IN THE INCOME TAX APPELLATE TRIBUNAL DELHI `H' BENCH
BEFORE SHRI A.N. PAHUJA, AM & SHRI C.M. GARG, JM
ITA no.1400/Del/2011
With
CO no.122/Del./2011
Assessment year:2007-08
ACIT,Circle-18(1), Room V/s . UFO India Ltd.,
no.211A, C.R. Building, IP 202, F-46, Bhagat Singh
Estate,New Delhi Market, New Delhi
[PAN : AABCV 8900 E]
(Appellant) (Respondent)
Assessee by None
Revenue by Shri B.R.R. Kumar,DR
Date of hearing 23-05-2012
Date of pronouncement 31-05-2012
ORDER
A.N.Pahuja:-This appeal filed on 18.03.2011 by the Revenue and the
corresponding cross objection[CO] filed on 21.04.2011 by the assessee against
an order dated 10.01.2011 of the learned CIT(A)-XXI, New Delhi, raise the
following grounds:-
I.T.A. No.1400/D/2011[Revenue]
1 The ld. CIT(A) has erred on facts and in law by restoring to
the file of the AO the issue of disallowance of ``3,43,116/-
u/s 14A for recalculation, ignoring that,
i) The powers of the learned CIT(A) to set aside
issues decided in scrutiny assessment have been
curtailed with effect from 1.6.2001.
ii) By not calling for a remand report from the
Assessing Officer on the issues set aside, the
learned CIT(A) has not decided the appeal in
accordance with the Board's Circular No.14 dt.
12.12.2001 on the issue.
2 ITA no.1400/Del./2011&
CO no 122/Del./2011.
2 The ld. CIT(A) has erred on facts and in law by allowing
depreciation @60% on UPS instead of @15% as allowed by
the Assessing Officer without examining or discussing the
case on merits and by ignoring that, the UPS is a separate
electrical device attached to a computer to provide battery
back up only and does not constitute an integral part of the
computer system.
3 The learned CIT(A) has erred on facts and in law by deleting
50% of the disallowance of ``25,48,492/- comprising legal
and professional expenses of capital nature on the basis of
the Hon'ble Delhi High Court order in the case of CIT Vs.
OCL India Ltd., 2010-TIOL-808-HC-Del-IT wherein it was
held that when the purpose of services rendered is partly
related to trading activity, then the payment made for such
services has to be bifurcated suitably, ignoring that,
i) In the case under consideration the purpose of
services rendered was almost entirely related to
benefit of enduring nature as apparent from
submissions of the assessee itself during
appellate proceeding cited at para 5.1 (i) on page
4 of the learned CIT(A) order.
ii) The assessee has not been able to satisfactorily
establish that the said legal and professional
expenses incurred chiefly in connection with
drafting, revising and amending of Articles of
Association, Investment Agreements etc was not
for enduring benefit of the company and was in the
nature of revenue expenditure.
iii) The assessee has stated in its submission during
the appellate proceedings as cited at page 5 of the
CIT(A) order that, without prejudice to its other
submissions, the said expenditure may be
amortized @1/5th for five successive years, thus
showing that even the assessee itself does not
believe the said expenditure to be entirely
allowable during the year.
iv) There is no acceptable basis for allowance of 50%
of the expenses and disallowance of 50% of the
expenses since no working has been given by the
learned CIT(A) to justify his stand that 50% of the
expenses was related to benefit of enduring nature
3 ITA no.1400/Del./2011&
CO no 122/Del./2011.
and 50% of the expenses was related to trading
activity.
4 The learned CIT(A) has erred on facts and in law by holding
that expenditure of ``6,29,435/- comprising rent/rates/taxes,
depreciation and freight disallowed by the Assessing Officer
as prior period expenses, was allowable as the liability for
payment of the said expenditure was crystallized during this
year, ignoring that:
i) The submissions made by the assessee in the
above regard during the appellate proceeding
were not made during the assessment
proceedings.
ii) The Assessing Officer has not been granted an
opportunity to examine the additional evidence
and explanation submitted by the assessee during
the appellate proceedings.
iii) The conditions laid down for admission of
additional evidence under Rule 46A are not
satisfied in the case.
iv) Neither the submissions of the assessee made
during the appellate proceedings nor the decision
of the learned CIT(A) make it abundantly clear that
the liability for payment of the said expenditure
pertaining to prior periods actually crystallized
during the year under consideration."
