ITA No.66 of 2004 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. ITA No.66 of 2004 Date of decision: 1.2.2011 The Commissioner Income Tax, Faridabad -----Appellant Vs. M/s Nuchem Limited Faridabad ----Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Ms. Urvashi Dhugga, Senior Standing Counsel for the revenue. Adarsh Kumar Goel,J. 1. As per office report, file was not available on account of fire in the Court premises. The file has been reconstructed on the basis of paper book furnished by learned counsel for the appellant. 2. The revenue has preferred this appeal under section 260A of the Income Tax Act, 1961 against the order of Income Tax Appellate Tribunal Delhi bench ‘E’ New Delhi passed in ITA No.7368/Del/92 filed by the respondent and ITA No.7204/Del/92 filed by the appellant for the assessment year 1988-89, raising following substantial questions of law:- “Whether the Hon’ble ITAT was right in law i) in allowing the carry forward of loss on the basis of the return filed after time allowed by the AO on extension application; ii) in allowing the deduction on account of net refund of excise duty; iii) in dismissing the appeal of the appellant against the deletion of Rs.30,34,414/- by the learned CIT (A) on account of excise duty refund credited to P&L account on accrual basis; 1 ITA No.66 of 2004 iv) in deleting the Car expenses disallowed for personal use by the Director; v) in dismissing the appeal filed by the appellant against deletion of addition on account of foreign travel expenses.” 3. The assessee filed its income tax return on 29.9.1988 which was beyond the extended time allowed upto 31.8.1988. The Assessing Officer invoked Section 80 of the Act and disallowed carry forward and set off of loss against the income of the subsequent years. 4. The assessee credited to its profit and loss account refund of higher rate of Central excise duty as it had challenged applicability of tariff entry attracting levy of higher rate by submitting that goods manufactured by it were covered by entry attracting lower rate of excise duty. It cleared the goods on furnishing of bank guarantee of the extra amount under interim order of the Court. Though the assessee succeeded before the Collector, the CEGAT set aside the order in favour of the assessee against which further appeal was pending before the Hon’ble Supreme Court. However, in later year, the duty was paid under KVSS. The Assessing Officer added the amount to which the petitioner was entitled to refund on the basis of order of Collector. 5. The Assessing officer also added refund which accrued to the assessee on the basis of judgment of the Hon’ble Supreme Court in another case which the assessee had credited to its P&L account. This was treated as income under section 41(1) of the Act, rejecting the plea of the assessee that the refund had neither been received nor accrued and mere entry in profit and loss account could not be treated as accrual of income. 2 ITA No.66 of 2004 6. The Assessing Officer disallowed part of deduction towards car expenses held to be attributable to personal use of the Director. 7. Claim of the assessee for deduction of foreign traveling expenses was disallowed on the ground that the expenditure was capital in nature. 8. The CIT(A) partly allowed the appeal of the assessee on which cross appeals were filed by the revenue and the assessee. 9. The Tribunal accepted the stand of the assessee and held as under:- i) Issue of carry forward of loss “7. We have considered the rival submissions. We find that the assessee was following Calendar year as its previous year. It changed the accounting period from Calendar to financial year. Thus, the relevant accounting period of the assessee was 15 months i.e. 1.1.1987 to 31.3.1988. For such change the assessee had also applied to the AO who was to please to approve such change. Even the IAC of it directed the AO to allow depreciation proportionately for 15 months. Naturally, as the accounting period was of 15 months the audit could have been initiated only after 31st march 1988. As the assessee found that its audit will not be completed by 31.7.1988. It applied for extension of time upto 31.8.1988 which was granted by the AO. But as the audit could not be still completed, it made an application for extension of time for filing the return of income upto 30.9.1988. The request on Form No.6 were made accordingly. The request for extension of time for filing the return of income upto 30.9.1988, therefore, was quite reasonable and the AO was not justified to reject the same. As there was reasonable cause in filing the return late and the return of income has been filed within time for which the extension of time was sought, we direct the AO to carry forward to determine loss of the year under consideration 3 ITA No.66 of 2004 to then subsequent years. This ground of appeal is accordingly allowed.” ii) Deduction on account of net refund “12. We have considered the rival submissions. It is admitted position that the assessee’s bank guarantee was revoked due to order of the Collector (Appeals), Central excise. But the Central Excise Department, did not accept this order and preferred the appeal before the CEGAT. The CEGAT vide its order pronounced on 8.5.1990 reversed the findings of the Collector (Appeals), Central Excise. Thus when the Collector (Appeals), Central Excise passed the order, it cannot be said that the assessee to claim the refund. It is settled law that the assessee could not be penalized for wrong entries made in the books of account. The tax cannot be levied on hypothetical income. A transaction of entry in the books of account or its treatment therein by the assessee may not always be relevant to decide whether a receipt is liable to income tax or whether the outgoing was allowable deduction. Our views find support from the decisions reported in 75 ITR 191(SC), 46 ITR 144 (SC), 216 ITR 15 (Cal.), 148 ITR 760 (All.) and 131 ITR 259 (Guj.). We have also noted that as the order of the Collector (Appeals), Central excise was not accepted by the Central Excise department, it cannot be said that the cessation of liability has taken place so as to attract the provisions of section 41(1) of the Act. It will not be out of place to mention that subsequently the CEGAT has reverted the order of the Collector (Appeals), Central Excise on this issue. Though the CEGAT had denied the claim of the assessee, the assessee had challenged the same before the