IT: Liquidated damages paid to purchaser for delay in delivery of goods to be allowed as revenue expenditure
■■■
[2013] 34 taxmann.com 149 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'C'
Huber+Suhner Electronics (P.) Ltd.
v.
Deputy Commissioner of Income-tax*
G.D. AGRAWAL, VICE-PRESIDENT
AND CHANDRAMOHAN GARG, JUDICIAL MEMBER
AND CHANDRAMOHAN GARG, JUDICIAL MEMBER
IT APPEAL NO. 4750 (DELHI) OF 2011
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
JANUARY 11, 2013
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Damages] - Assessment year 2007-08 - Whether where assessee-company was under obligation to deliver ordered goods to purchasers within period fixed for delivery in contract and on failure to deliver goods within stipulated period was liable to pay liquidated damages to purchaser, payment of such liquidated damages was allowable as revenue expenditure - Held, yes [Paras 16 & 17] [In favour of assessee]
CASE REVIEW
Swadeshi Cotton Mills Co. Ltd. v. CIT (No.2) [1967] 63 ITR 65 (SC) (para 10) distinguished.
CIT v. R.D. Sharma & Co. [1982] 137 ITR 333/1 Taxman 137 (Bom.) (para 17) followed.
CASES REFERRED TO
Travancore Rubber & Tea Co. Ltd. v. CIT [2000] 243 ITR 158/109 Taxman 250 (SC) (para 8), Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 2)[1967] 63 ITR 65 (SC) (para 10), Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 201 ITR 684/67 Taxman 546 (SC) (para 11), Jamna Auto Industries v. CIT [2008] 299 ITR 92/167 Taxman 192 (Punj & Har.) (FB) (para 11), CIT v. Sohanlal Kunwar & Sons [1987] 164 ITR 129/32 Taxman 588 (Raj.) (para 11), CIT v. R.D. Sharma & Co. [1982] 137 ITR 333/11 Taxman 137 (Bom.) (para 11), Mahalakshmi Sugar Mills Co. v.CIT [1980] 123 ITR 429 (SC) (para 12) and CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113/36 Taxman 88 (AP) (para 12).
Rajan Bhatia for the Appellant. Smt. Anusha Khurana for the Respondent.
ORDER
Chandramohan Garg, Judicial Member - This appeal has been filed by the assessee against the order of the learned Commissioner of Income-tax (Appeals)-XI, New Delhi, dated August 9, 2011, by which he sustained the disallowance of Rs. 32,35,721 on account of liquidated damages made by the Assessing Officer.
2. The grounds of appeal read as under :
| "1. | That the order of the learned Commissioner of Income-tax (Appeals) is bad both in law and on facts of the case. | |
| 2. | That the learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance made by the learned Assessing Officer of claim for deduction of liquidated damages of Rs. 32,35,721 payable under a contract, without appreciating the facts and position in law. | |
| 3. | That the learned Commissioner of Income-tax (Appeals) has erred in holding the amount paid as liquidated damages as capital expenditure, not allowable under section 37 of the Income-tax Act. | |
| 4. | That the learned Commissioner of Income-tax (Appeals) has erred in observing that liquidated damages have arisen out of a contract for purchase of capital asset, without appreciating that the contract was for sale of goods. | |
| 5. | That the learned Commissioner of Income-tax (Appeals) has erred in not allowing the deduction on the basis of terms of the relevant contract, erroneously interpreted by the learned Assessing Officer while disallowing the claim for liquidated damages. | |
| 6. | That the learned Commissioner of Income-tax (Appeals) has erred in holding that the liquidated damages do not constitute expenditure laid out wholly and exclusively for the purposes of business. | |
| 7. | That the learned Commissioner of Income-tax (Appeals) has erred in placing reliance on the decisions of Swadeshi Cotton Mills Co. Ltd. v.CIT (No. 2) [1967] 63 ITR 65 (SC), Travancore Rubber and Tea Co. Ltd. v. CIT [2000] 243 ITR 158 (SC) and Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC), not attracted on facts of the case and not following the decisions as relied upon by the appellant. | |
| 8. | That the learned Commissioner of Income-tax (Appeals) has erred in not disposing ground No. 5 dealing with levy of interest under section 234B and 234D, without assigning any reasons." |
3. Briefly stated, the facts giving rise to this appeal are that the assessee-company filed a return of income declaring loss of Rs. 2,14,09,637 and the same was processed under section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act) and subsequently, this case was selected for scrutiny and a notice under section 143(2) was sent on August 21, 2008. The Assessing Officer again issued a notice under section 143(2) of the Act along with a questionnaire under section 142(1) of the Act on May 12, 2009. Admittedly, the assessee-company was incorporated to carry out business of providing electrical and optical connectivity in various fields such as communication, transportation, medical technology, test and measurement of equipment and other industrial activity. In addition to that, the company was also incorporated to carry out wholesale trading, bulk imports with exports and to provide consultancy and technical support services, specialised after sales services of the products, systems and components.