CO no.122/Del./2011[Assessee]
1. "The learned CIT(A) went wrong in disallowing fifty
percent the expenditure of ``25,48,492/- in respect of
professional fee for conducting the legal due diligence
exercise on UFO Moviez Ltd. and other subsidiaries
of the company by treating the same to be of capital
nature.
2. For the above other grounds that may be further
adduced at the time of hearing, the order of the
learned CIT(A) requires to be modified suitably."
4 ITA no.1400/Del./2011&
CO no 122/Del./2011.
2. At the outset, the Bench rejected the request for adjournment on
behalf of the assessee in the letter dated 23rd May, 2012 signed by one Shri
Manu K Giri, Advocate, power of attorney of the signatory or of shri Anoop
Sharma, having not been filed . Earlier on 16.5.2012 also , the Bench adjourned
the hearing for want of power of attorney of the ld. AR. Considering the nature of
issues, the Bench proceeded to dispose of these appeals after hearing the ld.
DR.
3. Adverting first to ground no.1 in the appeal, facts, in brief, as per
relevant orders are that e-return declaring loss of ``25,21,37,436/- filed on
28.10.2007 by the assessee, engaged in the business of Digital Cinema System,
after being processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter
referred to as the Act) was selected for scrutiny with the service of a notice u/s
143(2) of the Act issued on 23.09.2008. During the course of assessment
proceedings, the Assessing Officer (A.O. in short) noticed that the assessee
claimed exemption of dividend income of ``97,153/- u/s 10(34) of the Act. On
perusal of details, the AO noticed that the assessee incurred an expenditure of
``27,98,84,089/- for earning gross income of ``7,92,48,938/-. Accordingly, the
AO disallowed proportionate expenditure of ``3,43,116/-, having recourse to
provisions of section 14A of the Act.
4. On appeal, the ld. CIT(A) restored the issue back to the file of AO
for re-computing disallowance in the light of decision in the case of Godrej Boyce
Mfg. Co. Ltd. Vs. DCIT and Another, 234 CTR 1 (Mumbai).
5. The Revenue is now in appeal before us against the aforesaid
findings of the ld. CIT(A).The ld. DR while referring to ground no.1 in their appeal
contended that the ld. CIT(A) did not have power to set aside and thus,
directions of the ld. CIT(A) were contrary to the law.
6. We have heard the ld. DR and gone through the facts of the case.
We find that there is nothing in assessment order or in the impugned order to
5 ITA no.1400/Del./2011&
CO no 122/Del./2011.
suggest as to whether the assessee submitted any computation for disallowance
in terms of the provisions of section 14A of the Act nor the AO pinpointed any
specific item of expenditure incurred for earning the dividend income. The
ld.CIT(A) merely followed the aforesaid decision in Godrej Boyce Mfg. Co. Ltd.
