Case Law Details
Supreme Auto (India) Pvt. Ltd. Vs ITO (ITAT Indore)
ITAT Indore held that the expenditure incurred for obtaining loan is a revenue expenditure. Accordingly, the fee paid for renewal of cash-credit is a revenue expenditure.
Facts- During assessment-proceeding, Ld. AO issued notice u/s 133(6) to M/s V.E. Commercial Vehicle Limited and obtained confirmation of account. On the basis of response received, the Ld. AO found that M/s V.E. Commercial Vehicle Ltd. has shown a debit balance of Rs. 66,99,695/- in the account of assessee, whereas the credit balance shown by assessee was Rs. 68,71,375/-. Thus, the Ld. AO computed a difference of Rs. 1,71,680/- and confronted the assessee to explain this difference. In response thereto, the assessee submitted that its accountant has left service and therefore unable to explain the difference. Thus, finding no explanation from assessee, the Ld. AO made addition.
Further, assessee is also aggrieved with disallowance of Rs. 63,000/- paid as upfront fee to State Bank of India for renewal of cash credit limit.
Conclusion- Held that in absence of any explanation from assessee, the lower authorities are very much justified in treating the difference of Rs. 1,71,680/- as unexplained credit and thereby make addition. We do not find any infirmity in the action of lower authorities on this count. Accordingly, this ground does not have any merit and is dismissed.
Held that the expenditure incurred for obtaining loan is a revenue expenditure and not capital in nature. Being so, we are unable to agree with the view taken by lower authorities. We are of the view that the fee paid for renewal of cash-credit is a revenue expenditure and the assessee has rightly claimed deduction, which the authorities should not have disallowed. Being so, we delete the disallowance made by lower authorities.
FULL TEXT OF THE ORDER OF ITAT INDORE
Feeling aggrieved by appeal-order dated 26.12.2019 passed by Ld. Commissioner of Income-Tax (Appeal)-III, Indore [“Ld. CIT(A)”] which in turn arises out of Assessment-order dated 12.01.2016 passed by Ld. ITO 1(4), Indore [“Ld. AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2013-14, the Assessee has filed this appeal on following grounds:
“1. On the facts and circumstances of the case and in law the learned Commissioner of Income tax (Appeals)-1, Indore (“CIT(A)”) erred in confirming the action of Assessing Officer In making additions in the assessment and not accepting the income as returned by the Appellant. The Appellant prays that the said additions and adjustments be deleted and returned income be accepted.
2. On the facts and circumstances of the case and in law the learned CIT(A) erred in confirming the action of Assessing Officer in making addition u/s 56(2) of the Income Tax Act, 1961 amounting to Rs.967680.00/- received as share premium from its directors and shareholders which was within the amount allowed as per the discounted cash flow method as prescribed under the Provisions of the Act. The Appellant prays that the said addition be directed to be deleted.
3. On the facts and circumstances of the case and in law the CIT(A) erred in confirming the action of assessing officer in making addition of Rs. 1575/-which are paid by the appellant in respect of duties and taxes. Therefore, the Appellant prays that the said disallowance made in contravention to provisions of the act and needs to be deleted.
4. On the facts and Circumstances of the case and in law the learned CIT(A) erred in confirming the action of learned assessing officer by making disallowance of Rs. 171680.00/- under section 68 of the Income Tax Act, 1961. Here we would like to submit that the amount of Rs. 171680.00/- is difference of amount shown as credit balance of Rs. 6871375.00/- whereas the company V.E. Commercial Limited shown outstanding balance of Rs. 6699695.00/-. However, during the course of assessment proceedings, the learned assessing officer fully accepted the purchases, sales and trading results disclosed by the appellant. There are an inherent thought and implied observation that once sales are made by the assessee obviously purchases were also made therefore, purchases could not be treated as unexplained itself. Hence the contention of the learned assessing officer is incorrect and bad in law by making addition on account of unexplained cash credit and liable to be reserved.
5. On the facts and circumstances of the case and in law the learned CIT(A) erred in making a disallowance of an amount of Rs. 63000.00/- which was paid in respect of upfront fees paid to State Bank of India for renewal of cash credit limit which was a kind of Bank Charges and in revenue nature. However, the learned CIT(A) erred in upholding the contention of learned assessing officer by considering the said amount as capital nature. Therefore, the Appellant prays that the said addition be directed to be deleted.
6. The Appellant craves leave to add to, alter and/or amend all or any of the foregoing grounds of appeal.”
2. At the time of hearing, none appeared on behalf of assessee nor any adjournment application filed. Ld. DR representing the revenue was ready to argue and also submitted that the case can be decided on the basis of his submissions and material held on record. Accordingly, we proceeded to hear and decide this appeal.
