Naraingarh Sugar [Mills ][Ltd v. Commissioner [Of ][Income Tax

IN THE HIGH ?t +ITA 5l OF 2011ITA 52 0F 2011rTA 58 0F 2011 Juclgment Reserved [On: I2-09.201I]Jatlgment Pronounced [On ][: ][3 ][0.9.20 ] [I] ITA sl oF 2011(1) . . . APPELLANT NARAINGARH SUGAR [LTD.] Through : Mr. C.S. [Aggarwal, Sr. ][Advocate ][with ][Mr']Prakash Kumar, [Advocate.] VERSUS . ..RESPONDENTAggarwal, Sr.Standing COMMISSIONER ItrrgUgb. [Ms. ][Suruchi]Counsel. ITA s2 oF 2011(2) [ [LTD.]][[LTD.]]. . . APPALLANTThroueh : Mr. C.S. [Aggarwal, ][Sr' ][Advocate ][with ][Mr']Prakash Kumar" Advocate'Throueh : Mr. C.S. [Aggarwal, ][Sr' ][Advocate ][with ][Mr']Prakash Kumar" Advocate' NARAINGARH SUGAR [ [LTD.]][[LTD.]] VERSUS COMMISSIONER . . .RI]SPONDENT 'I'hroush: Ms. Suruchi Aggarwal, Sr'StandingCounsel. ITA Nos.51,52, & 58 [of ][2011] Page 1 of 2 Digitally Signed By:AMULYACertify that the digital file andphysical file have been compared andthe digital data is as per the physicalfile and no page is missing. ITA s8 oF 201r(3) NARAINGARH [LTD. ] . . . APPELLANT Through : Mr. C.S. [Aggarwal- ][Sr' ][Advocate ][with ][Mr']Prakash Kumar. [Advocate'] VERSUS COMMISSIONER . . .RESPONDENT Ms. Suruchi [Aggarwal' ][Sr'Standing]Through: Counsel. CORAM:- HON'BLE MR. JUSTICE [A.K. SIKRI]HON'BLE MR. JUSTICE l. whether Reporters [of ][Local ][newspapers ][may ][be ][allowed]to see the Judgment?2. To be referred [to the Reporter or ][not'l]3. whether the Judgment [should be ][reported ][in ][the Digest?] A.K. SIKRI. [J.] l. For orders. see ITA [57l20ll ][-] SEPTEMBER [30,2011]skb ITA Nos.51,52, & 58 [of ]2011 t/ffi4r- Y [sr]t---'-'-F- [--- ][|](A.K.SIKRI)JUDGE t .l /lc\' -- \-- (SIDDHARTH MRIDUL)JUDGE Page 2 of 2 . IN THE HIGH COURT OF DEI.HI AT NEW DEI,I{I + ITA 57 OF 2011ITA sL 0F 2011ITA s2 0F 2011ITA 58 0F" 20L1 Judgment Reserved On: 12.09.201IJudgment Pronotutced On:30.9.2011 % (1) rTA s7 OF 20L1 NARAINGARHSUGARMILLSLTD. I ...APPI'LI-ANT 'lhrough : iVIr. C.S. Aggarwal, *. Oduo.atc with Mr.Prakash l(umar. Advocate.Prakash l(umar. Advocate. t VERSIJS COMMISSIONER OF INCOME TAX . . .IItrSPONDIINT Through: Ms. Suruchi Aggarwal, Sr.SlanclingCounsel. rTA sl OF 201.L(2) . NNN.AINGAIUI SUGAR MILLS LTD. . . . API'ELLANT 'fluoueh : Mr. C.S. Aggarra'al, Sr. Adrrocate with Mr.Prakash I(umar. Advocate. \ VI]RSUS . . . .I{ESI'ONDENT Through: Ms. Suruchi Agganval, Sr.StanclingCounsel. \ Page L of L3 ITA Nos.5L,52,57 &.58 of 2OLI I ) rrA sz oF 2or 1(sl NARAINGARH SUGAR MILLS LTD. . . . APPEI-LANT Through : Mr. C.S. Aggarwal, Sr. Advocate with Mr:.Prakash l(urirar. Advocate. VERSUS COIVIMISSIONER OF INCOME TAX . . .R.ESPONDENT ' Tluough: Ms. Suruchi Aggarwal, Sr.StandingCounsel. ITA s8 OF 2011(4) NARAINGARH SUGAR MILLS LTD.I . . . API}E]-N.ANT Tluough : Mr. C.S. Aggarwal, Sr. Advocate with Mr.Prakash l(umar. Advocatc. VEITSUS COMMISSIONER OF INCOME TAX . . .II.ESPONDENT Thlough: Ms. Suruciri Aggarwal, Sr.Standing" Counscl. CORAM:- ItrON'BLE MR. JUSTICE A.K. SIKRIHON'BLE MR. JUSTICE SIDDIIARTH MITIDUL alr' l. Whether Reporters of Local newspapers rnay be allowcd to see the Judgment? 