(supra) and restored the matter to the file of the AO. However, the extant
provisions of section 251 of the Act do not bestow any power on the ld. CIT(A) for
setting aside the issue in an assessment. A mere glance at the impugned
order reveals that the order passed by the ld. CIT (A) is cryptic and
grossly violative of one of the facets of the rules of natural justice,
namely, that every judicial/quasi-judicial body/authority must pass
reasoned order, which should reflect application of mind by the
concerned authority to the issues/points raised before it. The
application of mind to the material facts and the arguments should
manifest itself in the order. Section 250(6) of the Act mandates
that the order of the CIT(A) while disposing of the appeal shall be in
writing and shall state the points for determination, the decision
thereon and the reasons for the decision. The requirement of
recording of reasons and communication thereof by the quasi-
judicial authorities has been read as an integral part of the concept
of fair procedure and is an important safeguard to ensure
observance of the rule of law. It introduces clarity, checks the
introduction of extraneous or irrelevant considerations and
minimizes arbitrariness in the decision-making process. Hon'ble
jurisdictional High Court in their decision in Vodafone Essar Ltd. Vs. DRP,196
Taxman423(Delhi) held that when a quasi judicial authority deals with a lis, it is
obligatory on its part to ascribe cogent and germane reasons as the same is the
heart and soul of the matter and further, the same also facilitates appreciation
when the order is called in question before the superior forum. We may point
out that a `decision' does not merely mean the `conclusion'. It
embraces within its fold the reasons forming basis for the
6 ITA no.1400/Del./2011&
CO no 122/Del./2011.
conclusion.[Mukhtiar Singh Vs. State of Punjab,(1995)1SCC
760(SC)].
6.1. Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing
Company Ltd. (supra) while adjudicating a similar issue in the context
of provisions of sec. 14A of the Act and Rule 8D of the IT
Rules,1962 concluded that Rule 8D, inserted w.e.f 24.3.2008
cannot be regarded as retrospective because it enacts an artificial
method of estimating expenditure relatable to tax-free income. It
applies only w.e.f AY 2008-09. For the assessment years where
Rule 8D does not apply, the AO will have to determine the quantum
of disallowable expenditure by a reasonable method having regard
to all the facts and circumstances, the Hon'ble High Court
concluded.
6.2 Hon'ble Supreme Court in their decision dated 6.7.2010 in
CIT v. W alfort Share & Stock Brokers (P.) Ltd.,326 ITR 1, inter alia,
observed that for attracting section 14A of the Act there has to be
a proximate cause for disallowance, which is its relationship with the
tax exempt income.
6.3 Hon'ble Punjab & Haryana High Court in their decision in CIT
vs. Hero Cycles Ltd.,323 ITR 518 have observed that disallowance
under section 14A requires finding of incurring of expenditure and
where it is found that for earning exempted income no expenditure
has been incurred, disallowance under section 14A cannot stand.
6.4 In the light of view taken in the aforesaid decisions, Hon'ble jurisdictional
High Court in a recent decision dated 18.11.2011 in Maxopp Investment Ltd. vs.
CIT,[2011] 15 taxmann.com 390 (Delhi) held as under:
7 ITA no.1400/Del./2011&
CO no 122/Del./2011.
"35. We are of the view that Rule 8D would operate prospectively. We agree
with the submissions made by Dr Rakesh Gupta that if the said Rule were to
have retrospective effect, nothing prevented the Central Board of Direct Taxes
from saying so, particularly, in view of the fact that it had the power to make a
rule retrospective by virtue of Section 295(4) of the said Act. Instead of making
Rule 8D retrospective, clause 1(2) of the Income-tax (Fifth Amendment) Rules,
2008 made it clear that the rules would come into force from the date of their
publication in the Official Gazette. It is, therefore, clear that Rule 8D, which was
introduced by virtue of the Notification No.45/2008 dated 24.03.2008, was
prospective in operation and cannot be regarded as being retrospective. We may
also point out that we have had the benefit of the decision of the Bombay High
Court in Godrej & Boyce Mfg. Co. Ltd. v Dy. CIT [2010] 328 ITR 81/194 Taxman
203, wherein it has, inter alia, been held that the provisions of Rule 8D of the said
Rules has prospective effect and shall apply with effect from assessment year
2008-09 onwards.
36. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have
also been introduced by virtue of the Finance Act, 2006 with effect from
01.04.2007. This is apparent, first of all, from the Notes on Clauses of the
Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes
on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A
of the said Act. It is specifically mentioned in the said Notes on Clauses that:-
"This amendment will take effect from 1st April, 2007 and will, accordingly,
apply in relation to the assessment year 2007-08 and subsequent years."
