assessee also liftedsome amount of goods supplied and that PEIPL had passed on the debit note to the assessee is not a reason forthem to honour the debit note and claim that amount asexpenditure. 8.In view of the fact that there is no contractual agreement between the assessee and thesupplier, nor is there any agreement between the PEIPLand the assessee, they could not have compelled the assessee to meet the said liability. The Tribunal agreed with the contention raised by the Revenueholding that the trading transaction is an independentone and that the penal charges is something agreed uponto be paid by the associate company of the assessee andthat there was no contract, whatsoever, between theparties to Annexure D agreement and the assessee. Asthere was no contractual obligation on their part todischarge such amount, there was no commercialexpediency in incurring the same. 9.Heard the learned Counsel for the appellant,and the learned Senior Counsel, Government of India(Taxes). 10. The question that arises before us is whether there was justification in the authorities disallowingthe amount that is claimed by the assessee asexpenditure incurred wholly and exclusively for thepurpose of the business. 11. The learned Counsel appearing for the assesseerelies on the decision in Catalysts and Chemicals India (West Asia) Limited v. C.I.T., [1987] 166 ITR 769 insupport of their arguments. A Division Bench of thisCourt had in the aforesaid decision held as thus: “The learned counsel for the Revenue, however,submitted that in the absence of a writtenagreement between Coromandel Fertilizers andtheassessee-company,authorisingtheassessee-company to spend the amount inquestion, the expenditure cannot be treated asone allowable on the basis of commercialexpediency. We are of the view that theargument in the light of the principlesemerging from the decisions of the SupremeCourts liable to be rejected. As alreadynoted, a sum of money expended not ofnecessity and with a view to an immediatebenefit to the trade but voluntarily and onthe grounds of commercial expediency and notincurred for fostering business of another orwith some improper or oblique purposes, willbe treated as money expended wholly andexclusively for the purpose of the trade. Itappears to us that the facts found by theTribunal bring the payment in question withinthe description mentioned above. We do not find any way to interfere with the conclusionsof the Tribunal based on the findings whichhave become final.” 12. We are of the opinion that this decision citedabove by the assessee in support of their argument isnot identical on facts and according to us would notstraight away, apply it to the facts and circumstancesof the case in hand. In the above cited case, the assessee-company had an agreement with a foreign Company, a Colloborator for supply of catalysts.Pursuant to an agreement of supply by the Colloboratorto one Coromandel Fertilizers, the assessee-company hadvolunteered to bear the freight and customs duty forthe catalysts supplied and returned on grounds of the quality standards having not been met. In a subsequent find any way to interfere with the conclusionsof the Tribunal based on the findings whichhave become final.” 12. We are of the opinion that this decision citedabove by the assessee in support of their argument isnot identical on facts and according to us would notstraight away, apply it to the facts and circumstancesof the case in hand. In the above cited case, the assessee-company had an agreement with a foreign Company, a Colloborator for supply of catalysts.Pursuant to an agreement of supply by the Colloboratorto one Coromandel Fertilizers, the assessee-company hadvolunteered to bear the freight and customs duty forthe catalysts supplied and returned on grounds of the quality standards having not been met. In a subsequent transaction with the assessee the CoromondalFertilizers claimed set off of the customs duty &freight relating to the goods returned. The A.O.declined the claim of business expenditure on thepremise that it had no connection with the business ofthe assessee and was not incidental to its business.The principle of commercial expediency was succinctly stated by the Division Bench, following a decision of the Supreme Court, in the following words: “The law applicable in such circumstancesis well settled as is seen from the decisionsof the Supreme Court in Eastern InvestmentsLtd v. CIT, [1951] 20 ITR 1 and CIT v.Chandulal Keshavlal & Co.,[1960] 38 ITR 601and Sasoon J.David and Co.(P) Ltd. v. CIT,[1979] 118 ITR 261. Viscount Cave L.C. in Atherton v. BritishInsulated & Helsby Cables Ltd. [1925] 10 TaxCas 155 (HL), has stated thus (at page 191): “It was made clear in the above citedcases of Usher's Witshire Brewery v. Bruce[194] 6 Tax Cas 399 and Smith v. IncorporatedCouncil of Law Reporting [1914] 6 Tax Cas 477that a sum of money expended, not of necessityand with a view to a direct and immediatebenefit to the trade, but voluntarily and onthe ground of commercial expediency, and inorder indirectly to facilitate the 'carryingon of the business, may yet be expended whollyand exclusively for the purposes of the trade;.....”This observation has been noted withapproval by the Supreme Court and, therefore,the said observation is also relevant in thecontext. The principles deducible from theserulings are: The payment made or expenditureincurred, though not of necessity and with aview to a direct and immediate benefit to thetrade, but voluntarily and on the grounds ofcommercial expediency and principles ofordinary commercial trading and in orderindirectly to facilitate the carrying on ofthe business will be treated as money expendedwholly and exclusively for the purpose of thetrade. It is immaterial even if a third partyalso benefits thereby. However, the claim will be disallowed if the expenditure wasincurred to foster the business of anotheronly or was “made by way of distribution ofprofits or was wholly gratuitous or for someimproper or oblique purpose outside the courseof business”. This Court agreed with the Tribunal's view that it was sufficient to show that the expenditure was one madevoluntarily and on grounds of commercial expediency, inorder to facilitate the carrying on of the business andthere was no need to establish a necessity or animmediate, direct benefit. There the assessee was acollaborator of the foreign supplier and Coromandal wasexpected to be the assessee's customer. 13. In the instant case, may be, PEIPL was a sisterconcern, or an associate concern of the assessee, butthe assessee did not have any privy to Annexure Dagreement, which was between M/s Cargill India Pvt.Ltd.and PEIPL. It cannot therefore be said that theexpenditure was incurred by the assessee for thepurpose of their business. The authorities werejustified in disallowing the expenditure and we find noreason to interfere with the concurrent finding of theappellate authorities. The questions of law are 13. In the instant case, may be, PEIPL was a sisterconcern, or an associate concern of the assessee, butthe assessee did not have any privy to Annexure Dagreement, which was between M/s Cargill India Pvt.Ltd.and PEIPL. It cannot therefore be said that theexpenditure was incurred by the assessee for thepurpose of their business. The authorities werejustified in disallowing the expenditure and we find noreason to interfere with the concurrent finding of theappellate authorities. The questions of law are answered in favour of the Revenue. The appeal standsrejected. No order as to costs. Sd/-K.VINOD CHANDRANJUDGE dkr Sd/-ASHOK MENONJUDGE APPENDIX PETITIONER'S/S EXHIBITS: ANNEXURE -A TRUE COPY OF THE ASSESSMENT ORDER DATED19/12/2008 FOR 2006-07 ISSUED BY THE INCOMETAX DEPARTMENT TO THE APPELLANT. ANNEXURE - B TRUE COPY OF THE ORDER DATED 28/10/2009ISSUED BY THE COMMISSIONER OF INCOME TAX(APPEALS) TO THE APPELLANT. ANNEXURE - C TRUE COPY OF THE TRIBUNAL ORDER DATED06/01/2012 ISSUED TO THE APPELLANT. ANNEXURE - D TRUE COPY OF THE AGREEMENT DATED 01/03/2005BETWEEN THE APPELLANT'S SISTER CONCERNPARISONS ESTATES AND INDUSTRIES LTD., WITHTHE CARGILL INDIA PVT. LTD.