2. To be referred to the Reporter or not? 3. Wrether the Judgrnent should be reported in the Digest? ,.h I ) rrA sz oF 2or 1(sl NARAINGARH SUGAR MILLS LTD. . . . APPEI-LANT Through : Mr. C.S. Aggarwal, Sr. Advocate with Mr:.Prakash l(urirar. Advocate. VERSUS COIVIMISSIONER OF INCOME TAX . . .R.ESPONDENT ' Tluough: Ms. Suruchi Aggarwal, Sr.StandingCounsel. ITA s8 OF 2011(4) NARAINGARH SUGAR MILLS LTD.I . . . API}E]-N.ANT Tluough : Mr. C.S. Aggarwal, Sr. Advocate with Mr.Prakash l(umar. Advocatc. VEITSUS COMMISSIONER OF INCOME TAX . . .II.ESPONDENT Thlough: Ms. Suruciri Aggarwal, Sr.Standing" Counscl. CORAM:- ItrON'BLE MR. JUSTICE A.K. SIKRIHON'BLE MR. JUSTICE SIDDIIARTH MITIDUL alr' l. Whether Reporters of Local newspapers rnay be allowcd to see the Judgment? 2. To be referred to the Reporter or not? 3. Wrether the Judgrnent should be reported in the Digest? ,.h 1. Though the Assessing Officer while, fi'arning the assessrnent for theassessrnent yeu 2003-04, had made three additions we are, concernecl in theseappeals with oniy one itern narnely clisallowance of clairn ,of deferred revcnueexpenditure which arises in these four appeals and pertains to assessrnent year2003-04 to 2006-07. The question has initially arisen in the assessmcrit year 2003-04 [out of which ITA 571201 1 arises] and in other years it is spill over of that veryissue and, therefbre, we wonld like to take note of the facts appearing oI' I fl\\5712011. [We ][rnay also ][clarify ][that ][the facts ][pertaining ][to ][the aforesaicl ][issuc ][only]are recapitulated by us. 2. The appellant is a public limited corllpany which was incorporatccl under theCompanies Act in the year 1991. ['lhe ]appellant is engaged in producing sugal',molasses and bagasse. For the instant assessulent ycar 2003-04, the appellantcompany filed its return of incorne declaring total loss of { 9,58 ,5I,076/-. Thereturn of incorle was processed on 3'd February,2004 uncler Section 143 (1) (a) ol'athe Act at the returned loss. Thereafter, the case was selected for scnrtiny andnotice under Section I43 (2)of the Act was issued. The Assessing Of{lc"r. *nl"Oan assessrnent under Section 143 (3) of the Act determining the loss at{6,81,51,750/-. The Assessing Officer, inter alia made the following disallowancs:- ITA Nos.5L,52,57 &.58 of 2OLl Page 3 of L3 (i). disallowallce of clairn of deferrecl revenue expencliturc of T 1,08,43,872/-. . We ruay point out in this behalf that the [asscssee ][had ][taken ][loans ][tou,arcls]working capital as well as term loans fi'om various banks. Ou [these ]loans, [during]the year in question, the assessee paid a total interest of < 6,23,73,9471-. Flor,vevcr,entire interest paid was not shown as revenue.expencliture in this [year. ][Instead ][the]assessee booked a suln of { 1,06,68,2471- to profit and loss account [as ][rcvdnue]expenditure adopting the foruiula of 26 days : 150 days.. The bzrlance [amoLtut ]of {' 5,16,99,700/- was transferred by the assessee'to deferrecl revenue cxpenditure.1 [The afolesaid approach ][of ][treating the intelest ][paid ][as ][deferred revenue cxpcnditure]did not gel with the Assessing Officer. I{e asked the assessee to [substantiale]accuracy and genuirleness of the clairn supported by docurneutary evicleuce. hlreply the assessee had stated that the deferred revenue expenditure [incluclecl]experses of Dilector foreign travel and excess of interest on term loau [aucl ][working]capital taken proportionately to the period o.f operation in current [year ][as ][compared]to the previous year. According to the Assessing Officer, as no [docutncntary]evidence was furnished, he disallowed the clairn of T i,08,43,8721- and addecl [the]salne in the income of the assessee The assessee preferred appeal against this ordcrraising a grievance that no adequate