37. Furthermore, in the Memorandum explaining the provisions in the Finance
Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference
to clause 7 which pertains to the amendment to Section 14A of the said Act that:-
"This amendment will take effect from 1st April, 2007 and will, accordingly,
apply in relation to the assessment year 2007-08 and subsequent years."
38. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to
paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating
expenditure in relation to exempt income and paragraphs 11.1 and 11.2
explained the basis and logic behind the introduction of sub-section (2) of Section
14A of the said Act. Paragraph 11.3 specifically provided for applicability of the
provisions of subsection (2) and it clearly indicated that it would be applicable
"from the assessment year 2007-08 onwards".
39. It is, therefore, clear that sub-sections (2) and (3) of Section 14A were
introduced with prospective effect from the assessment year 2007-08 onwards.
However, sub-section (2) of Section 14A remained an empty shell until the
introduction of Rule 8D on 24.03.2008 which gave content to the expression
"such method as may be prescribed" appearing in Section 14A(2) of the said Act.
40. From the above discussion, it is clear that, in effect, the provisions of sub
sections (2) and (3) of Section 14A would be workable only with effect from the
date of introduction of Rule 8D. This is so because prior to that date, there was
8 ITA no.1400/Del./2011&
CO no 122/Del./2011.
no prescribed method and sub-sections (2) and (3) of Section 14A remained
unworkable."
7.. As already observed, the impugned order suffers from lack of
reasoning and is not a speaking order on the issue before us. In
view of the foregoing, especially when the ld. CIT(A) have not
passed a speaking order on the issue raised in this appeal before
us nor had the benefit of aforesaid decisions including that of the Hon'ble
jurisdictional High Court, we consider it fair and appropriate to set aside
the order of the ld. CIT(A) and restore the matter to his file for
deciding the issue, afresh in accordance with law in the light of
aforesaid judicial pronouncements, after allowing sufficient
opportunity to both the parties. Needless to say that while
redeciding the appeal, the ld. CIT (A) shall pass a speaking order,
keeping in mind, inter alia, the mandate of provisions of sec. 250(6)
of the Act. W ith these observations, ground no. 1 in the appeal of
the Revenue is allowed.
8.. Ground no.2 in the appeal relates to claim of depreciation on UPS
@60%. The AO noticed that the assessee claimed depreciation @60% on UPS
as against admissible rate of 15%. Accordingly, the AO disallowed excess
depreciation of `2,11,010.
9. On appeal, the learned CIT(A) allowed the claim of assessee for
depreciation @60% as applicable to computer systems.
10. The Revenue is now in appeal before us against the aforesaid
findings of the ld. CIT(A). The ld. DR merely supported the order of the AO.
11. We have heard the ld. DR and gone through the facts of the case.
We find that the Hon'ble Delhi High Court in the case of CIT v. BSES Rajdhani
9 ITA no.1400/Del./2011&
CO no 122/Del./2011.
Powers Ltd. in I.T. Appeal no. 1266 (Delhi) of 2010, in their decision dated 31-8-
2010 while adjudicating a similar issue, held as under:
"We are in agreement with the view of the Tribunal that computer accessories
and peripherals such as, printers, scanners and server etc. form an integral
part of the computer system. In fact, the computer accessories and
peripherals cannot be used without the computer. Consequently, as they are
the part of the computer system, they are entitled to depreciation at the higher
rate of 60 per cent."
11.1 Following the said decision, ITAT in ITO vs.v.Omni Globe
Information Technologies India (P.) Ltd., 131 ITD 280(Delhi) held that if
peripherals such as printers, scanners and servers etc. form integral part of the
computer system, UPS will also be an integral part of the computer system,
entitled for deduction of depreciation at the rate of 60 per cent. In another
decision dated 9.11.2010, Hon'ble Delhi High Court in CIT vs. Citycorp Maruti
Finance Ltd. in ITA nos. 1712& 1714/2010 followed their own decision in BSES
Yamuna Powers Ltd.(supra) and upheld the view of the ITAT, allowing
depreciation @60% on computer accessories and peripherals like printers etc. .A
similar view was taken in CIT Vs. M/s Bonanza Portfolio Ltd.: I.T.A. no.833 of
2011 by the Hon'ble jurisdictional High Court in their decision dated 10.8.2011. In
the light of view taken in the aforesaid decisions, especially when the Revenue
have not placed before us any contrary decision nor any other material so as to
enable us to take a different view in the matter, we have no hesitation in
upholding the findings of the ld. CIT(A),allowing depreciation @60% on UPS.
