Tca/418/2009 Of The Commissioner Of Income Tax v. M/S Pricol Limited (Formerly

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HON'BLE MR.JUSTICE T.S.SIVAGNANAMAND THE HON'BLE MR.JUSTICE SATHI KUMAR SUKUMARA KURUP The Commissioner of Income Tax-II,Coimbatore.... Appellant/Respondent .Vs. M/s.Pricol Limited (Formerly known asPremier Instruments & Controls Limited),No.1087-A, Avanashi Road, Coimbatore – 641 037.... Respondent/Appellant PRAYER:- Tax Case Appeal preferred under Section 260A of the IncomeTax Act, 1961, against the order of the Income Tax AppellateTribunal, Madras, “A” Bench, dated 20.08.2008 in I.T.A.No.260/Mds/2007, Assessment Year 2003-04 and the Commissioner of IncomeTax (Appeals)-I, Coimbatore, dated 01.12.2006 in AppealNo.451/2005-2006, Assessment Year 2003-2004 and against theOrder of the Assistant Commissioner of Income Tax Company CircleIV(1), Coimbatore, dated 13.03.2006 in PAN/GIR.No. ,Assessment Year 2003-2004. For Respondent : Mr.R.Meenakshi Sundaram (Judgment was delivered by T.S. SIVAGNANAM, J.) This Tax Case Appeal filed under Section 260-A of the IncomeTax Act, 1961 (“the Act”) is directed against the order passedby the Income Tax Appellate Tribunal, Chennai “A” Bench, inI.T.A.No.260/Mds/2007 for the Assessment Year 2003-04. 2. The Revenue is the appellant before us and the appeal wasadmitted on 29.06.2009 on the following substantial questions oflaw : “1.Whether on the facts and in thecircumstance of the case, the Appellate Tribunalwas right in law in setting aside the order of theLower authorities, even though the amount writtenoff was incurred in the course of assessee'sbusiness and it was a capital item shown in theassessee company's balance sheet? 2.Whether on the facts and in thecircumstance of the case, the Income Tax AppellateTribunal was right in law in holding that thesecurity deposit of Rs.6 crores written off asirrecoverable was a revenue expenditure is valid?” 3. We have heard Ms.K.G.Usha Rani, learned Standing Counselfor 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 thebusiness of manufacturing Dash Board instruments, sensorsaccessories, auto components, etc. The return of income for theAssessment Year under consideration, AY 2003-04, was processedunder Section 143(1) on 10.12.2003, and subsequently, the casewas taken up for scrutiny and notice under Section 143(2) wasissued on 13.10.2004. On such scrutiny assessment, theAssessing Officer pointed out that the assessee had deposited asum of Rs.6 Crores as security with M/s.Terra Agro TechnologiesLtd. for leave and license operations to take over theoperations of M/s.Terra Agro Technologies Ltd. for a period of24 months with effect from January, 2001, with monthly leaserent of Rs.50 Lakhs. The assessee was able to carry on thebusiness only for six months, i.e., upto July, 2001 only, andsuffered loss and business could not be continued thereafter.Hence, the assessee wrote off the said security deposit paid toM/s.Terra Agro Technologies Ltd. as irrecoverable securitydeposit for the previous Assessment Year relevant to AY 2003-04.The Assessing Officer disallowed the return of income on theground that it was not incurred in the course of the assessee'sbusiness and it was a capital item reflected in the assessee'sbalance sheet. Against such order, the assessee preferred anappeal 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 beforethe Tribunal, which has been allowed by the impugned order. 5. The Tribunal, in our considered view, has done thoroughfactual exercise as to the nature of business activities of theappellant and this has been brought out by the Tribunal in ParaNo.16 of the order, the operative portion of which, reads asfollows : 5. The Tribunal, in our considered view, has done thoroughfactual exercise as to the nature of business activities of theappellant and this has been brought out by the Tribunal in ParaNo.16 of the order, the operative portion of which, reads asfollows : “16. ... As per the details mentioned in theassessment order, the assessee suffered a loss ofmore than Rs.1.19 Crores within 6 months of theoperation taken over by the assessee. It is clearthat if the assessee continued the business, theassessee had to pay at least Rs.12 Crores aslicense fee for the entire 24 months license termand at least Rs.5-6 Crores more loss incurring asthe operations under the leave and license fordehydrated vegetables. The lower authorities havenot disputed the details regarding income andexpenditure furnished by the assessee. But, theA.O. has concluded that since the security depositis in the nature of capital, the same cannot beallowed as revenue expenditure or business loss.Even the A.O. has not disputed the genuineness