IN THE HIGH COURT OF GUJARAT
R/Tax Appeal No. 185 Of 2019
THE PRINCIPAL COMMISSIONER OF INCOME TAX
M/s GUJARAT NARMADA VALLEY FERTILIZER AND CHEMICALS LTD
J B Pardiwala & A C Rao, JJ
Dated: July 29, 2019
Appellant Rep by: Mr Varun K Patel(3802)
Respondent Rep by: Mr Manish J Shah(1320)
Income Tax – Sections 28, 37 & 40(a)(ia)
Keywords – Business loss – Capital expenditure – Commission payment to dealers – Fertilizer bonds – Revenue expenditure
The assessee filed its return for the relevant AY and declared its business loss alogwith deduction on various expenditures. The expenditures were in respect of replacement of stores and spares and commission payments made to dealers of the assessee. The loss was regarding receipts after sale of fertilizer bonds. The AO, held the expenditure incurred for replacements as capital expenditure and disallowed the commission payments u/s 40(a)(ia) r/w section 194(H). The loss was termed as capital loss and not business loss. The CIT(A) and later the ITAT, however set aside the AO’s order allowing the expenditure as revenue expenditure and loss as business loss.
Having heard the parties, the High Court held that,
Whether in absence of latent defect in fact-finding by the ITAT with respect to setting aside the disallowance made by the AO, the criteria of raising substantial question of law before invoking the appellate jurisdiction of writ court is not fulfilled – YES: HC
++ the issues arising is no longer res integra. They fell for the consideration of this Court in assessee’s own case in PCIT vs Gujarat Narmada Valley Fertilizers and Chemicals Ltd – 2019-TIOL-1283-HC-AHM-IT. Hence, following such ruling the appeal of the Revenue is dismissed.
Revenue’s appeal dismissed
Per: J B Pardiwala:
1.00. This Tax Appeal under section 260A of the Income Tax Act, 1961 (for short “the Act, 1961”) is at the instance of the revenue and is directed against the order passed by the Income Tax Appellate Tribunal dated 27/09/2018 in ITA No.2663/AHD/2014 for A.Y. 2010-11.
2.00. The revenue has proposed the following substantial questions of law for consideration of this Court :-
“(a).Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in upholding the deletion of addition on account of disallowance of expenses on consumption and replacement of stores and spares of Rs.1,96,48,785/- treating the same as revenue expenditure instead of capital expenditure?
(b). Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in in deleting addition on account of loss on sale of fertilizer bonds of Rs.14,00,30,377/- treating it as business loss instead of capital loss?
(c). Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in deleting the addition on account of loss of sale of fertilizer bond without appreciating that these fertilizer bonds were held by the assessee as investment and were not held as stock in trade of the business carried on by the assessee and consequently the said losses cannot be termed as business loss?
(d). Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in deleting the disallowance u/s.40(a)(ia) in respect of commission payment to dealers of Rs.3,86,99,035/- without appreciating that considering the nature of service rendered by the dealers to the assessee Company, the A.O. Had correctly made disallowance u/s 40(a)(ia) of the Act by invoking the provisions of Explanation (I) to section 194(H) of the Act?”
3.00. We take notice of the fact that the very same substantial questions of law, as proposed by the revenue in the present Tax Appeal fell for the consideration of this Court in the case of the very same assessee in the Tax Appeal No.1360 of 2018 = 2019-TIOL-1283-HC-AHM-IT relating to A.Y. 2009-10. This Court while answering the first question as regards the disallowance of the expenses on consumption and replacement of stores and spares treating the same as revenue expenditure instead of capital expenditure, held as under :-
“4. It emerges from records that the manufacturing facility of the appellant included fertilizers and chemical plants complex wherein fertilizers like Urea and Ammonium Nitro phosphate and chemicals like Ammonia, Formic Acid, Acetic Acid, Weak Nitric Acid, Concentrated Nitric Acid and Methanol were manufactured. Various plants and equipment were in continuous operation in corrosive and acidic atmosphere. It was found that no new assets were created in the process of replacement of worn out parts. There was no capacity addition. The replacement of components of old machinery was made to bring to its original state of efficiency so that the entire integrated manufacturing unit which was considered as a profit making apparatus functions efficiently to its capacity and produces quality products. The CIT (Appeals) after perusing the paper book which contains the details like name of the main plant or machinery to which the replaced component pertains, cost of replaced component, cost of total plant and past history of disallowance and appellate decision in past in respect of similar components and the facts which were explained with the help of diagram/process chart showing that replaced component is part of the main plant. The CIT (Appeals), therefore found from the details of additions to that the fixed assets that addition of independent machinery has already been capitalised and claim is made only for depreciation. Thereafter, the CIT (Appeals) on the above facts found that the expenditure claimed as revenue expenditure is in respect of components of the machinery which cannot be treated as the independent machinery in itself as they are not capable of functioning independently. It was further held that the chemical and fertilizer plant was very large plant within which again there are large machines and within the machine there are components requiring replacement due to wear and tear, that was different plants within the fertilizers and chemical plant. Reference was also made to past history of disallowance wherein the Tribunal had set aside the issue to the Assessing Officer for the assessment years 1998-99 to 2002-03, who in turn accepted the explanation furnished by the appellant in de novo assessment proceedings and no additions were made. On perusal of the facts noted by the CIT (Appeals) as well as affirmed by the Tribunal, it is clear that question (a) raised by the revenue is a pure question of fact and in the absence of any perversity being pointed out in the concurrent findings of fact recorded by the Tribunal, does not give rise to any question of law.”