Therefore, ground no.2 in the appeal of the Revenue is dismissed.
12.. Ground no.3 in the appeal of the Revenue and ground no.1 in the
CO relate to disallowance of legal and professional charges. During the course
of assessment proceedings, the AO noticed that the assessee incurred an
amount of ``6,16,98,370/- towards legal and professional charges ,including an
amount of `25,48,492/- paid to M/s Wadia Gandy & Co. for conducting due
diligence and drafting employment agreement relating to the forthcoming merger
of the company and UFO Moviez (India) Ltd. Since the said expenditure,
10 ITA no.1400/Del./2011&
CO no 122/Del./2011.
according to the AO, bestowed enduring benefit, the AO added an amount of
``25,48,492/- on the ground that amount was capital in nature..
13. On appeal, the assessee contended that for carrying out due
diligence exercise on the company ,UFO India and other subsidiaries, for
discussing the issues arising out of legal due diligence exercise as also for
drafting employment agreements in terms of the investment agreement and for
revising or amending Articles of Association of the company ,UFO India and
other subsidiaries, the assessee incurred the said expenditure. While pointing
out that no merger took place in the year under consideration and the assessee
incurred the expenditure for merely due diligence exercise, it was submitted that
no disallowance could be made. Inter alia, the decision in the case of CIT Vs.
Kochin Malabar Estates and Industries Ltd., 207 ITR 398 (Kerala) was relied
upon. Without prejudice to these arguments, the assessee claimed that
expenditure be amortised u/s 35DD of the Act. In the light of these submissions,
the learned CIT(A) reduced the addition to 50% in the following terms:-
"5.2 I have gone through the finding of the AO and submission of
the ld. AR. In this regard I place my reliance on the judgment of the
Hon'ble Delhi High Court in the case of CIT Vs. OCL India Ltd.
reported at 2010-TIOL-808-HC-Del-IT, wherein, the Hon'ble High
Court had decided similar issue in favour of the revenue holding
that 40% of expenditure incurred in the nature of the capital. The
finding of the Hon'ble High Court is reproduced hereunder:-
"Governed by the aforesaid principles, we are of the view that the
Tribunal has rightly held that the scope of study was the mixture
of both the areas namely part of it related to the study from which
benefit of enduring nature was sought to be achieved and part
thereof related to the trading activities. Therefore, the
expenditure incurred was required to be apportioned between the
two viz capital and revenue expenditure.
When we come to the allocation of this expenditure, the reason
for allocating 20% of the expenses towards capital expenditure is
not discernible from the order of the Tribunal. According to the
Tribunal itself, out of the five aspects on which report to the
consultant was sought, two related to expansion or starting of
11 ITA no.1400/Del./2011&
CO no 122/Del./2011.
new projects. On this observation of the Tribunal there is no
dispute. This is correct as areas No.4 & 5 relate to possible
acquisition in southern region and expansion of existing cement
plant and from these studies benefit of enduring nature was
sought to be derived at. Then the obvious fallout would be to
allocate 40% of the total expenditure and not 20% to the head
"capital expenditure.
We, therefore, answer the question by holding that the Tribunal
was not correct in sustaining addition only to the extent of 20%
treating as incurred in the same capital field and it should have
sustained addition to the extent of 40% of the addition on total
payment of `47.25 lacs as capital expenditure. The order of the
Tribunal is modified accordingly."
