Maharaja Appliances Ltd., New Delhi vs Department Of Income Tax

1 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "E" NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI ABY. T. VARKEY : JUDICIAL MEMBER

ITA no. 1543/Del/2011 A.Y. 2007-08 Income-tax Officer, Vs M/s Maharaja Appliances Ltd., Ward 6(1), New Delhi. 1/7, East Patel Nagar, New Delhi-110008. PAN: AACM 1791 M

( Appellant ) ( Respondent )

Appellant by : Shri Padam Kanuhjha Sr. DR Respondent by : Shri S.R. wadhwa Adv.

Date of hearing : 12-02-2015 Date of order : 20-02-2015.

ORDER

PER S.V. MEHROTRA, A.M:-

This appeal, preferred by the department, is directed against the order dated 30-11-2010, passed by the CIT(Appeals)-IX, New Delhi, relating to A.Y. 2007-08.

2. Brief facts are that the assessee, in the relevant assessment year, was engaged in the business of trading of home appliances as distributor/ wholesaler. It had sold products through its network of dealers and distributors. The assessee had filed its return declaring income of Rs. 4,10,580/-. The assessment was completed at a total income of Rs.

2 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

62,91,888/-, inter alia, making addition/ disallowance in respect of following:

(i) Disallowance u/s 37(1) Sales tax interest & penalty Rs. 2,05,705/-

(ii) Disallowance u/s 32(1) Assets not used for business Rs. 3,11,610/-

(iii) Disallowance of sales Service charges Rs. 31,89,625/- (iv) Disallowance u/s 37(1) Administrative expenses Rs. 22,43,445/- (v) Short term capital gain on sale of assets Rs. 2,22865/-.

2.1. In first appeal, the ld. CIT(A) partly allowed the assessee's appeal. Aggrieved, with the order of ld. CIT(A) the assessee is in appeal before us. Following grounds are raised:

1. The order of the learned CIT(Appeals) is erroneous & contrary to the facts & law.

2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in restricting the addition on account of interest and penalty to Rs. 1,25,8466/- as against Rs.2,05,705/- made by the A. .

2.l. The Ld. CIT(A) ignored the finding recorded by the A.O. and the fact that the expenses in question are penal in nature. 3.0n the facts and in the circumstances of the case and in law, the Learned CIT(Appeals) has erred in deleting the addition of Rs.2,22,865/- made by A.O. on account of short term capital gain on account of sale of assets.

3.l.The Ld.CIT(A) ignored the finding recorded by the A.O. and the fact that the assessee itself has confirmed the sale of machinery vide letter dated 24/12/2009..

4.0n the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of Rs.3,11,610/- made by A.O. u/s 32(1) of the Act on account of depreciation.

4. 1. The Ld.CIT(A) ignored the finding recorded by the A.O. 3 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

and the fact that the assessee itself has confirmed the sale of machinery vide letter dated 24112/2009.

5. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in restricting the addition on account of sale and service to Rs. 4,26,887/- as against Rs. 31,89,625/- made by the AO.

5.1. The Ld.CIT(A) ignored the finding recorded by the A.O. and the fact that the assessee could not substantiate its claim during the assessment proceedings.

6. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in restricting the addition on account of administrative expenses to Rs.98,123/- as against Rs.22,43,445/- made by the A.O .

6.1. The Ld.CIT(A) ignored the finding recorded by the A.O. and the fact that the assessee could not substantiate its claim during the assessment proceedings

7.The appellant craves leave to add, to alter, or amend any grounds raised above at the time of hearing."

3. At the outset ld. counsel for the assessee submitted that the revenue has accepted the CIT(A)'s order for AY 2009-10 and 2010-11, inasmuch as, in both the assessment years, following the CIT(A)'s order, the AO has restricted the disallowances, as directed.

4. Ground nos. 1 & 7 are general in nature and require no adjudication.

5. Ground no. 2 & 2.1. :Brief facts of the case are that assessee had claimed a sum of Rs. 3,71,060/- on account of "additional sales tax - penalty appeal". The tax audit report revealed the sales tax penalty and interest borne by the assessee at Rs. 2,05,705/-, the AO, therefore, disallowed the same.