opportunity was given to the [assessee ]forfurnishing the evidence in support of the claim. The assessee [gave ]the [details]bcfore the CIT (A). -l ITA Nos.5L,52, 57 & 58 of 2O11 Page 4 of L3 These details of the interest [paid ][to ][various ][banks ][on ][working ][capital ][as] -l ITA Nos.5L,52, 57 & 58 of 2O11 Page 4 of L3 These details of the interest [paid ][to ][various ][banks ][on ][working ][capital ][as] well as term loan and details of [the expenditure ][in ][the ][manner ][statcd ][abovc ][is] reflected in the following chart:- Details of the Interest for [the ][period ][01.-04-02] \ 3. As per the assessee that [interest trairsferred ][to ][defbrred revenue expenditure].J.'was to be amortizecl for aperiod of five years starting fiorn the assessment [year]2003-04 [,itself ]and, therefore, 1/5tl' of [thc ][aforesaid ][figure ][which ][catne ][to ][{ ]- 1,08,43,8J2 was debited [to profit ][and ][loss ][account ][in ][this ][vel'y ][year and ][the']calculatiols submitted in [this behalf ][has ][subrnitted ][by ][the ][assessee ][were ][as ][uttdcr:-]Details of Deferred [Revenue ][Expenditure ][for]fTA Nos.51,52,57 &.58 of 201L . Page 5 of ' lJ tlre A.Y. 2003-04: Ilalance was taken [to ][the capital ][account and ][on ][that ][amount ][the ][assessce]claimed dePreciation. 4. The assessee further [submitted ][tliat ][the ][aforesaid arnount ][was treatcd ][as]deferred revenue [expencliture ][ancl ][written ][off ][over ][a ][period ][of ][fivc ][ycal's ][i.c' ][1/5tl' in]each year o1the'basis [of ][decision ][of ][the contpany ][which ][have ][beeu approvcd b)' ][the]Directors as itwas [an ][act ][of ][business ][prudence, ][in ][ordel ][to ][avail credit ][facility ][fi'om]the banks. Accorcling [to ][the ][assessee, ][thus, ][it ][was ][clone ][for ][the ][commcrcial ][of ][the]business. The [course ][of ][action taken ][for ][arnortising ][the ][saicl ][expelrditure ][over ][a]period of five years sought [to ][be ][justified ][on the ground ][that ][in ][the ][case ][of ][sugar-]the work [capital ][funcls are used ][iri ][building ][of ][stock, benefit whcrcof]industry tTA Nos.51,52, 57 [&.58 ][of ][2oLL]Page 6 of I-3 accrues in future. Judgrnent of the Suprerne Court in the [case ]of Mndros IndustrialInvestnrcld Corporotiort Ys. CIT 225 IIF. 802 [was'relied ][uporl ][in ][support of,the]contention that concept of deferted revenue expenditurc has been duly [approvcd ][by]the Ape>q Court. The contention of the assessee found favour [rvitl'r ][the ]CI'f [(A)]who allo,wecl the claim as deferrecl fevenue expenditure thereby [deleting ][tlie]adclition of {1,08,43,87 2l -. 5. The departrnent felt aggrieved of [the ][aforesaid ][order.of ][the ] [(A) ][and]hence preferred the appeal before thc ITAI'. In the tneautime for other [asscsstncnt]Iyears also, the expenditure was allorved @ ll5'n by the CIT (A), thc I{evenue filcclfour appeals in respect.of all these [assessrnent ][years. ]All [these ][appeals ][r.vere]consolidated and have been decided by the learned Tribunal vide cotlmon [clccision]dated 8tl'January 2010. Aftertaking into account [the ]facts, narration [whereof ][has]already givbn above, as well as the subrnission of the parties, the Tribtural [got]persuaded by the argurnent of the Revenue and thus set asidc the order of [the ][CII'](A) and restore that of the Assessing Officer, supported by the fbllorvingcliscussion:- "We have heard both the parties aud gone thror"rgh