5.3 The ratio of the above said judgment of the Hon'ble Delhi
High Court is clearly attracted in the case as there is a basic
similarity in the case as above mentioned case was pertaining to
the report of the consultant for starting of new projects. Herein the
payment has been done in relation to merger of the company. So, I
am of the considered opinion that 50% of the expenditure incurred
to M/s Wadia Gandy & Co. should be treated as capital in nature.
So, 50% of the addition is upheld. Thus, assessee gets a relief of
`12,74,246/- on this account."
14 The Revenue is now in appeal before us for reducing the addition
by 50% while the assessee is in appeal for upholding the remaining addition. The
ld. DR merely supported the order of the AO while referring to decision of Hon'ble
Delhi High Court in CIT Vs. OCL India Ltd., 2010-TIOL-808-HC-Del-IT.
15. We have heard the ld. DR and gone through the facts of the case.
Indisputably, the amount of `25,48,492/- was incurred towards legal and
professional charges paid to M/s Wadia Gandy & Co. for due legal diligence
exercise of the assessee company, UFO India and other subsidiaries and
revising and amending their Articles of Association pursuant to the terms of
investment agreement besides drafting employment agreement etc. The exact
scope of services rendered by the consultants and basis of payment is not
evident from the impugned order nor the ld. DR placed before us any agreement
or document in that connection. The AO treated the amount capital in nature
12 ITA no.1400/Del./2011&
CO no 122/Del./2011.
while the ld. CIT(A) reduced the disallowance by 50% on the basis of decision in
OCL India Ltd.(supra) . We find that the ld. CIT(A) without analyzing the basis of
allocation of each of the job undertaken by M/s Wadia Gandy & Co. vis--vis
assessee and other entities, attributed 50% of the amount in relation to merger
of the company as capital in nature. The ld. CIT(A) nowhere adduced the basis of
such allocation nor the ld. DR could throw any light on this aspect. In OCL India
Ltd.(supra) followed by ld. CIT(A), the Hon'ble Delhi Court after examining the
agreement between the assessee and the Consultant, which delineated the
scope of study as mentioned in para 7 of the said order and in the light of broad
principles governing nature of expenditure mention in para 13 of the order in the
light of decision in CIT Vs. J K Synthetics Ltd., 222 CTR 339(SC) ,attributed 40%
of the amount as capital in nature. In the instant case before us, the ld. CIT(A)
did not make elaborate discussion on the scope of study undertaken by the
consultants nor the ld. DR submitted a copy of the agreement with consultants, if
any, before us. In these circumstances ,especially when complete facts in
relation to scope of study are not available before us nor the basis of allocation of
the amount towards each of the job undertaken by the consultant and nor even
as to whether portion of expenditure was attributed to other entities in the group
covered in the study, we consider it fair and appropriate to vacate the findings of
the ld. CIT(A) and restore the matter to his file for deciding the issue raised in
the ground no.3 in the appeal of the Revenue and ground no.1 in the CO,
afresh in accordance with law in the light of our aforesaid observations, after
allowing sufficient opportunity to both the parties, bringing out clearly as to the
nature of each of the job comprised in the scope of study and amount in relation
thereto, before concluding as to whether or not such amount is capital or
revenue in nature. With these observations, ground no. 3 in the appeal of the
Revenue and ground no.1 in the CO are disposed of.
16.. Ground no.4 in the appeal relates to prior period expenditure of
``6,29,435/- . The AO disallowed the claim merely because the expenditure did
not relate to the year under consideration.
13 ITA no.1400/Del./2011&
CO no 122/Del./2011.
17. On appeal, the assessee contended that prior period expenses
comprised rent rates and taxes-`4,59,705; depreciation-`92,380 & freight and
forwarding charges-` 77,350. The amount of rent rates and taxes was on
account cess for the FY 2005-06 paid to Navi Mumbai Municipal Corporation
covered u/s 43B of the Act. As regards depreciation on lens for projectors, the
assessee submitted that since capitalization of lenses was made with
retrospective effect and total depreciation amounting to ``3,69,21,875/- as per
books, including ``92,380/- was added back in the return of income and no
additional depreciation relating to preceding year was claimed under the Act,
amount could not have been disallowed again. As regards freight and forwarding
charges, the assessee contended that the liability for the said amount on account
of carriage, loading and octroi charges crystallized during the year under appeal.