5.1. Before ld. CIT(A), the assessee had, inter alia, submitted as under:

"Further Rs. 88,453/- out of the total disallowance relates to sales tax & penalty which is of compensatory nature & not penal. Breakup of such expenses is given below:

4 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

S. No. Particulars Nature Amount in Rs. 1. Sales Tax additional Sales Tax 28,919/- demand due to non additional receipt of form F at demand Ahmedabad. DD for payment of sales tax demand 2. Amount for late Compensation 8,594/- payment of sale tax. for late payment 3. VAT paid at MVAT paid 50,940/- Maharashtra, calculation. Total 88,453/-.

5.2. Ld. CIT(A) noted that out of Rs. 88,453/-, Rs. 8,594/- was penal in nature and, therefore, he allowed a relief of Rs. 79,859/- and restricted the addition at Rs. 1,25,846/-.

5.3. Ld. counsel for the assessee pointed out that in AY 2009-10 and 2010-

11, the AO has restricted the disallowance accordingly to Rs. 12,000/- and Rs. 2500/- respectively.

5.4. Having heard both the parties, we do not find any infirmity in the order of ld. CIT(A), because only those payments, which were penal in nature, could be disallowed. Ground is rejected.

6. Ground no. 3 & 3.1.:From the fixed assets chart, the AO noticed that assessee had sold machinery worth written down value of Rs. 47,50,500/-. In terms of section 50, he computed the short term capital gains at Rs. 2,22,865/- as under:

Sale consideration Rs. 70,36,357/- Opening written down value Rs. 68,13,492/- 5 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

Addition to Plant & machinery Rs. Nil. Short term capital gain Rs. 2,22,865/-

6.1. Ld. CIT(A) in para 3 of his order observed as under:

"5.3 On going through the detailed submissions filed by the appellant, I have found the same' to be correct. It appears that the Ld. AO erroneously took the figure of sales proceeds of the assets at Rs.70,36,357/- which included MODVAT, excise duty etc. as against the actual sale consideration of Rs.47,50,5001-. The Ld. AO also missed out the fact that the entire block was not sold out and there was an addition of Rs.29,5001- to the same during the year. The addition of plant and machinery of Rs.29,5001- had to be included to the block, as is evident from the block of fixed assets. Thus, the value of the said block of assets did not become NIL at the end of year and as such under the scheme of block of assets there was no scope to treat it as short term capital gains. Under the circumstances, the ld. AO was not right in invoking the provisions of section 50 of the Act to work out the short term capital gain of Rs. 2,22,865/-. The same being wrongly done is directed to be deleted."

6.2. The finding of ld. CIT(A) that the block of assets did not become nil, has not been controverted.

6.3. Having heard both the parties, we find that this issue is covered by the ratio of decision of Hon'ble Delhi High court in the case of CIT Vs. Eastman Industries Ltd. (2008) 219 CTR 593 (Del.), holding as under:

"Section 50 (2) of the Act comes into play only if assets of the same class "cease to exist" for the reason that all assets in that block are transferred during the previous year. The "block of assets" cease to exist in accordance with sub- section (2) of Section 50 only when, all assets in that block are transferred 'during' the 'previous year'. The expression 'previous year' is preceded by the word 'during'. It is well settled that the intention of the legislature is best ascertained by resorting to the plain meaning of the words used in the legislation. The plain meaning of the word 'during' clearly indicates that the provision refers to transfer of assets in the block, in a defined period and not at any particular point in time. Thus, it is only when the 6 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

following conditions are fulfilled does Section 50(2) get triggered in i) all the assets in the block, ii) are transferred

iii) throughout the course of or after the commencement and before the expiration of iv) the financial year of the assessee immediately preceding the assessment year. A bare reading of the provision of sub-section (2) of Section 50 of the Act would show that, the very fact that, there is a reference to, in arriving at the cost of acquisition, to the written down value of the „block of assets‟ at the beginning of the previous year as increased by actual cost of assets falling within the "block of assets" acquired during the previous year would show that what is required to be seen is that whether at the end of the previous year, the „block of assets‟ have ceased to exist or, in other words what is to be seen is that whether „throughout the course of‟ or „after the commencement and before the expiration of the previous year‟ (i.e., the financial year immediately preceding the relevant assessment year) there was an asset which fell within the "block of assets". In the event the block of assets i.e., a class of asset(s) bearing same rate of depreciation exist(s) was with the assessee at the end of the previous year, then the provision of Section 50 (2) would not apply.

