2013 (11) TMI 922 - AT - Income Tax

Disallowance of expenditure - Payment of Privilege fees - Nature of expenditure - Exclusive privilege for wholesale trade of Indian made Foreign Liquor & Beer - Held that - The Excise Department on the basis of granting license to the buyers of the products sold by the assessee is entitled to license which privilege fees is demanded by the Excise Department. Therefore at no point of time can the assessee claim that it was not the part of expenditure for the purpose of its sales and it s direct link - It was a controlled item for the purpose of decentralization and the procurement was from outside the State of Orissa was to be considered for sale in Orissa under the sharp eye of Excise Department not because Orissa Sate Beverages Corporation Ltd without having suffered production cost was the wholesale distributor only. This Excise Duty therefore is a privilege of the Excise Department as the Central Excise alone will jeopardize the sale of liquor of the same brand elsewhere causing undue illicit trade from outside the State of Orissa. Incidentally, this issue also takes care of the fact as pointed out by the learned Counsel for the assessee, that the jeeps were procured for the Excise Department were not to be used by the assessee independently had shown the ownership in their books of account and claimed deprecation on it which the learned Counsel for the assessee agreed that the depreciation cannot be allowed to it as the same were put to use by the Excise Department and not the assessee. The depreciation therefore was not to be claimed by the assessee as having not fulfilled the twin conditions being ownership and put to use by the assessee . Privilege fees therefore becomes integral part and parcel of expenditures to be allowed to the assessee insofar as it is linked to the sale which sale figures are on the basis of license granted by the Excise Department who are in full control in the State and therefore is directly linked to the turnover of the assessee which volume increases the license fees including the payment of privilege fees which remain intact at the threshold. CIT(A) merely followed the earlier decision when the Assessment Year 2003-04 on the actual fact finding he only considered it to be allowed and the license fees which was already claimed as revenue expenditure stood allowed by the Assessing Officer earlier and later as well. The privilege fee therefore is directed to be allowed for all the respective AYs - Following decision of Rajasthan State Beverages v. ACIT 2013 (9) TMI 557 - ITAT JAIPUR - Decided in favour of assesee. Validity of proceedings u/s.147 - Held that - cash discount available was rendered to tax in the Assessment Year 2005-06 therefore could not have been claimed in the Assessment Year 2001-02 validates the reopening of the assessment - Decided against assessee.

Issues Involved:
1. Validity of reassessment proceedings.
2. Allowability of cash discount under mercantile system of accounting.
3. Treatment of security deposits as capital receipts.
4. Disallowance of privilege fees paid to the Excise Department.
5. Charging of interest under sections 234D, 234B, and 234C.
6. Deletion of addition under the head "License Fees" for Assessment Year 2004-05.
7. Disallowance of depreciation on vehicles used by the Excise Department.
8. Treatment of prior period expenses.
9. Disallowance of service tax payable.
10. Treatment of sundry creditors.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The reassessment proceedings were challenged by the assessee for the Assessment Year 2001-02. The tribunal upheld the validity of the reassessment proceedings, noting that the cash discount was rendered to tax in the Assessment Year 2005-06, thereby validating the reopening of the assessment.

2. Allowability of Cash Discount:
The tribunal directed that cash discounts should be allowed in the year to which they pertain. The Assessing Officer is to verify the cash discounts for the respective assessment years and allow them accordingly.

3. Treatment of Security Deposits as Capital Receipts:
The tribunal held that security deposits could not be taxed as revenue receipts. These deposits, being part of the monopolistic trade of IMFL, were considered capital assets and not revenue to be taxed in one go.

4. Disallowance of Privilege Fees Paid to the Excise Department:
The tribunal allowed the privilege fees as a deductible expenditure for all the respective assessment years. The fees were considered integral to the business operations of the assessee, directly linked to the turnover and sales controlled by the Excise Department.

5. Charging of Interest under Sections 234D, 234B, and 234C:
Interest under section 234D was not applicable for the Assessment Year 2001-02, as the statute came into effect from Assessment Year 2003-04. However, interest under sections 234A, 234B, and 234C were mandatory and to be levied in accordance with the provisions of the Income Tax Act.

6. Deletion of Addition under the Head "License Fees" for Assessment Year 2004-05:
The tribunal dismissed the Revenue's appeal, upholding the deletion of the addition of Rs. 5 Crores made under the head "License Fees" by the CIT(A).

7. Disallowance of Depreciation on Vehicles Used by the Excise Department:
The tribunal agreed that depreciation on vehicles (Commander Jeeps) used by the Excise Department could not be claimed by the assessee, as the vehicles were not put to use by the assessee but by the Excise Department.

8. Treatment of Prior Period Expenses:
The tribunal restored the issue of prior period expenses to the file of the Assessing Officer for verification. The expenses should be allowed if they crystallized in the impugned assessment year and were not against the principles of the mercantile system of accounting.

9. Disallowance of Service Tax Payable:
The tribunal noted that service tax payable should not be disallowed under section 43B if the amount was not debited to the profit & loss account as an expenditure nor claimed as a deduction. The addition was to be deleted in line with the decision in CIT vs. Noble Hewitt (I) (P) Ltd.

10. Treatment of Sundry Creditors:
The tribunal directed the Assessing Officer to verify the nature of sundry creditors. The assessee was required to furnish details to establish the nature of the creditors, and the issue was restored to the file of the Assessing Officer for reconsideration.

Conclusion:
The tribunal partly allowed all the appeals of the assessee and dismissed the solitary appeal preferred by the Revenue. The issues were adjudicated comprehensively, considering the legal principles and facts presented.

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