In the light of these submissions the ld. CIT(A),without analyzing the facts of the
case or allowing any opportunity to the AO, allowed the claim of the assessee,
holding that liability for payment of expenditure crystallized in the year under
consideration.
18. The Revenue is now in appeal before us against the aforesaid
findings of the ld. CIT(A).The ld. DR supported the order of the AO while
contending that the ld. CIT(A) did not analyze as to how the liability for each of
the expenditure comprised the amount of ``6,29,435/- crystallised in the year
under consideration. The ld. DR added that the learned CIT(A) admitted
additional evidence in contravention of Rule 46A of the I.T. Rules, 1962 and
allowed the claim of assessee.
19. We have heard both the parties and gone through the facts of the
case. As is apparent from the aforesaid facts, the AO disallowed the amount
without analyzing as to how the liability for each of the expenditure comprised in
the amount of ``6,29,435/- crystallised in the year under consideration . There is
nothing to suggest as to whether or not any details or reply was filed before the
AO and the assessment order is silent on this aspect. The ld. CIT(A) accepted
14 ITA no.1400/Del./2011&
CO no 122/Del./2011.
the submissions of the assessee, without having any report from the AO on the
written submissions/documents filed by the assessee and concluded that the
liability for the aforesaid expenses comprising the amount of ``6,29,435/-,
crystallized in the year under consideration . Admittedly, the assessee is
following mercantile system of accounting. It is well settled that accrual of a
statutory liability depends upon the terms of the relevant statute. The
quantification or ascertainment cannot postpone its accrual to the extent of
admitted liability. On the other hand, contractual liability accrues when the basis
for its quantification is settled by an agreement or otherwise. As held by the
Hon'ble Gujrat High Court in their decision in Saurashtra Cement & Chemical
Industries Ltd. vs. CIT, 213 ITR 523(Guj) ,merely because an expense relates to
a transaction of an earlier year it does not become a liability payable in the earlier
year unless it can be said that the liability was determined and crystallized in the
year in question on the basis of maintaining accounts on the mercantile basis. In
each case where the accounts are maintained on the mercantile basis it has to
be found in respect of any claim, whether such liability was crystallized and
quantified during the previous year so as to be required to be adjusted in the
books of account of that previous year. If any liability, though relating to the
earlier year, depends upon making a demand and its acceptance by the
assessee and such liability has been actually claimed and paid in the later
previous years it cannot be disallowed as deduction merely on the basis the
accounts are maintained on mercantile basis and that it related to a transaction
of the previous year, the Hon'ble High Court observed. It was further concluded
that it is actually known income or expenses, the right to receive or the liability to
pay which has come to be crystallized, which is to be taken into account under
the mercantile system of maintaining books of account. An estimated income or
liability, which is yet to be crystallized, can only be adjusted as a contingency
item but not as an accrued income or liability of that year.
19.1. In the instant case, as already stated, there is nothing to suggest as to
whether or not any reply was filed before the AO. On appeal, the assessee
15 ITA no.1400/Del./2011&
CO no 122/Del./2011.