oftransaction between the parties through the saidagreement. We further note that when the incomeand expenditure from the business was accepted bythe revenue authorities for the earlier years,then treating the business activity of dehydratedvegetables as a separate and discontinuation thebusiness of the assessee is not a correct viewtaken by the lower authorities when the assesseehas considered both business activities as itsbusiness and offered the income and expenditurefor the earlier years which was accepted, then inthe circumstances in which the continuation withthe operations was not possible for the assesseeand the assessee has taken the decision todiscontinue the dehydrated vegetables operationsto avoid further loss, it cannot be termed asclosing or discontinuation of its business. As perthe terms of the agreement, the assessee was tocontinue with operations for at least 24 months.But, when the assessee has discontinued theoperation before the expiry of terms of theagreement, that would certainly disentitle theassessee for claiming the security deposit whichwas made for performance of its obligation underthe agreement. Therefore, even otherwise, on theforeclosing of the agreement by the assesseebefore the expiry of its terms made the assesseedisentitled from recovering the deposit and the same stands forfeited in view of the terms andconditions of the agreement. Though there is nosuch term about the forfeiture but when assesseeagreed to have no right to terminate the agreementbefore the expiry of terms, then the violation ofthe said condition automatically led to forfeitureof the security. In these facts and circumstances,we have no hesitation to hold that the securitydeposit made by the assessee was for the purposeof business of the assessee. The said business forgetting the licence to run the operations was onlyfor 24 months - means that the assessee did notacquire any capital asset of permanent nature bydepositing such a security or for a capital assethaving enduring benefit of permanent nature. Eventhe assessee has discontinued the operationsbefore the expiry of the terms of the agreementand suffered loss in the shape of non-recovery ofsecurity deposit, the same would be a businessloss of the assessee and allowable under Section37 of the Act. It is an undisputed fact that asper the Memorandum of Association of the assessee-company, apart from other business, the businessof preservation, dehydration, freeze-drying, etc.and dealing with export, import handle as aprincipal or as an agent of all kinds of agroproducts with further objects of the company videamendment made by the assessee-company in themeeting held on 10.5.1995 and confirmed by theCompany Law Board on 18.12.95. Therefore, anyexpenditure made by the assessee to carry out thebusiness as per the objects of the assessee-company would be treated as business expenditureof the assessee.” 6. From the facts noted by the Tribunal as mentioned above,while granting relief to the assessee by treating theexpenditure as business expenditure, the Tribunal took note ofthe fact that the Assessing Officer and the Commissioner ofIncome Tax (Appeals) have not disputed the details regarding theincome and expenditure furnished by the assessee and theAssessing Officer only concluded that, since the securitydeposit is in the nature of a capital expenditure, the samecannot be allowed as a business loss. Though the Commissionerof Income Tax (Appeals) had rendered a finding that thetransaction itself was a sham transaction, the Tribunal rightlynoted that the Assessing Officer has not disputed or doubted thegenuineness of the transaction. Furthermore, the Tribunal notedthat the income and expenditure from business was accepted bythe Revenue authorities for the earlier years treating the business activity of dehydrated vegetables as a separate anddiscontinuation of the business of the assessee, is not acorrect view taken by the authorities when the assessee hasconsidered both the business activities as its business andoffered the income and expenditure for the earlier years, whichwas accepted. 7. In the light of the factual conclusion arrived at by theTribunal, we find there is no question of law much lesssubstantial question of law arising for consideration.Accordingly, the appeal filed by the Revenue is dismissed. Nocosts. Sd/- Assistant Registrar(CS IX) //True Copy// Sub Assistant Registrar mknTo 1. The Income Tax Appellate Tribunal, Chennai, “A” Bench.2. The Commissioner of Income Tax (Appeals)-I, Coimbatore.3. The Assistant Commissioner of Income Tax, Company Circle IV(1), Coimbatore.+1cc to Mr.T.R.Senthilkumar, Senior Standing Counsel, S.R.No.37560 TAX CASE APPEAL NO.418 OF 2009 NR(CO)PBS/25/08/2021