IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD " A " BENCH, HYDERABAD BEFORE CHANDRA POOJARI, ACCOUNTANT MEMBER & SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA No.1322/Hyd/2008 Assessment year 2004-05 M/s Laser Dot Limited, Vs The ACIT, Circle Hyderabad 16(1), Hyderabad (PAN AAACL6230C) Appellant Respondent ITA No.1039/Hyd/2008 Assessment year 2003-04 M/s Laser Dot Limited, Vs The ACIT, Circle Hyderabad 16(1), Hyderabad (PAN AAACL6230C) Appellant Respondent Appellant by : Shri S. Rama Rao Respondent by : Shri K. Viswanatham Date of hearing : 28.2.2012 Date of Pronouncement : 20/04/2012 ORDER
PER ASHA VIJAYARAGHAVAN, JM .
Both the appeals preferred by the assessee are directed against the orders passed by the CIT(A) -V, Hyderabad dated pertaining to the assessment years 2003-04 & 2004-05. Since the facts and issues are identical in both these appeals, the same were heard together and, therefore, a common order is passed for the sake of convenience.
2. The assessee is a public limited company engaged in the business of pre press processing handling job 2 ITA No.1322 & 1039/Hyd/2008 Laser Dot Limited, Hyderabad works of colour scanning and processing to offset and other printers. For the assessment year 2003-04, the assessee has filed return of income admitting a loss of Rs.25,23,453/-. The case was selected for scrutiny and assessment order u/s 143(3) of the IT Act, 1961, was passed by the assessing officer by disallowing of certain expenses and certain additions as adjustments to the taxable income. The assessing officer arrived at a taxable income of Rs.NIL for the assessment year 2003-
3. Aggrieved, the assessee preferred an appeal before the CIT(A).
4. Ground Nos. 2 to 4 in AY 2003-04 and Ground Nos. 1 to 3 in AY 2004-05 are common except the amounts, therefore, the same are to be disposed of by referring to the facts in AY 2003-04.
5. The first issue was w.r.t. the assessing officer's order estimating 14% of the loans and advances as interest income of Rs.23,90,424/-. The assessing officer estimated the interest income at 14% on the advances amounting to Rs.23,90,424/- and disallowed the said amount from the total loss shown by the assessee. Before the CIT(A) the learned counsel for the assessee submitted that the term loan obtained by the assessee from IDBI was used for extending loans and advances to the concerns in which the directors are interested, for business purpose of the assessee company. It was stated that the company was not in a position to pay the interest due to IDBI and the amount 2 3 ITA No.1322 & 1039/Hyd/2008 Laser Dot Limited, Hyderabad was disallowed in the statement of computation by the company as unpaid statutory liabilities. It was contended that the amount outstanding as loan to the companies under the same management, shown at Rs.2,61,641/- is negligible. It was further submitted that the advances recoverable shown at Rs.1,70,74,460/- were given towards business purpose only. It was contended that the Assessing Officer order estimating interest income @ 14% on the above loans and advances, is erroneous. It was contended that such advances were extended for business purpose only, for procurement of various services and materials during the course of business. The AR furnished before me in details of the amount of Rs.1,70,74,460/- shown as advances recoverable in cash or kind or valued to be received, which were furnished before the Assessing Officer during the assessment proceedings. As per the said details, a sum of Rs.6,65,913/- has been shown as advance to others.
6. The CIT(A) held that the loan of Rs.2,61,641/- which was given interest free to the associate concerns was not for any business purpose.