thematerial placed on record. There is no dispute that theassessee is followillg rrercantile systetn of accouutiug.Therefore, the liability incurred on accoullt of [intercst]payable on term loan and wotking capital as well as otherexpenditure by way of directors foreign travel expenscsare allowable as deduction in the [year ]in which such Page 7 of L3 fTA Nos.5L,52,57 & 58 of 2oLL a\ "We have heard both the parties aud gone thror"rgh thematerial placed on record. There is no dispute that theassessee is followillg rrercantile systetn of accouutiug.Therefore, the liability incurred on accoullt of [intercst]payable on term loan and wotking capital as well as otherexpenditure by way of directors foreign travel expenscsare allowable as deduction in the [year ]in which such Page 7 of L3 fTA Nos.5L,52,57 & 58 of 2oLL a\ liability is incurred. There is no [concept ][of ][dcferred]revenue expenditure in Incorne-tax [Act. ][The ][assessee]liad taken a decision to [clairn ][l/sthof ][such ][expenditure in]the year in which the expenditq'e [is ][incurred ][and ][the]balalce expelditure has [been ][claimed ][i1 ][four ][subsequeut]years equally. The expenditure which [had ][been clairned ][in]subsequent [years constitutes ][the ][part ][of ][previous ][year's]expenditure, which is not [allowable ][as ][deduction. ][It ][is ][not]a case where the expenditure [was ][itlculted ][in ][relation ][to]certain iuvesttnents, the effect of [which ][would ][bc ][spread]over in lnore than one [year. ][Thereforc, ][the ][assessec]cannot be allowed deduction [under Section ][37 ][in ][tespcct]of expelditure, which [was ][incurred ][in ][earlier ][years on ][the]principal of deferred revenue [eirpenditul€, ][as ][claimed ][by]the assessee. The income of [the ][assessee has ][to ][bc]determined on the basis of [the facts ][of ][each ][year. ][If ][the]contention of the assessee is [accepted ][that ][expenditure]should be allowed on the basis [of ][decision taken ][by ][the]assessee, it will opeu flood [gates ][for ][litigations ][under]which the assessee [can ][defer any expenditure the ][way ][they]like and clairn the satle in [the ][year ][in ][which ][its ][becotncs]rirore convenient and bendficial [to thetn. Thcrefore, ][wc ][do]not approve the contention [of ][the ][aSSeSSee ][that ][revenue]expenditure which has been incurred [in ][a ][particular ][year]should be deferred to subsequent [years. ][Therefore, ][no]deduction out of defemed [revenue expenditure, ][which ][has]come fi'orn earlier [years, ]can be [allowed ][as ][deduction ][in]the years under consideration [as ][the ][satne ][will ][constitutc]the prior period exlrenditure. [The decision ][relied ][upon by]the Ld. CIT (Appeals) in [the ][case ][of ][Madras ][Industrial]Investtnent Corporation [(supra) ][is ][not ][applicable ][to ][the]facts as pointed out by the Lcl. [Sr. ][DR' ][Accordingly' ][in]our considered opinion, [the ][Ld.'CIT ][(Appeals) ][was ][uot]justified in allowing the claim of assessee in respect ofdeferred revenus expenditure. [We, therefore, ][set ][aside the]order of the Ld. CIT [(Appeals) and ][restore ][that ][of ][the]assessing officer.The ground relating to [deferred]revenue expenditurein all the vears'is allowed in [favour]of the Revenue." 