4. During the assessment, the Assessing Officer noted that the assessee has claimed an amount of Rs. 29,97,029 on account of liquidity damage expenses and he asked the assessee to explain the claimed expenses. In its reply vide letter dated September 3, 2009 along with copies of purchase orders from the parties/Departments on behalf of whom the said amount was claimed, the assessee submitted that the said amount had been claimed as per the orders issued by the purchaser enterprises which were governed by the Indian Railway Standard (IRS) and as per conditions of the contract, the expenses were allowable as per the provisions of section 37(1) of the Act. The Assessing Officer considered the submissions and citations placed by the assessee and concluded with a finding as given below :
"The explanation of the assessee as well as the documents furnished were considered and are not acceptable in view of the following facts :
(A) As per condition No. 0702(a) of Indian Railway Standard conditions of contract, the liquidity damage is to be recovered equivalent to 2 per cent. of the price of any stores (including elements of taxes, duties, freight, etc.) which the contractor has failed to deliver within the period fixed for delivery in the contract or as extended for each month during which the delivery of such stores may be in arrears.
(B) The details furnished for liquidated damages also includes the name of Bharat Electronics Ltd., Ghaziabad, Panchkula and Bangalore for which no copy of contract is furnished.
(C) The details furnished reveals that the liquidity damage is claimed at much more rate than prescribed in the contract of Railways.
In view of above facts of the case, the claim of in respect of liquidity damage amounting to Rs. 32,35,721 is not allowable and the same is disallowed and added to total income of the assessee."
5. The assessee filed an appeal before the Commissioner of Income-tax (Appeals) challenging the disallowance of liquidity damages made by the Assessing Officer. The learned Commissioner of Income-tax (Appeals) dismissed the appeal of the assessee with the following observations :
"2.4 It is a fact that the appellant has entered into an agreement with Indian Railways Standards (IRS) Conditions. As per 0702(a) of the contract, the liquidated damages is to be recovered equivalent to 2 per cent. of the price of any store which the contractor has failed to deliver within the period fixed for delivery in the contract or as extended for each month during which the delivery of such stores may be in arrears.
Damages recovered on account of late supply of capital assets have been held to be capital in nature and not allowable as revenue expenditure by the hon'ble Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 2) [1967] 63 ITR 65 (SC). Consequent on the decision of the High Court, the assessee's land was not acquired and the assessee did not take possession of the land from Delhi Glass Works. The arbitrator fixed the compensation at Rs. 1,70,000 and this amount was paid by the assessee during the accounting period relevant to the assessment year 1958-59. The decision of the Supreme Court in that case was in favour of the Revenue and against the appellant.
2.5 Since liquidated damages have arisen out of a contract for purchase of capital equipment, what is relevant is the nature of goods purchased under the contract, and not the treatment or method of accounting/accounting policy adopted by the applicant. Applying the rule to this case, if the agreed sums of money under the agreements had been paid by the assessee, they would have been credited in its account as a capital expenditure and not revenue expenditure. That being so, the amounts paid must also be treated as capital payment. The plea of the applicant that the amount to be treated as a revenue expenditure within the meaning of section 37(1) for the purposes of business, is not borne out from the record. Similar issues have been discussed in Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 2) [1967] 63 ITR 65 (SC), Travancore Rubber and Tea Co. Ltd. v. CIT[2000] 243 ITR 158 (SC) and Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC).
2.6 That therefore the payment of the same would not constitute expenditure laid out wholly and exclusively for the purposes of business under section 37(1) of the Act. That section 37(1) as well as section 57(iii) specifically excluded expenditure, which was in the nature of capital expenditure. That the liquidated damages were in the nature of capital. That even though it was taken to the Revenue account by the applicant it never arose out of the business of the applicant. That the amount was not paid wholly and exclusively for the purpose of business within the meaning of section 37(1) therefore, the same could not be allowed as deduction from the income of the year under review.
2.7 Since liquidated damages have arisen out of a contract for purchase of capital equipment, what is relevant is the nature of goods purchased under the contract, and not the treatment or method of accounting/accounting policy adopted by the applicant. In this regard it would be apposite to refer to the decision of the hon'ble Supreme Court in the case of Travancore Rubber and Tea Co. Ltd. v. CIT [2000] 243 ITR 158 (SC) wherein it was observed as under (page 166) :
'The logic of the principle is that the assessee's right to recover the compensation was to place the assessee in the same position as if the breach had not taken place. Applying the rule to this case, if the agreed sums of money under the agreements had been received by the assessee, they would have been credited in its account as a capital receipt. That being so, the forfeited amounts must also be treated as capital receipt.'