Hon’ble Supreme Court, the same was still pending. During the pendency of the appeal before the Hon’ble Supreme Court, the assessee thought it fit to offer the same for taxation and ultimately the same was 4 ITA No.66 of 2004 also offered for taxation under KVSS. A copy of the order issued by the Collector, Central Excise is also on record. Under these circumstances, we hold that as there was no cessation of liability, the provisions of section 41 (1) of the Act were not applicable. We also hold that sustaining any addition in the year under consideration, will amount to double taxation as the same has already been taxed by the department in the assessment year 1998-99. Under these circumstances, the addition sustained by the CIT(A) is not justified and the same is deleted. This ground of appeal is allowed.” iii)Refund credited to P&L Account on hypothetical basis was not income. “43. We have considered the rival submissions. It is settled law that merely because the entry of an amount has been made in the profit and loss account or in the books of account was not enough in holding that an income has accrued to the assessee. The assessee has claimed refund of certain amount of central excise on the basis of Supreme Court decision in some other case. Thus, the assessee was not legally entitled to refund in its own case. It is settled law that it was the real income and not the hypothetical income which has to be brought to tax. Our views find support from the decisions reported in 46 ITR 144 (SC) and 140 ITR 860 (P&H). The CIT(A) appreciated these facts and deleted the addition. We do not find any infirmity in his findings and while upholding the same, we dismiss the ground of appeal raised by the revenue.” iv) Disallowance of car expenses attributable to the personal use of the Director “28. Ground No.13 related to the disallowance out of motor car expenses. The assessee is company and there cannot be any disallowance on account of personal use of the car in the case of a company. The issue is squarely covered in favour of the assessee by the decision of the 5 ITA No.66 of 2004 Delhi bench of the ITAT reported in 76 ITD 32. Concurring with the same, we hold that the disallowance sustained by the CIT(A) is not justified and the same is deleted.” v) Foreign travelling expenses could not be held to be capital expenses. “56. We have heard the rival submissions. We find that the assessee was already manufacturing and dealing with the same products for which Shri Arun Brar has visited abroad. During his visit, he explored the possibility of technical collaboration for manufacturing of similar items. Any expenditure for modernization or up gradation of the technology of the existing product cannot be said to be capital expenditure. It is settled law that where an expenditure is incurred for setting up of a new factory or a new line of business, such expenditure will be capital expenditure. But where the expenditure is incurred for keeping oneself abreast the latest technique of his business or for foreign collaboration has to be held as revenue expenditure. Our views find support from the decisions reported in 76 ITR 644 (AP), 157 ITR 751 (Bom,), 14 ITR 335 (Bom.) and 132 ITR 401 (Gaj.). We therefore hold that the CIT(A) has correctly appreciated the facts in deleting the addition. While upholding his findings, we dismiss the ground of appeal raised by the revenue.” 10. We have heard learned counsel for the appellant. We proceed to deal with the questions raised by the revenue. Re: (i) 11. Learned counsel for the revenue submitted that the return of the assessee being beyond the time allowed by the Assessing Officer, carry forward of loss was not permissible in view of section 80 of the Act. 6 ITA No.66 of 2004 Reliance has been placed on judgments of the Kerala High Court in CIT v. Smt.Gunavathy Dhasmasy, (2000) 241 ITR 168 and CIT v. Rajesh Kumar, National Spices, (2003) 259 ITR 629. 12. We are unable to accept the submission. As rightly held by the Tribunal, though the Assessing Officer had rejected the prayer for extension, the assessee had justification for delay on account of audit being incomplete. The Tribunal having exercised its discretion in extending the time beyond the date on which the return was filed, Section 80 could not be invoked. In the judgments relied upon, the return was beyond the prescribed date which was never extended. The question is, thus, answered against the revenue. Re: (ii) 13. The Tribunal has set aside the addition towards refund in view of the fact that the assessee had offered the amount for taxation under KVSS which had been accepted by the department in subsequent assessing year. In view of this undisputed fact, the question whether the dispute raised by the assessee was still pending in Hon’ble Supreme Court could not be a ground to tax the amount again. Accordingly, the question is decided against the revenue. In such circumstances, the judgment relied upon in Polyflex (India) Private Limited v. CIT, (2002) 257 ITR 343 is not attracted as therein tax liability had not been discharged by the assessee under KVSS as in the present case. Re: (iii) 14. The Tribunal has found, as a fact, that claim of the assessee for refund was based on judgment of the Hon’ble Supreme Court in some other case and the said claim was never accepted in the year in dispute. The credit entry in the profit and loss account was made on hypothetical basis. 7 ITA No.66 of 2004 This being the factual finding which is not shown to be erroneous, the deletion by the Tribunal is not liable to be interfered with. The question is decided against the revenue. Re: (iv) 15. In view of the finding of the Tribunal that car expenses disallowed for personal use were not attributable to personal use, which finding is not shown to be perverse, the order of the Tribunal is not liable to be interfered with. The question is decided against the revenue. Re: (v) 16. The Tribunal has found that the foreign traveling expenses were incurred to explore possibility of technical collaboration for manufacture of products in which case the expenditure was in the nature of revenue expenditure and not capital expenditure as submitted on behalf of the revenue. The finding recorded by the Tribunal is not liable to be interfered with. The question is decided against the revenue. 17. As a result of the above, the appeal is dismissed. (Adarsh Kumar Goel) Judge February 1, 2011 (Ajay Kumar Mittal) ‘gs’ Judge 8