6. It is not in dispute that the liability incurred on accoullt of intcrcst payableon term loan as well as working capital and also other expenditure by way ofdirector's fbreign travel expellses. It is also not in dispute that thc liability on this [']account acerued in the year 2003-04 and incurred by the assessee in that year. It isalso an admitted fact that the assessee is following rnercantile system of accounting.fhe [expencliture ][of ][this ][nature, on the face ][of ][it ][is ][revenuc expcnditurc ][zurcl ][there]was no reaso[ to spread over the salne over a period of five years. In fact on thesevery term loans and working capital the assessee had paid interest in the succecdingyear as well ancl clairned decluction on entire expencliture as revenlle cxpcllcliture inIthose succeecling years. It was not a case of the asscssee that there was all cncluringbenefit ancl effect thereof was over a period of five years. L We agree with the reasoning of the ITAT that the rnove on thc part of thcassessee in arnortizing the said ex.penditure, over a period of five years treatingthetn as deferred revenue expenditure was clearly misconceived and fi'aught ivit.hdangers, inasmuch as the assessee could not be given such a lcvy perrnitting it to1 [deferred any expenditure the ][way ][it ][likes ][and ][clairn ][the ][same ][in ][the year ][in which ][it]become rnore convenient and beneficiai to it. ' fTA Nos.sl,52,57 & 58 of 2OLL Page 9 of L3 b, The Tribunal is right in holcling that in the instant'case thc [jLrdgurent ]ofSnpreme court in Madros htdustriol Investnrcnt [Corytoratiort ][(supra) woulcl ][not ][be]applicable 9. Insofbr as [judgment ]of this Court in Comntis.sioner [oJ'Inconle ][Tsx ][Ys.]Irtdustrial Finance Corporatiort of India Ltd. 185 TAXMAN 296 it is [not]applicable in the present case.. In that case, this Court [held ][that the ][assessee ][himself]wanted to spread the expenses over a period of ensuing [year ]it should [be ][allowecl.]Fiowever, there was no such proposition laid down in [absolute ][tertn. ][It ][was clearly]Ilstated that such a course of action would be.adrnissible only if the principlc o[rnatching concept is satisfied which was restricted [to ][the ][cases ][of ][clebenturcs. This]Court categorically observed that the [general ]principle stated eveu [in ][Modras]Indwtrisl Investnterfi Corporutiort (supra) was that ordinarily [revellue ][incurred]wholly or exclusively for the purpose of business' [can ]be [allowcd ][in ][the ][year iu], which it is incurecl. There may be solne [exceptional ][cases ][justifying ][spreacling the]expenditrire and clairning it over a certain number of [years, ]that too, [when ][the]. assessee chose to do so. The discussion was sulnlned up in the following manner:- -J "Thus, the first thing r.vhich is to be noticed is thatthough the entire expenditru'e was incttrt'ed in that [year,]it was the assessee who wanted the spread over. [The]f'Court was collscious of the principle that normallyrevenue expenditure is to be allowed in the same [year]in which it is incured, but at the instance of theassessee, who wanted spreading over, the Cout agreed fTA Nos.5L,52, 57 &.58 of 2OL1 Page 1O of L3 to allow the assessee that benefit when it was foundthat there was a conlinuing benefit to the business ofthe company over the entire period. What follows fi'orn the above is that normally thecirdinary rule is to be applied, narnely, revenlrcexpenditure incured in a particular year is to bcallowed in that year. Thus, if the assessee claims thatexpenditure in that year, the Income Tax depafimentcannot deny the