In the light of aforesaid facts and circumstances and discussions made above, the amount of claim lodged by the applicant on account of liquidated damages is not an allowable deduction from its business income under the Income-tax Act, 1961 in its assessment for the relevant assessment year."
Ground Nos. 2 to 7
6. We have heard rival arguments of both parties and carefully considered the same and perused the entire record and citations placed before us by both parties. As per the observations of the Assessing Officer, the assessee-company has claimed liquidated damage amounting to Rs. 32,35,721 which was disallowed by the Assessing Officer. The main basis adopted by the Assessing Officer for the above disallowance is as follows :
| (a) | liquidated damage was to be recovered equivalent to 2 per cent. of the price of any stores which the contractor (assessee-supplier) has failed to deliver within the period fixed for delivery in the contract. | |
| (b) | the details furnished by the assessee for the claim of liquidated damage includes the name of Bharat Electronics Ltd., Ghaziabad, Panchkula and Bangalore for which no copy of the contract was furnished by the assessee. | |
| (c) | The details furnished by the assessee-supplier reveal that the liquidated damage was claimed at much more rate than prescribed in the contract with the Railway department. |
7. Learned counsel for the assessee submitted that the Commissioner of Income-tax (Appeals) was not justified and grossly erred in upholding the disallowance made by the Assessing Officer pertaining to the claim of liquidated damages paid under a valid contract of sale of goods by the assessee to the railway department and other Government undertaking enterprises. The authorised representative further submitted that in the facts and circumstances of the law coupled with the position of the related statutory provisions, the payment of liquidated damages was of revenue in nature and was made for the purposes of business. The authorised representative also submitted that the Commissioner of Income-tax (Appeals) has erred in holding that the amount paid as liquidated damages was of capital expenditure and not allowable under section 37(1) of the Act. The authorised representative submitted that in view of legal precedents, the provisions of law and facts of the case, the amount of liquidated damages is an allowable expenditure because it was paid out of a contractual obligation which was not a provision but actual expenditure, not paid for any offense and was not prohibited by any law. The authorised representative further submitted that the expenditure was not in the nature of any penalty for infraction of any law.
8. Replying to the above submissions, the Departmental representative supported the orders of the authorities below and submitted that the liquidated damages paid by the assessee were in the nature of capital expenditure which were not paid wholly or exclusively for the purpose of business within the meaning of section 37(1) of the Act. Therefore, the same could not be allowed as deduction from the income of the year under consideration. He further submitted that since the liquidated damages has arisen out of a contract for purchase of capital equipment, therefore, the learned Commissioner of Income-tax (Appeals) rightly held the same in the nature of capital. The learned Departmental representative placed his reliance on the decision of the hon'ble Supreme Court in the case of Travancore Rubber & Tea Co. Ltd. v. CIT [2000] 243 ITR 158/109 Taxman 250.
9. On careful consideration of the above submissions, at the outset, we observe that admittedly, the assessee-company has been incorporated to carry out business of supply of various electrical and optical connectivity equipment and the liquidated damages claimed by the assessee were incurred under contract with the purchasers of these equipment. We also observe that the main purchasers-clients of the equipment sold by the assessee-supplier company are Indian Railway Department, Bharat Electronics Ltd. and public sector enterprises owned by the Central and State Governments. The liquidated damages as claimed by the assessee-supplier were to be recovered from the assessee by the purchasers at 2 per cent. of the price of any store including elements of taxes, duties, freight, etc., which the contractor-assessee has failed to deliver within the period fixed for the delivery in the contract under condition No. 0702(a) of the contract which reads as follows :
"0702. Failure and Termination : If the Contractor fails to deliver the stores or any instalment thereof within the period fixed for such delivery in the contract or as extended or at any time repudiates the contract before the expiry of such period the purchaser may without prejudice to his other rights :
| (a) | recover from the Contractor as agreed liquidated damages and not by way of penalty a sum equivalent to 2 per cent. of the price of any stores (including elements of taxes, duties, freight, etc.) which the Contractor has failed to deliver within the period fixed for delivery in the contract or as extended for each month or part of a month during which the delivery of such stores may be in arrears where delivery thereof is accepted after expiry of the aforesaid period, or" (paper book page 30) |
10. On a bare reading of the impugned order, we observe that the learned Commissioner of Income-tax (Appeals) has relied on the judgment of the hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 2)[1967] 63 ITR 65. In this case, the appellant-assessee was carrying the business of manufacturing and selling cloth and other textile goods, and entered into two contracts for purchase of textile machinery in order to expand its factory. Having regard to altered circumstances, the appellant-assessee textile company subsequently cancelled the contracts as the machinery to be purchased would not be required for its business and the assessee-company paid Rs. 15,000 and Rs. 20,000 respectively to the other contracting parties (sellers of the textile machinery) as compensation. In this case, the hon'ble apex court held that the payment was made neither for the purpose of earning profit nor for the purpose of furthering, protecting or continuing its business which was to be carried on day-to-day. In this case, the Supreme Court finally held that the payment was made with the object of avoiding an unnecessary investment in capital assets and was in the nature of capital expenditure. On careful perusal of above judgment of the hon'ble apex court, we respectfully hold that the benefit of the ratio of this judgment is not available to the Revenue in the present case because the present case is related to the issue of allowance of liquidated damages paid by the assessee-seller company under contractual obligation to the purchasers of electrical equipment which is a day-to-day business activity of the assessee-company which is not an expenditure of capital in nature.