The Section creates a deeming fiction. It cannot be extended beyond the purpose for which it has been enacted. The section is a special provision, which provides for bringing to tax by way of short term capital gains depreciable assets which are transferred during the previous year as against those provided in Section 2 (42A). As noted by the Tribunal, as well as, the CIT that sub-section (2) of Section 50 of the Act provides for the computation of capital gains where "block of assets" ceases to exist "for the reason that all the assets in the block are transferred in the previous year". In the instant case, all the assets had not been transferred during the previous year because of the fact that some assets still remained in the block at the end of the year. This fact, as noted by the Tribunal, is not 7 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

disputed. In our view, in the circumstance, that the assets were available in the "block of assets" at the end of the previous year, the provision of Section 50 (2) will not be applicable, as held by both the Tribunal and the CIT. In the circumstance, no substantial question of law has arisen for our consideration."

6.4. Respectfully following the decision of Hon'ble High Court, we see no reason to interfere in the order of ld. CIT(A) on the issue in question. Accordingly, ground nos. 3 & 3.1 stand rejected.

7. Ground no. 4: During the course of assessment proceedings the AO noticed that depreciation of 3,11,661/- was claimed on plant and machinery. Keeping in view the fact that assessee was no more involved in any manufacturing activity, the AO required the assessee to show as to why depreciation claimed on plant & machinery should not be disallowed. The assessee, inter alia, pointed out that company had temporarily stopped its manufacturing and started more concentration on trading activity. The management was looking for starting manufacturing a new business line in appliance industry in which company had expertise. The AO, however, did not accept the assessee's contention and, inter alia, pointed out that such sale formed 70% of the total plant and machinery, that too at the beginning of the previous year i.e. 1-4-2006. After such sales, assessee was only left with 30% of the plant and machinery. He, therefore, disallowed the assessee's claim of depreciation of Rs. 3,11,660/- .

7.1. Ld. CIT(A), taking note of the fact that assets were kept ready for use, allowed the assessee's claim of depreciation, observing in para 6.6 as under:

6.6 I have considered the submissions of the appellant, 8 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

various judicial pronouncements relied upon by the Id. AR, the findings recorded by the Id. AO as per the assessment order and the facts of the case on record. It has been consistently. held by various judicial authorities that if the assets are kept ready for use, the claim of depreciation is allowable to an assessee. The same view was held by the Jurisdictional High Court in the cases relied upon by the appellant. In the instant case, although, there was no manufacturing activity during the year under consideration but in the next year the same took place as can be seen from the submissions filed by the Id. AR. The appellant has submitted the details of raw material consumption and manufacturing of goods for the succeeding year when the plant and machinery was actually put to use. This establishes the fact that during the year under consideration, the assets were, in fact kept ready for use. Therefore, in the light of the rulings of the Hon'ble Jurisdictional High Court relied upon by the appellant and after considering the submissions filed by the Ld. AR, I am of the opinion that the claim of depreciation is legitimately allowable to the appellant. The addition of Rs.311661/- made by the Ld. AO is, therefore, deleted.

7.2. Having heard both the parties, we do not find any reason to interfere with the order of ld. CIT(A). Firstly, because the block of plant and machinery continued to exist and the manufacturing activities had temporarily been suspended and the business was not closed down. Secondly, the machinery was kept ready for future use and, therefore, in view of the decision in following cases, the assessee's claim was rightly allowed by ld. CIT(A) :

- Capital Bus Service (P) Ltd. v. CIT 123 ITR 404 (Del.);

- CIT Vs. Yamaha Motor India Pvt. Ltd. 183 Taxmann 291 (Del.);

- CIT V. Refrigeration & Allied Industries Ltd. 113 Taxmann 103 (Del).

