2010 (10) TMI 531 - HC - Income Tax

Disallowance - Search and seizure - Capital or revenue expenditure - The Revenue has accepted the returns filed by the assessee in regard to the deposit made by most of the distributors except the eight distributors on the ground that those eight distributors are not at all doing any business and that they are the kith and kin of the directors of the assessee-company and some of them are retired employees and some of them are employees - Held that amount of Rs. 90 lakhs shown in the security deposit towards bottles is fictitious in nature and that the findings of the Assessing Officer are based on facts and therefore the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal could not have reversed the well reasoned order of the Assessing Officer when no material is placed to show that really there was breakage of bottles, the deduction claimed under the said head in a sum of Rs. 3,98,012 has been wrongly claimed by the assessee - Held that assessee has made a categorical statement that the income earned by those eight distributors is enjoyed by them only and the quantum of deposit would vary and depends upon the actual business of each of the distributor - But there is no prohibition under the law that an assessee-company cannot give its distribution either to the relatives of the directors or to its retired employees or to its employees - whether there is a deposit of Rs. 90 lakhs under the head Security deposit towards bottles and crates is a question of fact and not a question of law - Decided against the revenue

Summary

Issues Involved:
1. Treatment of Rs. 90 lakhs as income under the head "Security deposit".
2. Deduction claim of Rs. 3,98,012 towards "bottle breakage".
3. Deduction claim of Rs. 4,37,571 towards repairs of wooden crates.

Issue-wise Detailed Analysis:

1. Treatment of Rs. 90 lakhs as income under the head "Security deposit":
The Revenue challenged the concurrent findings of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, which had rejected the Assessing Officer's treatment of Rs. 90 lakhs as income. The Assessing Officer had doubted the genuineness of the security deposits from eight distributors, alleging they were fictitious or closely related to the company's directors. The appellate authorities, however, accepted the assessee's explanation that the deposits varied based on business needs and were reflected in the distributors' books of accounts. The court noted that the Revenue had failed to verify the distributors' transactions and tax assessments, which could have substantiated their claims. Thus, the court upheld the appellate authorities' findings, stating that the matter was a question of fact, not law, and dismissed the Revenue's appeal on this issue.

2. Deduction claim of Rs. 3,98,012 towards "bottle breakage":
The Revenue contended that the deduction for bottle breakage was wrongly allowed by the appellate authorities, arguing that there was no cogent evidence of such breakage. The court observed that bottle breakage is a common occurrence in the business of manufacturing beverages due to wear and tear during washing, filling, and transporting. The court also noted that similar deductions had been allowed in previous and subsequent years. Therefore, the court found no reason to interfere with the appellate authorities' decision to allow the deduction and ruled against the Revenue on this issue.

3. Deduction claim of Rs. 4,37,571 towards repairs of wooden crates:
The Revenue argued that the expenditure on repairs of wooden crates should be treated as capital expenditure, not revenue expenditure. The court disagreed, stating that repairs to wooden crates are a regular and necessary expense in the beverage manufacturing business. The court emphasized that such repairs are routine and cannot be classified as capital expenditure. Consequently, the court upheld the appellate authorities' decision to allow the deduction and ruled against the Revenue on this issue.

Conclusion:
The court dismissed the Revenue's appeal, affirming the decisions of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal on all three issues. The substantial questions of law raised by the Revenue were answered against them, supporting the assessee's claims regarding the security deposit, bottle breakage, and repairs to wooden crates.