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TMI Blog2014 (11) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... eal of the assessee in Assessment Year 2002-03 is directed against the order of the CIT(A)-III, Baroda in sustaining the disallowance made by the Assessing Officer of Rs. 21,39,553/- on account of revaluation of liability. 4. The facts of the case are that a tripartite agreement was made between Sarabbai Machinery Ltd. (SML), Ambalal Sarabhai Enterprise Ltd. (ASE Ltd.) and the purchasers of the shares of SML on 18.04.1994. At that particular point i.e. in 1994, SML was indebted to ASE Ltd. for an aggregate amount of Rs. 7,40,96,250/- (consisting of unpaid purchase consideration, advances received by SML from ASE Ltd and interest provided on these amounts). In the said agreement, clause 3 expressly provided that the interest on the unpaid purchase consideration shall cease to accrue with effect from 01.10.1993. The clause 4 of the agreement provided for the payments in installments in the following manner: "4.1 The aforesaid sum of Rs. 7,40,96,250 shall be paid by SML to ASE in the following manner: Rs. 1,00,00,000 On 1st October, 1994 1,00,00,000 On 1st April. 1995 1,00,00,000 On 1st October, 1995 1,14,10,000 On 1st April, 1996 4,14,10,000 3,26,86,250 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t event that the amount by which the liability had ceased upon such earlier payment, can be known. 7. Considering that SML had the option to discharge the aggregate interest liability of Rs. 3,26,86,250 (which was payable on 1.4.2014) at any earlier point of time by the payment of only that amount which was equal to the discounted value thereof (based on the discounting factor of 18% p.a.) at the time of payment, solely with a view to secure that the books of account reflected this position, the Board of Directors of the Company passed a resolution at their meeting held on 2.9.1996 for writing back Rs. 82,47,082 [Rs. 99,08,539 minus Rs. 16,61,457 (present value of Rs. 3,26,86,250 as on 31/03/1996 at a discounting factor of 18%)]. This amount of Rs. 82,47,082 written back to the credit of the Profit and Loss Account does not at all represent any cessation, remission or waiver of the liability to ASE - especially such as is envisaged by Section 41 of the Income-tax Act, 1961, and there can be no question for including the credit as the Company's income for taxation purposes for the year ended 31.3.1996 corresponding to A.Y. 1996-97. The assessee-company submitted that the ASE ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 32,21,195 31.3.2001 38,01,010 31.3.2002 44,85,192 10. As the ICICI Bonds had been redeemed early, the board thought it advisable to write up the liability so that the books of account as at 31.3.2002 would show the liability at its then present value of Rs. 44,85,192. That would require a credit entry for Rs. 28,23,735 [Rs. 44,85,192 minus Rs. 16,61,457 (already provided there in books)] on account of increment in the present value during the period from 1.4.1996 to 31.3.2002 on the basis of the discounting factor of 18% per annum. This was done by the company by debiting profit and loss account and crediting liability account. As the Department assessed Rs. 82,47,082/- for A. Y. 1996-97, the same is now debited to Profit and Loss A/c. while restoring the liability and therefore is rightly deducted. 11. It was further submitted by the AR of the assessee that while disallowing the claim of the assessee the Assessing Officer has not appreciated the facts of the case properly. Further, he submitted that the Assessing officer in para 4.4.3 of his order has held that agreement was executed in 1994 and the bonds were purchased in 1997, therefore there is no direct nexu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the A.Y. 1997-98 to meet its liability payable to ASE limited in 2014, the assessee-company had not revalued its liability in A.Y. 1997-98 and following notes was included in the Annual accounts for such decision. "10. Provisions for interest on the Company's liability to Ambalal Sarabhai Enterprises Ltd. (ASE) pursuant to the agreement dated April 18, 1994 has not been made since the maturity value of the ICICI Bonds acquired by the Company for securing that liability will be adequate to meet the Company's liability to ASE, both for principal and interest." 14. Further, a note explaining above referred situation was explained in return of income for A.Y. 1997-98, which reads as under:- "In view of what has been mentioned in Note No. 10 of Schedule-J forming part of the attached Annual Accounts, deduction for interest on the Company's liability to Ambalal Sarabhai Enterprises Limited pursuant to the Agreement dated April, 1994 has not been claimed. Further, since no income on the ICICI Bonds referred to in the said Note, held by the Company, has accrued due during the year, the same has also not been considered in the computation of Total Income hereinabove." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and accordingly directing the Assessing Officer to allow the deduction of Rs. 6,84,182/- to the assessee from its income. 18. The Departmental Representative relied on the order of the Assessing Officer and submitted that the CIT(A) was not justified in deleting the disallowance to the extent of Rs. 6,84,182/- in AY 2002- 03 and Rs. 8,07,334/- in AY 2003-04. 19. We find that in the instant case the assessee has revalued its liability to M/s. Ambalal Sarabhai Enterprises Ltd. (ASE Ltd.) and increased the same by Rs. 28,23,735/-. In our considered view, in normal parlance such increase in liability is not an expense incurred wholly and exclusively for the purposes of business and is therefore not allowable as deduction to the assessee. But looking at the entire facts of the case, we find that in this case when the assessee revalued the same liability in the AY 1996-97 resulting in credit of Rs. 82,47,082/- to the profit and loss account, the Department held that amount as taxable income of the assessee. In our opinion, Department cannot be allowed to blow hot and cold at the same time. In the AY 1996-97 when in reality no cessation of liability of Rs. 99,08,539/- took place but o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 22. The Assessing Officer observed that the assessee had made investment of Rs. 6,65,358/- in shares of M/s. Paras Petrofills Ltd. Before the Assessing Officer, the assessee submitted that such investment was made in March 2002 from its cash credit facility obtained from Indusind Bank to whom the assessee was paying interest @ 15%. On query by the Assessing Officer to explain as to why the corresponding interest paid for investment in the shares should not be disallowed, the assessee failed to furnish any explanation and in that event, the Assessing Officer held that the investment in shares of M/s. Paras Petrofills Ltd. was made out of interest bearing funds and disallowed Rs. 8,317/- u/s 14A of the Act. 23. On appeal, the CIT(A) confirmed the action of the Assessing Officer for the reason that the assessee before the Assessing Officer accepted the investments in shares were made out of interest bearing funds. 24. Before us no material was brought on record by the AR of the assessee to show that the investments in shares of M/s. Paras Petrofills Ltd. were not made out of interest bearing funds of the assessee and that the assessee had sufficient interest free funds for makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contention of the AR of the assessee is that the disallowance was made without pointing out the items of the expenses in respect of which the assessee had not maintained the vouchers and therefore, the Assessing Officer is not justified in making disallowance of expenses on ad-hoc basis. We find force in the arguments of the AR of the assessee. We find that the Assessing Officer has not pointed out for which items of the expenditure the assessee has not maintained the vouchers. Without bringing such material on record, he was not justified in making ad-hoc disallowance of Rs. 40,000/- in AY 2002-03 and Rs. 43,458/- in AY 2003-04 out of staff welfare expenses of Rs. 6,74,490/- in AY 2002-03 and Rs. 5,79,459/- in AY 2003-04. Hence, we set aside the orders of the lower authorities on this issue and delete the disallowance of Rs. 40,000/- in AY 2002-03 and Rs. 43,458/- in AY 2003-04 and allow this ground of appeal of the assessee in both the years under appeal. 31. Ground No.4 of the assessee's appeal in AY 2002-03 is directed against the order of CIT(A) in initiating penalty u/s 271(1)(c) of the Act. This ground of appeal of the assessee is dismissed as premature. 32. Ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AR of the assessee supported the order of the CIT(A). 38. After considering the rival submissions and perusal of the material available on record, we are of the considered opinion that the tax is payable to the RTO for plying of vehicle on the road. Till immediately preceding year, the RTO was collecting tax every year and only in this year the RTO decided to levy life time tax on the vehicle of the assessee which was already used by the assessee and was not a case of acquisition of any new vehicle. By making this payment the assessee has not acquired any new asset. By making this payment to the RTO, the assessee is entitled to ply vehicle on road without which the assessee would not be able to ply the vehicle on road. Thus, the collection of road tax by RTO as one time payment was revenue expenditure. The DR could not bring any material on record to show that the expenditure in question was a capital expenditure because the assessee was deriving any benefit of enduring nature or has acquired any new capital asset. Hence, we find no infirmity in the order of CIT(A) which is confirmed and thus, this ground of appeal of the Revenue is dismissed. 39. Ground No.2 of the Cross-ob ..... X X X X Extracts X X X X X X X X Extracts X X X X
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