7. The CIT(A) further held that w.r.t. the other amount of Rs.1,70,74,460/- shown as 'advance recoverable in cash or kind or valued to be received'. Though the assessee has furnished the breakup of the same showing the amounts advanced to different parties, the purpose of such advance to those parties/concerns has not been indicated in the statement furnished by the assessee before the assessing officer.3 4 ITA No.1322 & 1039/Hyd/2008
Laser Dot Limited, Hyderabad
8. Before the CIT(A), it was admitted that the amounts of Rs.19,29,998/- Rs.17,93,801/- and Rs.91,71,883/- as advanced to M/s Jyothi Printing Inks P Ltd., APDC Printing Inks Ltd., and P. Raghavaraju Family Trust, respectively were given as loans. Hence the CIT(A) concluded that the said amounts aggregating to Rs.1,28,95,682/- advanced by the assessee to the above 3 parties were not for any business purpose.
9. As regards the balance amount of Rs.6,65,913/- shown as 'advance to others', the assessee had not explained or clarified the purpose of the advance in respect of the balance amount of Rs.5,82,766/-, and therefore the CIT(A) held that the interest ought to have charged on that amount as it were not for the purpose of business. Thus the CIT(A) directed charging interest on an amount of Rs.1,34,78,458/- out of total amount of advance shown under the head 'advances recoverable in cash or kind' in the balance sheet.
10. Aggrieved, the assessee is in appeal before us.
11. The learned counsel for the assessee Shri Rama Rao submitted that the CIT(A) erred in holding that the sum of Rs.1,28,95,682/- appeared as loans advanced to Jyothi Printing Inks P Ltd., APDC Printing Inks Ltd. and Shri P. Raghavaraju Family Trust, is not correct since there is a continuous account of lending and receiving with M/s Jyothi Printing Inks P Ltd., and APDC since both are sister concerns. W.r.t Shri. Raghavaraju Family Trust, the learned counsel for the assessee pointed out at Page 9 of the Paper Book wherein explanatory statement 4 5 ITA No.1322 & 1039/Hyd/2008 Laser Dot Limited, Hyderabad in the auditor's report, the following facts have been given:
"An amount of Rs.91,71,883/- is outstanding from Shri P. Raghava Raju Family Trust which was paid in the earlier years pursuant to an agreement to buy land from the Trust by the Company for its expansion plants. The transaction could not be completed by the company due to funds constraints and the advance paid to them remains outstanding. The amount has been unrecoverable as the Trust has no realisable assets. A proposal has now been received on behalf of the Trust to make an One Time Payment of Rs.10,00,000/- in full settlement by mobilising funds from outside borrowings. Your directors wish to place the matter for your consideration and to take a suitable decision in this regard.
Yours directors Mrs. P Swaraja Lakshmi being a Trustee of Shri P. Raghava Raju Family Trust and Mr. P Raghava Raju being a relative are deemed to be interested in resolution."
12. The learned counsel for the assessee further pointed out to computation of income for the year ended as on 31.3.3003 at page 6 of Paper Book that the unpaid interest to IDBI is Rs.54,35,404/- and the same was not been claimed by the assessee himself out of the finance charges paid to IDBI. The learned counsel for the assessee also pointed out that the loan from IDBI had been taken from 1994 and in the years earlier to the assessment year, no notional interest has been charged by the assessing officer. The counsel further took us through the profit and loss account and balance sheet as on 31.3.2003 where under the head sources of funds, capital, together with reserves and surplus amounting to Rs.23,12,0050 + 63,78,589/-.Hence he relied on the decision of CIT Vs. Radico Khaitan Ltd. (2005) (142 Taxman 681) where the Tribunal had recorded a finding that there was sufficient fund available with necessary 5 6 ITA No.1322 & 1039/Hyd/2008 Laser Dot Limited, Hyderabad company in form of share capital, share application money and reserve and surplus, other than borrowed money, for diverting a sum to sister concern, it could not be said that amount of loan advanced to sister concern was out of borrowed fund".
13. The learned counsel for the assessee further submitted that most of the advances were trade advances and had given the compilation of Loans and Advances at page 1-2 of the Paper Book.
