2019 (4) TMI 1723 - HC - Income Tax

High Court affirms Tribunal's decision on revenue expenditure, business losses, assets, and TDS exemption.

PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA-3 Versus M/s GUJARAT NARMADA VALLEY FERTILIZER AND CHEMICALS LTD.

The High Court dismissed the appeal, upholding the Tribunal's decision that expenses on stores and spares were revenue expenditure, losses on fertilizer ... Disallowance of expenses on consumption and replacement of stores and spares - capital expenditure OR revenue expenditure - HELD THAT:- 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 AO 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. Loss on allotment of fertilizer bonds and addition on account of loss on actual sale of fertilizer bonds - capital or business loss - HELD THAT:- Tribunal, on appreciation of facts and considering the history of allotment of bonds by the Government of India in lieu of subsidy amount, held that the finding of the Assessing Officer that from the date of allotment when the market value of the bond is less then it is the notional loss, is not correct. It was also found that as a matter of fact that in assessment year 2008-09, the Assessing Officer has already allowed such loss as revenue loss. 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. With regard to the loss suffered on allotment of bonds and actual loss on sale of bonds 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. 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. TDS u/s 194H - disallowance u/s. 40(a)(ia) in respect of commission payment - HELD THAT:- 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) cannot be applied as the dealer cannot be said to be a commission agent of the assessee company. It is not possible to state that the Tribunal has committed any legal error so as to warrant interference Issues Involved:1. Disallowance of expenses on consumption and replacement of stores and spares treated as capital expenditure.2. Loss on allotment of fertilizer bonds.3. Loss on actual sale of fertilizer bonds.4. Classification of fertilizer bonds as investment or stock-in-trade.5. Disallowance under section 40(a)(ia) for commission payments to dealers.Detailed Analysis:1. Disallowance of expenses on consumption and replacement of stores and spares treated as capital expenditure:The Assessing Officer (AO) disallowed Rs. 2,55,82,153/- claimed by the assessee as revenue expenditure on the consumption and replacement of stores and spares, treating it as capital expenditure. The CIT (Appeals) allowed the appeal, and the Tribunal upheld this decision, noting that the replacement of worn-out parts did not create new assets or increase capacity but restored the machinery to its original efficiency. The Tribunal found no perversity in the CIT (Appeals)'s findings, making this a question of fact rather than law.2. Loss on allotment of fertilizer bonds:The AO disallowed the loss of Rs. 18,62,04,574/- claimed by the assessee on the allotment of fertilizer bonds, arguing that the market value of the bonds on the date of allotment was less than their face value. The CIT (Appeals) allowed the appeal, and the Tribunal affirmed this, holding that the bonds received as subsidy were part of the sale price and thus current assets, not investments. The Tribunal found that the loss should be allowed as a business loss under sections 28 and 37 of the Act.3. Loss on actual sale of fertilizer bonds:The AO disallowed the loss of Rs. 3,77,73,348/- on the actual sale of fertilizer bonds, treating them as capital assets. The CIT (Appeals) and the Tribunal held that the bonds were received as part of the sale price (subsidy) and shown as current assets, not investments. Therefore, the loss on their sale was considered a business loss. The Tribunal referenced its earlier decision and a High Court ruling, which dismissed a similar appeal by the revenue, confirming that such losses should be treated as business losses.4. Classification of fertilizer bonds as investment or stock-in-trade:The Tribunal and CIT (Appeals) consistently held that the fertilizer bonds were received in lieu of subsidy and were part of the sale price, thus classified as current assets. The AO's argument that the bonds were investments due to their holding period was rejected, as the nature of the bonds as current assets was established by their receipt as subsidy and their treatment in the assessee's books.5. Disallowance under section 40(a)(ia) for commission payments to dealers:The AO disallowed Rs. 2,95,05,335/- paid as commission to dealers, arguing it should be subject to TDS under section 194H. The CIT (Appeals) and the Tribunal found that the relationship between the assessee and the dealers was on a principal-to-principal basis, with the dealers purchasing goods from the assessee and making payments accordingly. The Tribunal held that the payments to dealers were not commissions but discounts, and thus not liable for TDS under section 194H. Consequently, the provisions of section 40(a)(ia) did not apply.Conclusion:The High Court dismissed the appeal, finding no substantial question of law arising from the Tribunal's order. The Tribunal's findings were based on factual determinations and consistent legal interpretations, affirming the decisions of the CIT (Appeals) on all issues. The appeal was dismissed with no order as to costs.