same. I-Iowever, in those cases wherethe assessee hirnself wants to spread the expenditr"rrebver a period of ensuing years, it can be allowed onlyif the principle of matching concept is satisfied, whichthe assessee hirnself wants to spread the expenditr"rrebver a period of ensuing years, it can be allowed onlyif the principle of matching concept is satisfied, whichupto now has been restricted to the cases ofdebentures."debentures." -10. Even when we apply the aforesaid test in the present case, the assesseewould not be entitled to defer the expenditurc over a period of fivc years. For tliisreason, we dismiss the ITA 5l/201),,52/2011 and 58/2011. -10. Even when we apply the aforesaid test in the present case, the assesseewould not be entitled to defer the expenditurc over a period of fivc years. For tliisreason, we dismiss the ITA 5l/201),,52/2011 and 58/2011. I1. In hct, Mr. Aggarwal, at the time of arguing these appeals, aftcr putting afbeble altetnpt in questioning the r.visdom of the Tribunal adopting the aforesaidapproach, laid ernphasis on altogether clifferent aspect ancl the effect thereof1 [rvould ][be ][only ][on ] [5712011. ][I{is ][plea ][was ][that ][if ][the ][course ][of ][action ][adopted ][by]ttre revenue authorities is to be accepted, that would mean that it rvas not open forthe assessee to spread over the said expenditure in the folm of interest elc. over aa [period ][of ][five ][years ][which ][would ][rnean ][that ][the ][assessee ][could ][have ][clairled ][thc]entire expenditure in the year in question i.e. in the asscdsiuent years 2003-04, OnITA Nos.5L,52,57 & 58 of 2OLIPage LL of L3 this premise, his subrnission was that in that eventuality, when [there ][wzls ][l1o ][disptrte]that the expenditure was in fact incurred in the said [assesstnent ][year, the ][entire]expenditure of { 6,23,73,947l- should be allowed to the [assessee ]in [the ][assesstncut]year 2003-04. 12. Ms. Suruchi Aggarwal, learned counsel appearing for the I{evenuc, [ou tlie]other hand, subrnittecl that when no such claitl [was ][ever urade ][by ][the ][assessec ][in ][the]year in question, it should not be allowed. She further subrnitted that [fior ][ttre ]firstItirne this plea was raised in the instant appeal [and even ][beforc ][the ][Tribunal ][no ][such]case was set up. argued that unless the clairn is tnacle either in [the ]retttrn [or ][zrt].-She least in the revised r€turn, the assessee will [not perrnitted to push that claim.] 13. Technically , Ms. Suruchi Aggarwal [rnay be ][cotrect ][in ][her ][subrnissions. ][l\t]the same time, that would amount to not allowing [the ][appellant/assessce ][the claitn]the expencliture incurred on interest etc. [even ][in ]the [assesslnent ][year ][2003-,04]though the assessee was adrnittedly entitled to claim [the ]sarie [in that year, rvc ][make]this observation ['having ]regard to the fact [that ]is' no dispute zrbout the..therc genuineness of the said expenditure incurred in the [assesstnent ][year ][in ][questioti.] a 14. In these cilcurnstances, we [pennit ][the ][assessee ][to ][raise such a ][claitn ][in ][the]year in question by approaching the Assessing Officer, in accordance rvith [law.] lTA Nos.5L,52, 57 & 58 of [2OL1]Page 12 of 13 i.. .JI These appeals are disposed of in the [aforesaid ][tertns.] 15. >t',r 1/lL tK. slKxu) .IUDG['l,,(.-- [ot--'t](sIDDr{AttTFI MttXDrIlL)JUEGE SEPTEMBER 30"201.1.skb Page 13 of 13 ITA Nos.5L,52, 57 & 58 of 2OIL lT