11. Before us, the appellant assessee-company has relied on the judgment of the hon'ble Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 201 ITR 684/67 Taxman 546. The assessee's counsel has also placed his reliance on the judgment of the Full Bench of the hon'ble Punjab and Haryana High Court in the case of Jamna Auto Industries v. CIT [2008] 299 ITR 92/167 Taxman 192, the judgment of the hon'ble Rajasthan High Court in the case of CIT v. Sohanlal Kunwar & Sons [1987] 164 ITR 129/32 Taxman 588 and the judgment of the hon'ble Bombay High Court in the case of CIT v. R.D. Sharma & Co. [1982] 137 ITR 333/11 Taxman 137.
12. In the judgment of Prakash Cotton Mills (P.) Ltd. case (supra), the hon'ble apex court relied on its own decision in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 and on the decision of the Division Bench of the hon'ble Andhra Pradesh High Court in the case of CIT v.Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113/36 Taxman 88 held as under (page 690 of 201 ITR) :
"The decision of this court in Mahalakshmi Sugar Mills Co. [1980] 123 ITR 429 (SC) and the decision of the Division Bench of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 (AP) with the views of which we are incomplete agreement, are, in our opinion, decisions which settle the law on the question as to when an amount paid by an assessee as interest or damages or penalty could be regarded as compensatory (reparatory) in character as would entitle such assessee to claim it as an allowable expenditure under section 37(1) of the Income-tax Act. Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act, the assessing authority is required to examine the scheme of the provisions of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income-tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refused to give deduction to that component which is penal in nature." (Emphasis supplied)
13. The Full Bench of the hon'ble Punjab and Haryana High Court in the case of Jamna Auto Industries [2008] 299 ITR 92 (P&H) considered the allowability of business expenditure and their lordships held as follows (page 99) :
"19. In view of the authoritative pronouncements of the apex court and also of this court, it would thus, be concluded that whenever an assessee has indicated any amount, which had been paid either by way of damages or penalty, to be an allowable expenditure under section 37(1) of the Act, the assessing authority is obliged to discover the nature of such amount vis-a-vis two prominent aspects, whether it is compensatory or penal. The assessing authority would thereupon permit the amount as an allowable deduction that may be discovered to be purely of compensatory nature as payment for damages. However any statutory amount paid by the assessee which is sought to be claimed as an allowable expenditure on account of penalty, in that eventuality, the same shall be disallowed being payment for infraction of law. A situation may arise where an assessee might have to make a composite payment being compensatory and penal character both. In that situation, the assessing authority would, of course, be required to segregate the amount containing two characters. After undertaking this exercise, the amount that is held to be of compensatory nature shall be countenanced as allowable expenditure whereas the other portion of the amount, which is penal in nature, shall be refused to be an allowable expenditure." (Emphasis supplied)
14. The assessee's counsel has also placed his reliance on the judgment of the hon'ble Rajasthan High Court in the case of Sohanlal Kunwar & Sons(supra) wherein their lordships held that when the expenditure was incurred wholly and exclusively for the purpose of business and in the interest of business and for commercial exigency, then the same is an allowable deduction under the Act. The assessee's counsel has also placed his reliance on the judgment of the hon'ble Bombay High Court in the case of R.D. Sharma & Co. (supra) wherein their lordships held that the delay in completion of contract is incidental to the business and liability of compensation arisen in this regard is an allowable deduction.
15. In the light of the above citations, in the present case, the findings of the Commissioner of Income-tax (Appeals) are being reproduced as under :
"2.4 It is a fact that the appellant has entered into an agreement with Indian Railways Standards (IRS) Conditions. As per 0702(a) of the contract, the liquidated damages is to be recovered equivalent to 2 per cent. of the price of any stores which the contractor has failed to deliver within the period fixed for deliver in the contract or as extended for each month during which the delivery of such stores may be in arrears.
