TaxTMI 
TaxTMI 
2014 (11) TMI 12
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....f liability. 3. The ground No.1 of the appeal of the assessee in Assessment Year 2002-03 is directed against the order of the CIT(A)-III, Baroda in sustaining the disallowance made by the Assessing Officer of Rs. 21,39,553/- on account of revaluation of liability. 4. The facts of the case are that a tripartite agreement was made between Sarabbai Machinery Ltd. (SML), Ambalal Sarabhai Enterprise Ltd. (ASE Ltd.) and the purchasers of the shares of SML on 18.04.1994. At that particular point i.e. in 1994, SML was indebted to ASE Ltd. for an aggregate amount of Rs. 7,40,96,250/- (consisting of unpaid purchase consideration, advances received by SML from ASE Ltd and interest provided on these amounts). In the said agreement, clause 3 expressly provided that the interest on the unpaid purchase consideration shall cease to accrue with effect from 01.10.1993. The clause 4 of the agreement provided for the payments in installments in the following manner: "4.1 The aforesaid sum of Rs. 7,40,96,250 shall be paid by SML to ASE in the following manner: Rs. 1,00,00,000 On 1st October, 1994 1,00,00,000 On 1st April. 1995 1,00,00,000 On 1st October, 1995 ....
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....er. The cessation of liability can take place only when SML actually exercises the option of discharging the liability for Rs. 3,26,86,250 earlier than on 1.4.2014 and it is only in that event that the amount by which the liability had ceased upon such earlier payment, can be known. 7. Considering that SML had the option to discharge the aggregate interest liability of Rs. 3,26,86,250 (which was payable on 1.4.2014) at any earlier point of time by the payment of only that amount which was equal to the discounted value thereof (based on the discounting factor of 18% p.a.) at the time of payment, solely with a view to secure that the books of account reflected this position, the Board of Directors of the Company passed a resolution at their meeting held on 2.9.1996 for writing back Rs. 82,47,082 [Rs. 99,08,539 minus Rs. 16,61,457 (present value of Rs. 3,26,86,250 as on 31/03/1996 at a discounting factor of 18%)]. This amount of Rs. 82,47,082 written back to the credit of the Profit and Loss Account does not at all represent any cessation, remission or waiver of the liability to ASE - especially such as is envisaged by Section 41 of the Income-tax Act, 1961, and there can be no que....
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....factor of 18 per cent per annum. The present value as at the end of subsequent years upto 31.3.2002 is as under: Rs. 31.3.1996 16,61,457 31.3.1997 19,60,519 31.3.1998 23,13,412 31.3.1999 27,29,826 31.3.2000 32,21,195 31.3.2001 38,01,010 31.3.2002 44,85,192 10. As the ICICI Bonds had been redeemed early, the board thought it advisable to write up the liability so that the books of account as at 31.3.2002 would show the liability at its then present value of Rs. 44,85,192. That would require a credit entry for Rs. 28,23,735 [Rs. 44,85,192 minus Rs. 16,61,457 (already provided there in books)] on account of increment in the present value during the period from 1.4.1996 to 31.3.2002 on the basis of the discounting factor of 18% per annum. This was done by the company by debiting profit and loss account and crediting liability account. As the Department assessed Rs. 82,47,082/- for A. Y. 1996-97, the same is now debited to Profit and Loss A/c. while restoring the liability and therefore is rightly deducted. 11. It was further submitted by the AR of the assessee that while disallowing the claim of the assessee the Ass....
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....le. In this connection, the assessee-company submitted that it had written back the amount of Rs. 82,47,082 in profit and loss account in A.Y. 1996-97 on the basis of discounted value of the said liability. Further, as the assessee had purchased the bonds of ICICI limited during the A.Y. 1997-98 to meet its liability payable to ASE limited in 2014, the assessee-company had not revalued its liability in A.Y. 1997-98 and following notes was included in the Annual accounts for such decision. "10. Provisions for interest on the Company's liability to Ambalal Sarabhai Enterprises Ltd. (ASE) pursuant to the agreement dated April 18, 1994 has not been made since the maturity value of the ICICI Bonds acquired by the Company for securing that liability will be adequate to meet the Company's liability to ASE, both for principal and interest." 14. Further, a note explaining above referred situation was explained in return of income for A.Y. 1997-98, which reads as under:- "In view of what has been mentioned in Note No. 10 of Schedule-J forming part of the attached Annual Accounts, deduction for interest on the Company's liability to Ambalal Sarabhai Enterprises Limited pu....
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....ment year and that balance amount of Rs. 21,39,553/- had accrued as a liability before 01.04.2001 which cannot be allowed as a deduction during this assessment year. The purchase of ICICI Bond is a separate transaction which is not relevant for determining the accrual of such liability and accordingly directing the Assessing Officer to allow the deduction of Rs. 6,84,182/- to the assessee from its income. 18. The Departmental Representative relied on the order of the Assessing Officer and submitted that the CIT(A) was not justified in deleting the disallowance to the extent of Rs. 6,84,182/- in AY 2002- 03 and Rs. 8,07,334/- in AY 2003-04. 19. We find that in the instant case the assessee has revalued its liability to M/s. Ambalal Sarabhai Enterprises Ltd. (ASE Ltd.) and increased the same by Rs. 28,23,735/-. In our considered view, in normal parlance such increase in liability is not an expense incurred wholly and exclusively for the purposes of business and is therefore not allowable as deduction to the assessee. But looking at the entire facts of the case, we find that in this case when the assessee revalued the same liability in the AY 1996-97 resulting in credit of Rs. 8....
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.... the CIT(A) and dismiss this ground of appeal of the Revenue. 21. Ground No.2 of the appeal of the assessee in AY 2002-03 is directed against the order of the CIT(A) in confirming the disallowance of Rs. 8,317/- on account of interest expense made by the Assessing Officer u/s 14A of the Act. 22. The Assessing Officer observed that the assessee had made investment of Rs. 6,65,358/- in shares of M/s. Paras Petrofills Ltd. Before the Assessing Officer, the assessee submitted that such investment was made in March 2002 from its cash credit facility obtained from Indusind Bank to whom the assessee was paying interest @ 15%. On query by the Assessing Officer to explain as to why the corresponding interest paid for investment in the shares should not be disallowed, the assessee failed to furnish any explanation and in that event, the Assessing Officer held that the investment in shares of M/s. Paras Petrofills Ltd. was made out of interest bearing funds and disallowed Rs. 8,317/- u/s 14A of the Act. 23. On appeal, the CIT(A) confirmed the action of the Assessing Officer for the reason that the assessee before the Assessing Officer accepted the investments in shares were made out ....
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....3-04 out of staff welfare expenses of Rs. 6,74,490/- in AY 2002- 03 and Rs. 5,79,459/- in AY 2003-04 claimed by the assessee on the ground that majority of the expenses were incurred in cash and vouchers of such expenses were not enclosed. On appeal, the CIT(A) confirmed the action of the Assessing Officer. The contention of the AR of the assessee is that the disallowance was made without pointing out the items of the expenses in respect of which the assessee had not maintained the vouchers and therefore, the Assessing Officer is not justified in making disallowance of expenses on ad-hoc basis. We find force in the arguments of the AR of the assessee. We find that the Assessing Officer has not pointed out for which items of the expenditure the assessee has not maintained the vouchers. Without bringing such material on record, he was not justified in making ad-hoc disallowance of Rs. 40,000/- in AY 2002-03 and Rs. 43,458/- in AY 2003-04 out of staff welfare expenses of Rs. 6,74,490/- in AY 2002-03 and Rs. 5,79,459/- in AY 2003-04. Hence, we set aside the orders of the lower authorities on this issue and delete the disallowance of Rs. 40,000/- in AY 2002-03 and Rs. 43,458/- in AY 200....