3. Briefly stated the facts are such that the assessee-company filed return of relevant AY 2013-14 declaring a loss of Rs. 16,96,950/- which was subjected to scrutiny and statutory notices u/s 143(2) / 142(1) were issued from time to time which were duly complied with by the assessee. Finally, the Ld. AO completed assessment u/s 143(3) after making various additions and determining a total income of Rs. 3,17,298/-. Aggrieved, the assessee filed first-appeal to Ld. CIT(A) and got part relief. Still aggrieved, the assessee has filed present-appeal before us.
4. Ground No. 1 and 7 are general and do not require any specific adjudication. We proceed to decide Ground No. 2 to 6 one by one.
Ground No. 2:
5. This ground relates to the addition of Rs. 9,67,680/- u/s 56(2) on account of receipt of excess share-premium.
6. During assessment-proceeding, the Ld. AO found that the assessee-company had issued 3,92,200 shares at a price of Rs. 60/- per share (Rs. 10/-is face value + Rs. 50/- is premium) to Smt. Rajni Choudhary. Ld. AO asked the assessee to justify the fair market value of shares in terms of section 56(2), in response to which the assessee filed a reply dated 07.12.2015 which is reproduced by Ld. AO in Para No. 2.1 to 2.3 of assessment-order. In the said reply, the assessee submitted working of fair market value in terms of Rule 11UA of Income-tax Rules, 1962 at Rs. 57.76 per share. Accordingly, the Ld. AO computed a difference of Rs. 2.24 per share (Rs. 60 issue price – Rs. 57.76 fair market value) and arrived at a taxable income of Rs. 9,67,680/- as 4,32,000 (number of shares) X2.24 per share and made addition accordingly. During first-appeal, the Ld. CIT(A) upheld the addition by concurring with the findings of Ld. AO.
7. On a careful consideration of orders of lower authorities, we observe two undisputed figures, viz. (i) the shares were issued at a price of Rs. 60/- per share; and (ii) the assessee has itself computed fair market value at Rs. 57.76 per share and supplied working to Ld. AO in terms of Rule 11UA. Thus, there is hardly any scope for further elaboration on the issue, suffice it to say that the assessee has received excess consideration of Rs. 2.24 per share, being the difference of Rs. 60/- and Rs. 57.76 per share, which gives rise to taxable income in terms of section 56(2). However, we observe that in Para No. 1.3 and 2.2 of the assessment-order, the Ld. AO has mentioned that the assessee-company issued 3,92,200 number of shares but thereafter in final para No. 2.3, the Ld. AO has computed taxable income on the basis of 4,32,000 number of shares. Thus, there is an apparent inconsistency in the number of shares adopted by Ld. AO for making addition. During hearing, when we asked the Ld. DR representing the revenue on this point, he admitted this inconsistency but, however, could not inform the correct number of shares issued by assessee. Being so, we are unable to ascertain the exact number of shares issued by the assessee i.e. whether it was 3,92,200 or 4,32,000. In absence of any assistance from parties, we are constrained to remand this issue to the Ld. AO for verifying exact number of shares issued by assessee and thereafter re-compute taxable income by applying the rate of Rs. 2.24 per share. This ground is, thus, remanded back to the file of Ld. AO.
Ground No. 3:
8. This ground relates to the addition of Rs. 1,575/- in respect of payment of duties and taxes.
9. The Ld. CIT(A) has upheld this addition by observing as under, which is exactly the same reasoning as adopted by Ld. AO while making addition:
“4.0. This ground of appeal is with regard to making addition of Rs. 1,575/-. I have carefully gone through the assessment order as well as the submission of the appellant in this regard. After going through the facts of the case, it is clear that the appellant had paid the said amount on account of duty and taxes and the same was debited into its P&L account. The appellant has stated in its reply that the said amount pertained to the previous year. Therefore, the same was disallowed by the AO. It is also clear from the AO’s order that the appellant had followed mercantile system of accounting and therefore, the expenses of previous year cannot be considered in the year under consideration. I don’t find any merit to interfere with the finding’s of the AO and therefore, the addition so made by the AO is hereby confirmed and accordingly, this ground of appeal is dismissed.”