Damages recovered on account of late supply of capital assets have been held to be capital in nature and not allowable as revenue expenditure by the hon'ble Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 2) [1967] 63 ITR 65. Consequent on the decision of the High Court, the assessee's land was not acquired and the assessee did not take possession of the land from Delhi Glass Works. The arbitrator fixed the compensation at Rs. 1,70,000 and this amount was paid by the assessee during the accounting period relevant to the assessment year 1958-59. The decision of the Supreme Court in that case was in favour of the Revenue and against the appellant.
2.5 Since the liquidated damages have arisen out of a contract for purchase of capital equipment, what is relevant is the nature of goods purchased under the contract, and not the treatment or method of accounting/accounting policy adopted by the applicant. Applying the rule to this case, if the agreed sums of money under the agreements had been paid by the assessee, they would have been credited in its account as a capital expenditure and not revenue expenditure. That being so, the amounts paid must also be treated as capital payment. The plea of the applicant that the amount to be treated as a Revenue expenditure within the meaning of section 37(1) for the purposes of business, is not borne out from the record. The similar issues has been discussed in Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 2)[1967] 63 ITR 65 (SC), Travancore Rubber & Tea Co. Ltd. v. CIT[2000] 243 ITR 158 (SC) and Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC).
2.6 That therefore the payment of the same would not constitute expenditure laid out wholly and exclusively for the purposes of business under section 37(1) of the Act. That section 37(1) as well as section 57(iii) specifically excluded expenditure, which was in the nature of capital expenditure. That the liquidated damages were in the nature of capital. That even though it was taken to the Revenue account by the applicant it never arose out of the business of the applicant. That the amount was not paid wholly and exclusively for the purpose of business within the meaning of section 37(1) therefore, the same could not be allowed as deduction from the income of the year under review.
2.7 Since liquidated damages have arisen out of a contract for purchase of capital equipment, what is relevant is the nature of goods purchased under the contract, and not the treatment or method of accounting/accounting policy adopted by the applicant. In this regard it would be apposite to refer to the decision of the hon'ble Supreme Court in the case of Travancore Rubber & Tea Co. Ltd. v. CIT [2000] 243 ITR 158 wherein it was observed as under (page 166) :
'The logic of the principle is that the assessee's right to recover the compensation was to place the assessee in the same position as if the breach had not taken place. Applying the rule to this case, if the agreed sums of money under the agreements had been received by the assessee, they would have been credited in its account as a capital receipt. That being so, the forfeited amounts must also be treated as capital receipt.'
In the light of aforesaid facts and circumstances and discussions made above, the amount of claim lodged by the applicant on account of liquidated damages is not an allowable deduction from its business income under the Income-tax Act, 1961 in its assessment for relevant assessment year."
16. As we have noted hereinabove, as per condition No. 0702(a), the assessee-supplier (seller) company was under obligation to deliver the ordered goods to the Railway company and other public sector undertaking enterprises (purchasers) within the period fixed for delivery in the contract and in case the assessee-supplier (seller) company failed to deliver the ordered goods to purchaser enterprise within the period fixed for delivery in the contract, then liquidated damages at 2 per cent. of the price of stores was to be recovered from the assessee-supplier company by the purchaser Railway company. In this condition, it is specifically mentioned that the payment of liquidated damages would not be considered as penalty.
17. In this context, we respectfully follow the judgment of the hon'ble Bombay High Court in the case of R.D. Sharma & Co. (supra) wherein it was held that the delay in completion of contract is incidental to the business and liability of compensation arising because of delay is an allowable deduction under the Act. In the case in hand, admittedly, the assessee-company claimed liquidated damages paid to the Railway department and other Government undertaking enterprises as per contract and due to the delay in completion of supply contract. Therefore, in our considered opinion, this is an allowable expenditure and we are inclined to hold that the authorities below were not justified in disallowing the same. We also observe that the findings of the Commissioner of Income-tax (Appeals) that the payment of liquidated damages was capital in nature is not sustainable and deserves to be set aside.
18. Before we part with the judgment, we also hold that the claim of the assessee-company for liquidated damages is allowable under section 37(1) of the Act but the calculation of deduction has to be done by the Assessing Officer because the Assessing Officer has observed that the copies of the contract with M/s. Bharat Electronics Ltd., Ghaziabad, Panchkula and Bangalore have not been furnished before him and the details furnished by the assessee before the Assessing Officer for the claim of liquidated damages was at much more percentage than prescribed in the contract. In this situation, we restrict our finding to that the claim of the assessee on liquidated damages deducted under the agreed condition of the contract as allowable under section 37(1) of the Act subject to the verification of actual claim by the Assessing Officer. Hence, we restore the issue of calculation of allowable amount of liquidated damages for the year under consideration to the file of the Assessing Officer with the direction that the Assessing Officer would verify the quantum of claim of the assessee for liquidated damages and allow the deduction for the same as claimed by the assessee.