4.00. So far as the second and third questions are concerned, they are with respect to the deletion of loss on sale of fertilizer bond. This Court while answering the same in Tax Appeal No.1360 of 2018 held as under :-
“8. It emerges from records that on the date of allotment the bonds were received in lieu of subsidy which was the additional sale price receivable from GOI. The assessee had offered to tax the subsidy receivable as part of sale price. The realization of additional sales price by way of subsidy in the form of fertilizer bond does not make bonds an investment because the bonds were never acquired by the assessee as investment or capital but as debt and also shown as current assets. Therefore, the loss suffered on allotment of bonds and actual sale of the bonds cannot be considered as capital loss but has to be allowed as business loss under section 28 or section 37 of the Act.
9. With regard to the loss suffered on allotment of bonds and actual loss on sale of bonds amounting to Rs.377,73,348/- is concerned, the contention of the Assessing Officer was that after allotment the assessee company continued to hold bonds and, therefore, it takes characteristic of investment. However, holding period does not decide nature of bonds as investment. In view of the background of facts of getting bonds it clearly indicates that the bonds were not acquired as investments. The CIT (Appeals) as well as the Tribunal held that the bonds were received in lieu of subsidy which was additional sale price received from the Government of India and the assessee company had offered such amount to tax accordingly as part of the sale price and, therefore, the realisation to the additional sale price by way of subsidy in the form of fertilizer bonds does not make bond an investment, because such bonds were never acquired by the assessee as investment for capital but the same were received as debt and also shown as current assets. Accordingly, the loss on actual sale of the bonds cannot be considered as capital loss but the same was required to be allowed as business loss.
10. The Tribunal followed its earlier decision in ITA No.339/Ahd/2012 for assessment year 2008-09 in the case of Gujarat State Fertilizer and Chemicals Ltd. wherein similar issue had arisen. Being aggrieved by the same, the revenue preferred Tax Appeal No.900 of 2018 and this court by order dated 31.7.2018 dismissed the appeal by holding that the fertilizer bonds were issued by the Central Government in lieu of the subsidy. It is not disputed that the subsidy income cannot be said to be a business income. Therefore, in the facts of the case, the fertilizer bonds which were given by the Central Government in lieu of the subsidy when the same was sold at a lower price and the assessee suffered loss, the same was required to be allowed as business loss incurred and it cannot be treated as capital. In view of the aforesaid decision of this court dismissing the appeal of the revenue on the very same ground on account of loss arising on sale of bonds, no question of law can be said to have arisen out of the order of the Tribunal”
5.00. So far as the fourth question as regards the disallowence under section 40(a)(ia) of the Act is concerned, while answering the same in Tax Appeal No.1360 of 2018, this Court took the view as under :-
“13. On a perusal of the findings given by both the CIT (Appeals) as well as the Tribunal, it is not in dispute that the transaction of sale between the assessee company and the dealer is on principal to principal basis. Such supplies are made in the accounts of the dealers only. All accounts are maintained in favour of the dealer. The dealer makes the payment to the assessee for such supplies. All credit notes, debit notes, if any, for the agreed terms are issued by the assessee in favour of the dealers only and for all practical purposes, dealer is debtor of the company. On the facts of the case, when the assessee sells goods to its dealers, it is the dealer who makes the payment to the assessee and there is no payment made by the assessee to the dealer and, therefore, the question of deducting any tax under section 194H of the Act does not arise. The relevant extract of section 194H reads as under:-
“194. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent:
Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed fifteen thousand rupees:
… … ..
Explanation – For the purposes of this section-
(i) “commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying and selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.”
14. On a perusal of the aforesaid provision of section 194H, it is clear that any person, not being an individual or Hindu undivided family, who is responsible for paying by way of commission or brokerage shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash whichever is earlier, is liable to deduct tax. Explanation (1) to section 194H defines “Commission or Brokerage” which includes any payment received or receivable, directly or indirectly by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying and selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities. On the facts of the present case, as per the tripartite agreement entered into between the assessee and the dealer, there is no service provided by the dealer to the assessee in the course of buying or selling goods, inasmuch as, the assessee directly sells goods to the dealer and the dealer makes the payment after collecting it from the consumers and, therefore, it is a transaction on principal to principal basis and, therefore, the payment made by the dealer is not liable for any deduction of tax by the assessee company. Therefore, in the facts of the case, the provisions of section 40(a)(ia) of the Act cannot be applied as the dealer cannot be said to be a commission agent of the assessee company.”
6.00. In view of the aforesaid, none of the proposed questions of law are res-integra. In the result, this Tax Appeal fails and is hereby dismissed.