9 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

7.3. The order of ld. CIT(A) on the issue in question is upheld. Ground is rejected.

8. Ground no. 5 & 5.1.: The AO noticed that assessee had debited in its P&L A/c with a sum of Rs. 74,04,151/- on account of sales service charges under the head "Selling and Distribution Expenses". The assessee justified its claim, inter alia, pointing out that assessee company was in business of manufacturing and marketing of home appliances since last many years, having strong network of distributors and dealers all over India. Besides, assessee had good working network of providing after-sale services to customers through its franchisees, having strength of providing these facility all over India. It was further explained that assessee was buying products from its principal suppliers with understanding that after sales services was to be provided by the company itself. After sale services were provided through service franchisers who were paid on fixed & variable basis. Assessee had claimed part of expenses from its main distributors Far East Marketing Pvt. Ltd., which was also an existing Income Tax Paying Assessee. The assessee pointed out that it could produce confirmation from both the above concern in that regard.

8.1. The AO, however, did not accept the assessee's contention and after considering the service charges to be divided between assessee and distributor, held that expenditure on account of sales services to the extent of Rs. 31,89,625/- was excessive and disallowed the same u/s 37(1). 8.2. Ld. CIT(A) sustained the addition to the extent of 4,26,887/- by observing as under:

7.2 During his submissions before me, the Ld. AR argued that the 10 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

apportionment of sales and service expenses was made on the basis of region wise sales achieved by the appellate and FEMPL. He also produced a station wise list of sale and service franchisee to which apportionment was made as under:

51. Centre Franchisee Sales service No. claim 1 Lucknow MIs. Electrical solutions 144296/- 2 Kolkatta M/s.Europa sales & service 2165001- 3 Indore M/s.Glacier Aircon 1500001- 4 Jaipur M/s.Maharaja Services point 123365/- 5 Ludhiana M/s.Orion Appliances 116459/-

6 Chennai M/s.G.K.M. Customer Care Centre 2750001-

1025620/·

7.3 While discussing the submissions and on verification of the documents like copy of a/c of sales and services charges,· it was noticed that a further sum of Rs.4,26,887/- was attributable to FEMPL as payment made to the following concerns which were acting on its behalf:

M/s. Helping Hands (Service) Rs. 1,37,450/- M/s. Hi Tech Electric Service-(S) Rs. 2,28,410/-

M/s. Jai Sales (Service) Rs. 61,027/- Rs. 4,26,887/-

The appellant was, therefore, asked to explain as to why the same be not disallowed. The Ld. AR later on admitted that the aforesaid payments of Rs. 4,26,887/- actually pertained to FEMPL only and were wrongly remained to be apportioned to it. Therefore, further a sum of Rs. 4,26,887/- is held to be sales and service charges attributable to FEMPL apart from Rs. 1025620/- shown by the appellant. Thus, a total amount of Rs. 14,52,507/- (10,25,620+4,26,887) pertains to FEMPL as against a sum of Rs. 31,89,625/- disallowed by the AO. Hence, the addition to the extent of Rs. 4,26,887/- is sustained.

8.3. Ld. counsel for the assessee clarified that the sales service charges not related to franchise have been confirmed by ld. CIT(A) and to this extent the AO has also confirmed the sales and service charges in AY 2009-10 and 2010-11 at Rs. 12,20,768/- and Rs. 8,75,535/- respectively.

11 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

8.4. Having heard both the parties, we do not find any reason to interfere with the order of ld. CIT(A) because the AO has not disputed the rendering of after sales service by assessee. His only objection was that assessee was not bearing the entire cost of rendering after sales service and same ought to have been met partly by other distributors. We find that ld. CIT(A) has rightly restricted the disallowance only relating to non-franchise. We accordingly, confirm the order of ld. CIT(A) on the issue in question. Ground is rejected.

9. Ground no. 6: During the course of assessment proceedings, the AO pointed out that while examining the transactions with related parties, it was found that the address of assessee i.e. 1/7, West Patel Nagar, New Delhi was being shared by the assessee with five of its sister concerns viz. M/s Empire Home Appliances Ltd., M/s Omex Industries and M/s Far East Marketing Pvt. Ltd.' M/s Asiatic Engineers Pvt. Ltd., M/s Hindustan Appliances. As regards the issue of sales service charges, he pointed out that the transactions of the assessee with its sister concerns were found to be not at arm's length. He apportioned the following expenses between assessee and sister concerns, as under:

Personnel Expenses Rs. 1069844/- Books & periodicals Rs. 894/- Telephone Expenses Rs. 485219/- Office Water & Electricity Rs. 1147076/- Total: Rs. 2692133/-

9.1. The AO, accordingly, allowed the expenses of Rs. 4,48,688/- being 1/6th of such expenditure and the balance sum of Rs. 22,43,445/- was disallowed.