19. With this direction, ground Nos. 2 to 7 are allowed.
Ground No. 1
20. This ground is general in nature and needs no adjudication. We therefore dismiss the same.
Ground No. 8
21. This ground is consequential and premature and in view of above discussion and allowability of ground Nos. 2 to 7, the same becomes infructuous and we also dismiss the same.
22. In the result, the appeal of the assessee is allowed as indicated above.
ST : Where assessee had not claimed threshold exemption before lower authorities (including Commissioner (Appeals)), matter was to be remanded back to original adjudicating authority to consider assessee's claim in that regard
■■■
[2013] 34 taxmann.com 99 (Mumbai - CESTAT)
CESTAT, MUMBAI BENCH
Radhika Catering Services
v.
Commissioner of Central Excise, Raigad*
P.R. CHANDRASEKHARAN, TECHNICAL MEMBER
AND ANIL CHOUDHARY, JUDICIAL MEMBER
AND ANIL CHOUDHARY, JUDICIAL MEMBER
ORDER NOS. A/250/2013/CSTB/C-I,
S/185/2013/CSTB/C-I &
M/273/2013/CSTB/C-I
APPLICATION NOS. ST/COD/1665 OF 2012 &
ST/STAY/2319 OF 2012
APPEAL NO. ST/668 OF 2012
S/185/2013/CSTB/C-I &
M/273/2013/CSTB/C-I
APPLICATION NOS. ST/COD/1665 OF 2012 &
ST/STAY/2319 OF 2012
APPEAL NO. ST/668 OF 2012
JANUARY 30, 2013
Section 65(76a) of the Finance Act, 1994 - Outdoor Caterer's Services - Assessee, an outdoor caterer, did not pay service tax on services provided by it - Department raised demand, which was upheld by Commissioner (Appeals) - Assessee argued that it was eligible for threshold exemption under Notification No. 6/2005-ST but failed to claim it before lower authorities - HELD : Assessee was eligible for small service provider's exemption during material period - Since this point was not agitated before lower authorities, matter was to go back to original adjudicating authority to consider claim of assessee with regard to his entitlement for small service providers exemption - Further, since assessee had not collected service tax from customers, wherever he was liable to service tax, entire amount received would be treated as cum-tax [Para 7] [In favour of assessee]
Circulars and Notifications : Notification No. 21/2004-ST, dated 10/05/2004, Notification No. 6/2005-ST, dated 01/03/2005and Notification No. 2/2006-ST, dated 01/03/2006
EDITOR'S NOTE
The threshold exemption under Notification No. 6/2005-ST dated 01/03/2005 applies by default and one may opt out of the notification. Therefore, there can be no doubt that the assessee was eligible for exemption subject to other requirements.
Rajiv Luthia for the Appellant. S.V. Kuvalekar for the Respondent.
ORDER
P.R. Chandrasekharan, Technical Member - The appeal and stay application along with COD application has been filed against Order-in-Appeal No: BC/72/RGD/2012-13 dated 15/06/2013 passed by the Commissioner of Central Excise (Appeals), Mumbai - III.
2. There is a delay of 31 days in filing the appeal and the reason adduced for the delay is that the proprietor of the appellant-firm was unwell and a medical certificate to that effect is also enclosed. Considering the reason given is satisfactory, we condone the delay in filing the appeal and the application for Condonation of Delay is allowed.
3. The applicant is a catering-firm who undertook outdoor catering service in an educational institution called 'Adarsh Shikshan Prasarak Mandal'. The said activity was exempt vide Notification No. 21/2004-ST dated 10/05/2004 and this exemption was withdrawn vide Notification No. 2/2006-ST dated 01/03/2006. The appellant being small proprietorship-firm did not know that the exemption has been withdrawn and he is liable to pay service tax on the activity undertaken by him. Accordingly, a notice was issued for recovery of service tax amounting to Rs. 2,26,353/- for the period 01/03/2006 to 31/03/2009 and the demands were confirmed along with interest and also imposing penalties. The appellant preferred an appeal before the lower appellate authority, who dismissed the appeal and hence the appellant is before us.
4. The learned consultant for the appellant submits that during the impugned period the appellant was eligible for small service providers exemption under Notification No. 6/2005-ST dated 01/03/2005 as amended. The appellant's taxable turnover during the impugned periods were: Rs. 25,199/- during 2005-06; Rs. 6,70,776/- during 2006-07; Rs. 6,38,699/- during 2007-08; and Rs. 5,11,651/- during 2008-09. During the period 2006-07 exemption was available up to a turn over of Rs. 4 lakhs and only for the amount in excess of Rs. 4 lakhs, the appellant was liable to pay service tax. For 2007-08 and 2008-09, the threshold limit of exemption was Rs. 8 lakhs and the appellant was well within the limit and, therefore, there is no liability to pay service tax. However, the appellant being a proprietorship firm did not claim this exemption benefit before the adjudicating and appellate authorities due to his ignorance of law and, therefore, the consultant pleads that exemption be granted to the appellant as he is eligible and entitled for the same. Learned consultant also submits that he has made a payment of Rs. 51,740/- and the same be considered sufficient for hearing of the appeal.
5. The learned Asstt. Commissioner (AR) reiterates the findings given by the lower authorities but fairly concedes that the eligibility to small service providers exemption was not considered by the lower authorities as the same was not raised before them.
6. We have carefully considered the rival submissions. Since the issue to be decided is short, after waiving the requirement of pre-deposit, we take up the appeal itself for consideration.
7. As pointed out by the consultant, the appellant's turnover during the years, as given above, indicate that he was eligible for small service provider's exemption during the period and only in the year 2006-07, the liability would arise on an amount of Rs. 2,70,775/-which is in excess of the threshold limit of Rs. 4 lakhs. Since this point was not agitated before the lower authorities, the matter needs to go back to the original adjudicating authority to consider the claim of the appellant with regard to his entitlement for small service providers exemption under Notification No. 6/2005-ST. Since the appellant has not collected service tax from the customers, the entire amount received shall be treated as cum-service tax receipts. Accordingly, we remand the matter back to the original adjudicating authority to consider the case of the appellant for eligibility to small service providers exemption under the aforesaid Notification. The appellant is also directed to lead evidence with regard to the taxable turnover by producing the relevant bills for the consideration received.
8. The appeal is allowed by way of remand. The stay application is also disposed of.
■■ IT : Registration granted to trust under section 12A cannot be cancelled merely on ground of denial of exemption under section 10(23C)(vi)
■■■
[2013] 34 taxmann.com 135 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax
v.
Society of Advanced Management Studies*
R.K. AGRAWAL AND RAM SURAT RAM (MAURYA), JJ.
IT APPEAL NO. 143 OF 2010†
OCTOBER 29, 2012
Section 12A, read with section 10(23C), of the Income-tax Act, 1961 - Charitable or religious trust - Registration of [Withdrawal of exemption] - Assessment years 2004-05 and 2006-07 – Assessee, being a charitable institution, was granted registration under section 12A - It claimed exemption under section 10(23C)(vi) on ground that its income was related to educational institution, which was disallowed on ground that it had certain other objects, proving that institution was not established solely for educational purposes - On basis of above order, Commissioner cancelled registration granted under section 12A - Tribunal restored registration on ground that proceeding under section 10(23C)(vi) was an independent proceeding and could not be sole ground for cancelling registration granted under section 12A - Whether, where assessee had fulfilled conditions for claiming it to be a charitable institution, registration granted under section 12A could not be cancelled merely on ground that exemption under section 10(23C)(vi) had been denied - Held, yes [Para 5] [In favour of assessee]
FACTS
| ■ | The assessee-trust, being a charitable institution, was granted registration under section 12A. It also claimed exemption under section 10(23C)(vi) on ground that its income was related to educational institution, which was disallowed on ground that it had certain other objects, and therefore, the institution was not established solely for educational purposes. | |
| ■ | The Commissioner also cancelled registration under section 12A on basis of order denying exemption under section 10(23C)(vi). | |
| ■ | On appeal, the Tribunal restored registration under section 12A on ground that proceeding under section 10(23)(vi) was an independent proceeding and could not be the sole reason for cancelling registration under section 12A. | |
| ■ | On revenue's appeal : |
HELD
| ■ | Admittedly, one of the objects of the trust was for running educational institutions and imparting education. The trust, however, has other objects also. Exemption under section 10(23C)(vi) can be claimed by an assessee without applying for registration under section 12A as it is not required to fulfil the conditions mentioned under section 11 while claiming the exemption under section 10(23C)(vi). Further, in the order passed by the Commissioner, there is no whisper that the assessee has not fulfilled any of the conditions of section 11 for claiming it to be a charitable institution. He had solely relied on the order of the Chief Commissioner passed under section 10(23C)(vi) while denying the exemption under the aforesaid sub-section. Therefore, the tribunal had rightly restored the registration on the ground that in the assessment years 2004-05 and 2006-07 the benefit of exemption/deduction under section 11 was allowed to the respondent-assessee. [Para 5] | |
| ■ | There is no error in the impugned order passed by the Tribunal, Allahabad. The appeal fails and is dismissed. [Para 6] |
CASE REVIEW
Society of Advanced Management Studies v. CIT [IT Appeal No. 143 (All.) of 2009]; affirmed.
A.N. Mahajan for the Appellant. Kunal Ravi Singh and Manjari Singh for the Respondent.
JUDGMENT
1. The present appeal has been filed under section 260A of the Income-tax Act, 1961, hereinafter referred to as "the Act" against the order dated October 8, 2009, passed by the Income-tax Appellate Tribunal, Allahabad. The Revenue has proposed the following three substantial questions of law said to be arisen out of the order of the Tribunal.
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in coming to the conclusion that registration under section 12AA cannot be cancelled by taking into consideration an order passed under section 10(23C)(vi) of the Act by the Chief Commissioner as both the proceedings are independent proceedings ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in not appreciating the fact that the assessee was not doing any charitable activity as found by the Assessing Officer. During the assessment proceedings as such the provisions of sections 11, 12, 12A, 13 of the Act had been violated by the assessee, therefore, the cancellation of registration by the Commissioner of Income-tax was justified ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in not taking into consideration the decisions relied upon by the Commissioner of Income-tax in his order under section 12AA(3) of the Act while cancelling the registration of the assessee-society ?"
2. Briefly stated that the facts giving rise to the present appeal are as follows:
The respondent-assessee was granted registration under section 12A of the Act being a charitable institution. It claimed exemption under section 10(23C)(vi) of the Act on the ground that the income earned by it is relating to educational institution as the institution is solely for the education purposes. The claim of exemption under section 10(23C)(vi) of the Act was disallowed by the Chief Commissioner of Income-tax, Varanasi, vide order dated February 25, 2009, on the ground that in the objects of the institution there are certain other objects, which proves that the institution has not solely been established for educational purposes. Relying on the said order proceeding under section 12AA(3) of the Act was initiated and, vide order dated May 22, 2009, the Commissioner of Income-tax, Varanasi, cancelled the registration granted to the respondent-assessee under section 12A of the Act. Feeling aggrieved by the order dated May 22, 2009, cancelling the registration granted under section 12A of the Act, the respondent-assessee preferred an appeal before the Income-tax Appellate Tribunal, Allahabad, which was registered as I. T. A. No. 143 (All.) 09. The Tribunal, vide impugned order dated October 8, 2009, had allowed the appeal and set aside the order of the Commissioner of Income-tax dated May 22, 2009 and the registration had been restored. The Tribunal had come to the conclusion that the proceeding under section 10(23C)(vi) of the Act is an independent proceeding and cannot be made the sole ground for cancellation of the registration granted under section 12A of the Act. It further found that the deduction under section 11 of the Act has been allowed to the respondent-assessee herein for the assessment year 2006-07 and in the assessment order passed for the assessment year 2004-05 exemption under section 11 of the Act was disallowed, which order was reversed in appeal by the Commissioner of Income-tax (Appeals), Varanasi, allowing the deduction under section 11 of the Act, vide order dated October 3, 2007, which order has been accepted by the Revenue as no second appeal was preferred against the said order.
3. We have heard Sri Shambhu Chopra, learned senior standing counsel for the Revenue and Sri Kunal Ravi Singh, learned counsel appearing for the respondent-assessee.
4. Sri Chopra, learned counsel, submitted that as the institution has been established solely for the educational purposes and is a profit-earning institution exemption under section 10(23C)(vi) of the Act having been rightly denied to it as it ceased to be a charitable institution, therefore, the Tribunal has erred in restoring the registration. The submission is wholly misconceived. Admittedly, one of the objects of the trust was for running educational institutions and imparting education. The trust, however, has other objects also, which are reproduced below :
| "(i) | Development of scientific education amongst Indian children. | |
| (ii) | Modern education with moral duty and character building in accordance with the Indian culture as well as development of educational atmosphere. | |
| (iii) | To provide as well as arrange commercial and practical education to children. | |
| (iv) | Development as well as publicize the Indian culture and arts. | |
| (v) | To establish the school and management thereof from primary education to intermediate education. | |
| (vi) | To publicize as well as to educate and propagate the cottage industries as well as industries based on village amongst the youth so that they may lead their life independently and freely." |
5. In our considered opinion, exemption under section 10(23C)(vi) of the Act can be claimed by an assessee without applying for registration under section 12A of the Act as it is not required to fulfil the conditions mentioned under section 11 of the Act while claiming the exemption under section 10(23C)(vi) of the Act. Further, in the order passed by the Commissioner of Income-tax, there is no whisper that the assessee has not fulfilled any of the conditions of section 11 of the Act for claiming it to be a charitable institution. He had solely relied on the order of the Chief Commissioner of Income-tax passed under section 10(23C)(vi) of the Act while denying the exemption under the aforesaid sub-section. We are, therefore, of the considered opinion that the Tribunal had rightly restored the registration on the ground that in the assessment years 2004-05 and 2006-07 the benefit of exemption/deduction under section 11 of the Act was allowed to the respondent-assessee.
6. In view of the foregoing discussion, we do not find any error in the impugned order passed by the Income-tax Appellant Tribunal, Allahabad. The appeal fails and is dismissed.
P. SENRegards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
No comments:
Post a Comment