submitted detailed written submissions/documents. These details/documents
were not confronted to the AO, as pointed out by the ld. DR.A specific ground
has been taken before us regarding violation of procedure laid down in rule 46A
of the IT Rules,1962. These provisions stipulate that the ld. CIT(A) can take into
account any evidence produced under sub-r. (1)(b) & (c) of Rule 46A of the IT
Rules, 1962 if the assessee was prevented by sufficient cause . In Haji Lal
Mohd. Biri Works' case [2005] 275 ITR 496 (All), by making an elaborate
discussion on rule 46A of the Rules in paragraph 10 at page 500 and 501, it was
held that under rule 46A the authority is not permitted to act whimsically while
exercising the jurisdiction under it .In the case under consideration, the assessee
is stated to have placed before the ld. CIT(A),certain additional documents and
the said documents were not submitted before the AO. The powers of the CIT(A)
in terms of rule 46A to admit fresh evidence, entail an element of discretion
which is required to be exercised in a judicious manner. The powers of the
CIT(A) to admit additional evidence are not only in situations where the evidence
could not be produced before lower authorities owing to lack of adequate
opportunity but also in situations where the fresh evidence would enable the
CIT(A) to dispose of the appeal or for any other substantial cause. Of course,
the power is to be exercised judiciously and for reasons to be recorded. Here
we may point out that the Hon'ble jurisdictional High Court in CIT vs. Manish
Build Well (P.) Ltd.,16 Taxmann.com27(Delhi) held that that the conditions
prescribed in Rule 46A must be shown to exist before additional evidence is
admitted and every procedural requirement mentioned in the Rule has to be
strictly complied with so that the Rule is meaningfully exercised . Once the
assessee invokes Rule 46A and prays for admission of additional evidence
before the CIT (A), then the procedure prescribed in the said rule has to be
scrupulously followed. A distinction should be recognized and maintained
between a case where the assessee invokes Rule 46A to adduce additional
evidence before the CIT (A) and a case where the CIT (A), without being
prompted by the assessee, while dealing with the appeal, considers it fit to cause
or make a further enquiry by virtue of the powers vested in him under sub-
16 ITA no.1400/Del./2011&
CO no 122/Del./2011.
Section (4) of Section 250. It is only when he exercises his statutory power suo
moto under the above sub-section that the requirements of Rule 46A need not
be followed. On the other hand, whenever the assessee who is in appeal before
him invokes Rule 46A, it is incumbent upon the CIT (A) to comply with the
requirements of the Rule strictly so that the Rule is meaningfully exercised and
not exercised in a routine or cursory manner. The Hon'ble High Court held that
sub-rule (3) of Rule 46A interdicts the CIT (A) from taking into account any
evidence produced for the first time before him unless the AO has had a
reasonable opportunity of examining the evidence and rebut the same. In the
instant case, there is nothing in the impugned order of the ld. CIT (A) to suggest
as to whether or not any opportunity was allowed to the AO before concluding on
the issue nor the ld. CIT(A) refers to any additional evidence in terms of rule 46A
of the IT Rules,1962. In these circumstances and in the interest of justice and
fair play, we vacate the findings of the ld. CIT(A) and restore the issue raised in
ground no.4 of appeal of the Revenue before us to his file, with the directions to
follow the mandate in terms of Rule 46A of the IT Rules, 1962 as also principles
of natural justice and thereafter, dispose of the matter in accordance with law
after allowing sufficient opportunity to both the parties ,bringing out clearly as to
whether or not the liability for each item of the expenditure comprising the
amount of ```6,29,435/-, really crystallized in the hands of the assessee during
the year under consideration. Needless to say that while redeciding the
appeal, the ld. CIT(A) shall pass a speaking order, keeping in mind,
inter alia, the mandate of provisions of sec. 250(6) of the Act. With
these directions, ground no. 4 in the appeal of the Revenue is disposed of, as
indicated hereinbefore.
20. Ground No.2 in the CO being general in nature, does not require any
separate adjudication and is, accordingly, dismissed.
21. No other plea or argument was made before us.
17 ITA no.1400/Del./2011&
CO no 122/Del./2011.
22. In the appeal of the Revenue is partly allowed while corresponding CO is
allowed, but both for statistical purposes.
Order pronounced in Open Court
Sd/- Sd/-
(C.M. GARG) (A.N. Pahuja)
(Judicial Member) (Accountant Member)
Copy of the Order forwarded to:-
1. Assessee
2. ACIT,Circle-18(1), Room no.211A, C.R. Building, IP
Estate,New Delhi
3. CIT concerned.
4.CIT(A)-XXI, New Delhi.
5. DR, ITAT,'H' Bench, New Delhi
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Delhi
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