12 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

9.2. The ld. CIT(A) restricted the disallowance to Rs. 98,123/- by observing as under:

"8.2.1 The Ld. AR in his submissions before me contended that the addition was arbitrary in nature. He stated that the expenses claimed as per the P&L account pertained not only to the premises situated at 1/7, West Patel Nagar, New Delhi but to other premises also. He produced detailed working showing head wise and premises wise bifurcation of the total expenses claimed as under:-

Particulars Salary Staff Security Telepho- Office Total Income Welfa- Exp. ne & water & income as tax re expo Mobile electrici- per ROI paid Exp. ty Incurred at 1/7, west patel nagar MA 43283 40107 74061 397055 91640 410580 154849 EHAL 2934766 3197 - 137549 - (-) -

7404212 Omex 678220 30114 194237 328139 - 191735407 Industries FEMPL 32142363 130015 66581 122833 87126 . 521710 195161 Asiatic - - - - - - - Engineers Pvt. Ltd . . Hindustan - - - - - - - Appliances. Incurred at other premises. MA - 177620 734773 88164 1045436 - - EHAL 8642120 321008 584545 75285 9146510 - - Omex 12059508 295947 518051 1963332 3917252 - - Industries FEMPL - - - - - - - Asiatic - - - - - - - Engineers Pvt. Ltd .. Hindustan - - - - - - - Appliances 13 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

8.2.2 The Ld. AR also mentioned that the sister concerns of the appellant were also assessed at the same rates of income tax.

Hence, there was no intention/ requirement to transfer the booking of the expenditure incidence in a tax neutral scenario.

8.3 The Ld. AR further submitted that out of the total expenses of 2692133/- allocated by the Ld. AO., only Rs.?,46,146/- relate to the premises located at 117, West Patel Nagar, New Delhi and, therefore, there was no question of allocation of the expenditure of Rs.20,45,993/- incurred at other premises to the sister concerns situated at 117, West Patel Nagar, New Delhi.

8.4 I have carefully considered the detailed submissions made by the appellant and findings recorded by the Id. AO as per the assessment order and the facts of the case on record. As mentioned earlier, the Ld. AO has disallowed a 5/6th of the total administrative expenses of Rs.26,92,133/-. While doing so he mistakenly took the whole amount as pertaining to the premises situated at 1/7, West Patel Nagar, New Delhi, where it can be seen from the submission of the appellant that only an amount of Rs.6,46, 146/- was incurred for the said premises. Thus, there was no justification for considering the whole amount for disallowance. Moreover, premises it is seen that most of the sister concerns have booked expenditure under most of the heads. On the perusal of the chart produced in the submissions, it is however, seen that in the case elf some of the sister concerns, the expenditure on the heads as discussed below have not been booked for the said premises situated at 1/7, West Patel Nagar, New Delhi. The disallowance under the following heads is therefore considered necessary."

9.3. Ld. counsel for the assessee submitted that following the ld. CIT(A)'s findings for A.Y. 2007-08 the AO has restricted the disallowance to Rs. 26,03,867/- and Rs. 10,17,800/- in A.Y. 2009-10 and 2010-11 respectively.

14 ITA 1543/Del/2011 ITO Vs. Maharaja Appliances Ltd.

9.4. Having heard both the parties, we find that the findings of ld. CIT(A) regarding allocable expenses to sister concerns have not been controverted by the department. Therefore, we confirm the order of ld. CIT(A) in restricting the addition on account of administrative expenses to Rs. 98,123/- Ground is rejected.

10. In the result, revenue's appeal is dismissed. Order pronounced in open court on 20-02-2015.

Sd/- Sd/- (ABY. T. VARKEY ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 20-02-2015. MP: Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR