Amount on account of debit note issued by earlier management cannot claimed as expenditure

Brief of the case:

The court has dealt with two issues in this case. Firstly, whether Tribunal was justified in deleting the disallowance made by AO on account of claim made by the assessee towards cost paid to Hindustan Lever Ltd. for salary of Managers, Officers on deputation. Secondly, whether the Tribunal was justified in upholding the order passed by the CIT (A) deleting the addition made by the AO on account of a claim for additional payment for earlier years towards short payment of processing charges. After examining the facts of the case hon’ble court has decided first issue in favour of revenue and second issue in favour of assessee.

Facts of the case:

• Assessee was incorporated in 1975 started incurring losses and faced winding up proceeding during which rehabilitation proposals were made.
• Subsequently, at the request of financial institutions who backed the rehabilitation plant, Hindustan Lever Ltd. (HLL) agreed to participate in the rehabilitation proposal and accordingly a scheme of compromise was drawn on 15.2.1990.
• In terms of this arrangement HLL had five nominees on the Board of Directors of the assessee, the promoter had one nominee and financial institutions had three nominees. The rehabilitation scheme was to end on 30.9.2004.
• HLL however decided not to continue with the operations of the company and withdraw from management on 30.9.2004. Possession of the plant was handed over by HLL to the financial institution, IDBI on 1.10.2004. IDBI thereafter acting as the largest shareholder resumed management of the affairs of the company.
• For FY 2003-04, the assessee in its returns had made provision to the tune of Rs.1.52 crores on account of a debit note raised by HLL at the time of the handing over docket drawn to the company.
• The AO held that this debit note pertained towards salary payable for the period 1998-2002. The then management of the assessee Board acting upon the HLL’s letter of 27.10.2003, accepted the proposals in the meeting held on 4.12.2003 and accordingly charged the expense to the P & L account.
• This was disallowed by the AO and brought to tax. The other amount i.e Rs.24,30,000/- was raised as a claim by the assessee from HLL as short-payment of processing charges when the latter was managing its affairs in terms of rehabilitation scheme. The AO noted that the company had filed a petition based mainly against HLL demanding these amounts as short-payments on account of processing charges. The AO sought to bring these amounts to tax on the basis that according to the mercantile system the assessee ought to have included these in P & L account.
• CIT (A) held that the claim is allowed as expenditure accrued in subsequent years as assessee is following mercantile system of accounting. ITAT confirmed the view of CIT (A).

Contention of the revenue:

• AO noted firstly that when the Board Resolution of 14.12.2003 was made, HLL was very much in control since the majority of the Board of Directors of the assessee were nominees of HLL. Thus there was a ready acceptance of a liability for over a 12 year period.
• Other than debit note there was no real basis for accepting this liability and the AO was consequently justified in seeking to bring this to tax. It was submitted that likewise the deletion of Rs. 24.3 crores was not justified.

Contention of the assessee:

• Board took note of the debit note and gave effect to it by admitting a liability since there was no dispute that HLL in fact had claimed that amount. It was also emphasized that the debit note covered current period also i.e. financial year 2002-03.
• So far as the addition of Rs. 24.3 crores was concerned, the learned counsel submitted that both the CIT(Appeals) and the ITAT had noticed that the matter with respect to this liability was sub-judice and pending adjudication in the Company Court which since by its interim judgment dated 25.4.2013.

Held by the court:

• HLL subsequently in the year 2013 conceded that it only claimed Rs. 81,22,072/-which was payable towards the balance part of the payment of salaries of supervisors etc. In the circumstances, this Court is of the opinion that the ITAT’s reasoning affirming the order of the CIT(A) is entirely without justification. The first question of law is accordingly answered in favour of the revenue and against the assessee.
• The assessee has rightly claimed expenses of Rs. 24.3 Crores in light of ITAT order as both the CIT and the ITAT took note of the fact that these amounts were disputed and were mere claims which were rejected by Company Court it in its judgment.

Comments by the author:

HLL never appears to have pressed for the arrears of wages and salaries for its employees for the period 1999-2003 to the extent claimed by the assessee on the basis of the debit note. The debit note demanded Rs. 1.52 crores may be a matter of record.