14. On the other hand the learned departmental representative relied on the order of the lower authorities.
15. We have heard both the parties and perused the materials available on record. The Assessing Officer has computed interest at 14% on notional basis and added Rs.23,90,424/- to the loss returned. When no interest has been charged on loans, and the Assessee has no right to receive any interest there cannot be notional interest income. The Assessee had sufficient interest free owned funds by way of capital and reserves to cover the loans granted to associate concerns. The Borrowing from IDBI was not in this year. There has been no disallowance of interest payable to IDBI in the earlier years. Further the Assessee has not claimed any interest payable to IDBI as deduction this year. In the circumstances we delete the addition of Rs.23,90,424/- towards interest made by the Assessing Officer. The Assessee succeeds on this issue.6 7 ITA No.1322 & 1039/Hyd/2008
Laser Dot Limited, Hyderabad
16. The next issue is disallowance of Rs.3,14,64/-.t of software expenses. The assessee had debited a sum of Rs. 8,62,759/-. The explanation of the assessee was that a sum of Rs. 3,00,000/- was paid to 'Insight Communications and Eversmart Application software with Final Touch' and a sum of Rs. 14,641/- towards cost of 'PC Mc Milan Software'. The AO, therefore, held that the software purchased is capital in nature and not a revenue expenditure. Hence, he disallowed the said expenditure of Rs. 3,14,641/-. Aggrieved, the assessee carried the matter in appeal before the CIT(A).
17. Before the CIT(A), it was stated that the software purchased for Rs. 3,14,641/- is an application software and is of revenue nature only. He further stated that no asset of long life was created by such purchase, therefore, the software expenses are allowable as revenue expenditure. He relied upon few case laws in support his case. After considering the submissions of the assessee, the CIT(A) confirmed the addition made by the AO.
18. After hearing the learned DR and perusing the record, we shall hold the software expenses as capital expenditure and depreciation @ 60% is allowed on the same. Thus, this ground of appeal is partly allowed.
19. The next issue relates to disallowance on amounts paid to LIC, Group Gratuity Scheme. We find that the assessee's case is covered by the Coordinate Bench in ITA No.349/Hyd/2006 in the case of ACIT, Circle 3(2), Hyderabad Vs. M/s Krishna Drugs Limited, Hyd. wherein it has been held in Paras 4 - 5 & 6 as follows :7 8 ITA No.1322 & 1039/Hyd/2008
Laser Dot Limited, Hyderabad "We have considered rival submissions on either side and also perused the material available on record. Admittedly, the group gratuity scheme was not recognised by the CIT. This fact is not in dispute. We have carefully gone through the provisions of section 36(1)(v) of IT Act. Section 36(1)(v) reads as follows:
36(1): The deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therein in computing the income referred to in section 28.............
(v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust".
We have also carefully gone through the provisions of section 37 of the IT Act. Sec. 37 provides for deduction of expenditure not being in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee, but laid out and expended wholly and exclusively for the purposes of the business or profession, while computing income chargeable to tax. The main contention of the revenue is that u/s 36(1)(v) the payment made by the assessee as employer could be allowed only in respect of approval gratuity fund. Since the group gratuity scheme is not approved by CIT, according to the revenue, it cannot be allowed. However, the contention of the assessee is that in view of the judgement of the Madras High Court in the case of Premier Cotton Spinning Mills Ltd. and the judgement of the jurisdictional High Court in the case of Warner Hindustan Ltd. it has to be allowed.
We have carefully gone through the judgement of the jurisdictional High Court in the case of Warner Hindustan Ltd. In the case before the jurisdictional High Court, the Provident Fund was not approved by the CIT. The Andhra Pradesh High Court, after referring to the judgement of the Bombay High Court in Tata Iron & Steel Co. Ltd. Vs. DV Bapat, ITO (1975) (101 ITR 292) and the judgement of the SC in Metal Box Company of India Ltd. Vs. Their Workmen 8 9 ITA No.1322 & 1039/Hyd/2008 Laser Dot Limited, Hyderabad (1969) 73 ITR 53 held that the amount paid towards an unapproved gratuity fund can be deducted u/s 37 of the Act though not u/s 36(1)(v). In view of this judgement of the jurisdictional High Court, in our opinion , even if any payment is made to an unapproved gratuity fund, it has to be allowed u/s
37. By respectfully following the binding judgement of the Andhra Pradesh High Court in the case of Warner Hindustan Ltd. we uphold the order of the CIT(A)."
In view of the judgement of the jurisdictional High Court, it may not be necessary for us to discuss the judgements of the other High Courts."
20. The assessee has raised one more ground in AY 2004-05, which is regarding disallowance of claim under discount rebate and allowance of Rs.5,79,350/-.
21. The AO noted that in P&L A/c, the assessee had claimed an amount of Rs. 8,78,659/- towards discount and rebate and allowance. On verification of such claim, the AO noticed that a sum of Rs. 5,69,447/- in respect of Vintage Card and Creation Ltd. did not pertain to the sales effected during the previous year under consideration. Similarly claim of Rs. 69,903/- in respect of Partyline Products Pvt. Ltd. did not relate to the sales made during the year under consideration. Since the said claims did not relate to the year of account, the AO had disallowed an amount of Rs. 5,79,350/- out of the total claim made under discount. The counsel contended before the CIT(A) that the amount charged off to the profit and loss account during the year pertains to the balances receivable from various customers. The amounts pertain to the current year and previous year balances. Since the customers have disputed and not 9 10 ITA No.1322 & 1039/Hyd/2008 Laser Dot Limited, Hyderabad paid the balance the same has been charged off. This is in the nature of amounts not recovered and charged off. The Assessee relied on the following legal decisions for the allowance of an expenditure/loss.
1. CIT Vs. RB Rungta & Co. (1963) 50 ITR 233 (Bom.)
2. 44 Taxmann 477/177 ITR 461 (P&H)
22. The CIT(A) held that the assessee had not actually made any claim under bad returns though he had stated that it is in the name of bad debts, such claim to the extent Rs.5,79,350/- made under discount and rebate cannot be made under deduction. In the case Devi Films P Ltd. Vs. CIT (1970) (75 ITR 301 Mad) . wherein it has been held that a trading loss has a wider connotation than a bad debt. A bad debt may also be a trading loss but a trading loss need not necessarily be bad debt".
23. We find that the amount charged off to the profit and loss account during the year pertains to the balance receivable from various customers. The amounts pertains to the current year and previous year balances. Hence it is in the nature of amounts which cannot be recovered and charged off, the claim to the extent Rs.5,79,350/- is to be allowed as deduction. The Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Dayachand Hardilal (1989) (177 ITR 461) (P&H) has held that failure to recover price of certain goods sold under agreement by a selling agent is to be allowed as deduction. Hence, we find that the sum of Rs. 5,79,350/- claimed under discount/rebate is to be allowed as a deduction. Accordingly, this ground of appeal is allowed.10 11 ITA No.1322 & 1039/Hyd/2008
Laser Dot Limited, Hyderabad
24. In the result, the appeals of the assessee are partly allowed.
Order pronounced in the open court on:
20/04/2012 Sd/- Sd/- (CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 20 th April, 2012 Copy forwarded to: 1. M/s Laser Dot Limited, 3-480/3, Barkatpura, Hyderabad-27.
2. The ACIT, Circle 16(1), Hyderabad
3. The CIT(A)-IV, Hyderabad
4. The CIT, Hyderabad
5. The DR, ITAT, Hyderabad Np/ Date Initials
1. Draft dictated on 16/04/12
2. Draft placed before 19/04/12 author
3. Draft proposed & placed before second member
4. Draft discussed & approved by second member
5. Approved draft comes to Sr.PS/PS
6. Kept for 11 12 ITA No.1322 & 1039/Hyd/2008 Laser Dot Limited, Hyderabad pronouncement on
7. File sent to Bench Clerk
8. Date on which file goes to the Head Clerk
9. Date of dispatch of order.12