10. Thus, it is clear that the lower authorities have made disallowance only because the assessee follows mercantile method of accounting and the expenditure does not relate to the current year. But, we observe, that the lower authorities have not taken care of section 43B(a) which prescribes that notwithstanding anything contained in any other provision of the Income-tax act, any sum payable by an assessee by way of tax, duty, cess or fee under any law, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) in computing income of that previous year in which such sum is actually paid. Thus, even if the assessee follows mercantile method of accounting, the payment of tax or duty is allowable as deduction in the year of actual payment. Being so, we are of the view that the assessee has rightly claimed deduction in terms of section 43B on payment basis and therefore the disallowance made by lower authorities is wrong and deserves to be deleted. We order accordingly. This ground is thus allowed. Ground No. 4:
11. This ground relates to the addition of Rs. 1,71,680/- u/s 68 on account of difference in the credit balance of sundry creditor named “M/s V.E. Commercial Vehicle Limited”.
12. During assessment-proceeding, Ld. AO issued notice u/s 133(6) to M/s V.E. Commercial Vehicle Limited and obtained confirmation of account. On the basis of response received, the Ld. AO found that M/s V.E. Commercial Vehicle Ltd. has shown a debit balance of Rs. 66,99,695/- in the account of assessee, whereas the credit balance shown by assessee was Rs. 68,71,375/-. Thus, the Ld. AO computed a difference of Rs. 1,71,680/- and confronted the assessee to explain this difference. In response thereto, the assessee submitted that its accountant has left service and therefore unable to explain the difference. Thus, finding no explanation from assessee, the Ld. AO made addition.
13. During first-appeal, the Ld. CIT(A) upheld the addition by observing as under:
“6.1 During the course of assessment proceedings, the appellant had furnished copy of balance sheet. As against the purchase from VE Commercial Ltd., Pithampur credit balance was shown of Rs. 68,71,375/-. In order to verify the genuineness of creditors, the AO had taken external confirmation from V.E. Commercial Ltd wherein the company had shown balance only Rs. 66,99,695/-. Therefore, the AO had noticed difference of Rs. 1,71,680/- and had added the same to the appellant’s income. During the course of assessment proceedings, the appellant had failed to submit any evidence or explanation in respect of the said difference before the AO. During the course of appellate proceedings, the appellant had filed its reply but the appellant had failed to submit any reason for the said difference. Hence, the AO has rightly added the said amount to the appellant’s income. Thus, the addition so made by the AO is hereby confirmed and accordingly, this ground of appeal is dismissed.”
14. On a careful consideration, we observe that the assessee has not been able to explain the difference before the assessing officer and even before the Ld. CIT(A) in first-appeal. Hence in absence of any explanation from assessee, the lower authorities are very much justified in treating the difference of Rs. 1,71,680/- as unexplained credit and thereby make addition. We do not find any infirmity in the action of lower authorities on this count. Accordingly, this ground does not have any merit and is dismissed.
Ground No. 5:
15. This ground relates to the disallowance of Rs. 63,000/- paid as upfront fee to State Bank of India for renewal of cash credit limit.
16. We note that the Ld. CIT(A) has upheld this addition by observing as under:
“7.1 The AO had disallowed the said expenses by treating the same as capital nature. The appellant has stated in his submission that the said expense was incurred for the business purpose and revenue in nature and thus, accordingly allowable. The appellant has stated that the said amount was paid in respect of renewal of cash credit limit from State Bank of India on 28.02.2013 which was exclusively in the nature of bank charges which occurred in pursuance to grant of credit facility to assessee company. It is clear from the facts of the case that the appellant company had incurred the said expenses to grant credit facility to its company but the appellant had failed to distinguish this fact that the said expense is revenue nature or capital nature. Hence, the addition so made by the AO is hereby confirmed and accordingly, this ground of appeal is hereby dismissed.”
17. We observe that the assessee has paid fee of Rs. 63,000/- for renewal of cash-credit limit, which is an undisputed fact admitted by lower authorities. The lower authorities have made disallowance only by holding the same as a capital expenditure. However, we are consciously aware that the renewal of cash-credit limit is a regular feature, normally every year, being done by banks
and the banks charge fee for every renewal. Thus, the fee paid for such renewal is a recurring expenditure. Even otherwise, it is a well-settled judicial view that the expenditure incurred for obtaining loan is a revenue expenditure and not capital in nature. Being so, we are unable to agree with the view taken by lower authorities. We are of the view that the fee paid for renewal of cash-credit is a revenue expenditure and the assessee has rightly claimed deduction, which the authorities should not have disallowed. Being so, we delete the disallowance made by lower authorities. This ground is, therefore, allowed.
18. In the result, the appeal of assessee is partly allowed in terms indicated above.
Order pronounced as per Rule 34 of ITAT Rules, 1963 on 30/01/2023.
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