Income Tax Appellate Tribunal - DelhiMaharaja Appliances Ltd., New Delhi vs Department Of Income Tax on 20 February, 20151
                                                                     ITA 1543/Del/2011
                                                        ITO Vs. Maharaja Appliances Ltd.

          IN THE INCOME TAX APPELLATE TRIBUNAL
                DELHI BENCH "E" NEW DELHI
     BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER
                           AND
          SHRI ABY. T. VARKEY : JUDICIAL MEMBER

                        ITA no. 1543/Del/2011
                        A.Y. 2007-08
Income-tax Officer,           Vs M/s Maharaja Appliances Ltd.,
Ward 6(1), New Delhi.              1/7, East Patel Nagar,
                                   New Delhi-110008.
                                   PAN: AACM 1791 M

( Appellant )                        ( Respondent )

           Appellant  by :           Shri Padam Kanuhjha Sr. DR
           Respondent by :           Shri S.R. wadhwa Adv.

           Date of hearing    :      12-02-2015
           Date of order      :      20-02-2015.

                               ORDER

PER S.V. MEHROTRA, A.M:-This appeal, preferred by the department, is directed against the order
dated 30-11-2010, passed by the CIT(Appeals)-IX, New Delhi, relating to
A.Y. 2007-08.2.   Brief facts are that the assessee, in the relevant assessment year, was
engaged in the business of trading of       home appliances as distributor/
wholesaler. It had sold products through its network of dealers and
distributors. The assessee had filed its return declaring income of Rs.
4,10,580/-. The assessment was completed at a total income of Rs.2ITA 1543/Del/2011
                                                            ITO Vs. Maharaja Appliances Ltd.62,91,888/-, inter alia, making addition/ disallowance in respect of
following:(i)       Disallowance u/s 37(1)
             Sales tax interest & penalty             Rs. 2,05,705/-

   (ii)      Disallowance u/s 32(1)
             Assets not used for business             Rs. 3,11,610/-

   (iii)     Disallowance of sales Service charges Rs. 31,89,625/-
   (iv)      Disallowance u/s 37(1)
             Administrative expenses                   Rs. 22,43,445/-
   (v)       Short term capital gain on sale of assets Rs. 2,22865/-.2.1.      In first appeal, the ld. CIT(A) partly allowed the assessee's appeal.
Aggrieved, with the order of ld. CIT(A) the assessee is in appeal before us.
Following grounds are raised:1. The order of the learned CIT(Appeals) is erroneous &
          contrary to the facts & law.2. On the facts and in the circumstances of the case and in law,
          the learned CIT(Appeals) has erred in restricting the addition
          on account of interest and penalty to Rs. 1,25,8466/- as against
          Rs.2,05,705/- made by the A. .2.l. The Ld. CIT(A) ignored the finding recorded by the A.O.
          and the fact that the expenses in question are penal in nature.
          3.0n the facts and in the circumstances of the case and in law,
          the Learned CIT(Appeals) has erred in deleting the addition of
          Rs.2,22,865/- made by A.O. on account of short term capital
          gain on account of sale of assets.3.l.The Ld.CIT(A) ignored the finding recorded by the A.O. and
          the fact that the assessee itself has confirmed the sale of
          machinery vide letter dated 24/12/2009..4.0n the facts and in the circumstances of the case and in law,
          the learned CIT(Appeals) has erred in deleting the addition of
          Rs.3,11,610/- made by A.O. u/s 32(1) of the Act on account of
          depreciation.4. 1. The Ld.CIT(A) ignored the finding recorded by the A.O.3ITA 1543/Del/2011
                                                           ITO Vs. Maharaja Appliances Ltd.and the fact that the assessee itself has confirmed the sale of
       machinery vide letter dated 24112/2009.5. On the facts and in the circumstances of the case and in law,
       the learned CIT(Appeals) has erred in restricting the addition
       on account of sale and service to Rs. 4,26,887/- as against Rs.
       31,89,625/- made by the AO.5.1. The Ld.CIT(A) ignored the finding recorded by the A.O.
       and the fact that the assessee could not substantiate its claim
       during the assessment proceedings.6. On the facts and in the circumstances of the case and in law,
       the learned CIT(Appeals) has erred in restricting the addition
       on account of administrative expenses to Rs.98,123/- as against
       Rs.22,43,445/- made by the A.O .6.1. The Ld.CIT(A) ignored the finding recorded by the A.O.
       and the fact that the assessee could not substantiate its claim
       during the assessment proceedings7.The appellant craves leave to add, to alter, or amend any
       grounds raised above at the time of hearing."3.     At the outset ld. counsel for the assessee submitted that the revenue
has accepted the CIT(A)'s order for AY 2009-10 and 2010-11, inasmuch as,
in both the assessment years, following the CIT(A)'s order, the AO has
restricted the disallowances, as directed.4.     Ground nos. 1 & 7 are general in nature and require no adjudication.5.     Ground no. 2 & 2.1. :Brief facts of the case are that assessee had
claimed a sum of Rs. 3,71,060/- on account of "additional sales tax -
penalty appeal". The tax audit report revealed the sales tax penalty and
interest borne by the assessee at Rs. 2,05,705/-, the           AO, therefore,
disallowed the same.5.1.   Before ld. CIT(A), the assessee had, inter alia, submitted as under:"Further Rs. 88,453/- out of the total disallowance relates to
       sales tax & penalty which is of compensatory nature & not
       penal. Breakup of such expenses is given below:4ITA 1543/Del/2011
                                                            ITO Vs. Maharaja Appliances Ltd.S. No.      Particulars                    Nature                   Amount in
                                                                    Rs.
1.          Sales Tax additional           Sales      Tax           28,919/-
            demand due to non              additional
            receipt of form F at           demand
            Ahmedabad. DD for
            payment of sales tax
            demand
2.          Amount     for     late        Compensation             8,594/-
            payment of sale tax.           for     late
                                           payment
3.          VAT       paid       at        MVAT paid                50,940/-
            Maharashtra,
            calculation.
                                           Total                    88,453/-.5.2.     Ld. CIT(A) noted that out of Rs. 88,453/-, Rs. 8,594/- was penal in
nature and, therefore, he allowed a relief of Rs. 79,859/- and restricted the
addition at Rs. 1,25,846/-.5.3.     Ld. counsel for the assessee pointed out that in AY 2009-10 and 2010-11, the AO has restricted the disallowance accordingly to Rs. 12,000/- and
Rs. 2500/- respectively.5.4.     Having heard both the parties, we do not find any infirmity in the
order of ld. CIT(A), because only those payments, which were penal in
nature, could be disallowed. Ground is rejected.6.       Ground no. 3 & 3.1.:From the fixed assets chart, the AO noticed that
assessee had sold machinery worth written down value of Rs. 47,50,500/-. In
terms of section 50, he computed the short term capital gains at Rs.
2,22,865/- as under:Sale consideration             Rs. 70,36,357/-
         Opening written down value     Rs. 68,13,492/-5ITA 1543/Del/2011
                                                                   ITO Vs. Maharaja Appliances Ltd.

       Addition to Plant & machinery Rs. Nil.
       Short term capital gain       Rs. 2,22,865/-6.1.   Ld. CIT(A) in para 3 of his order observed as under:"5.3 On going through the detailed submissions filed by the appellant, I
       have found the same' to be correct. It appears that the Ld. AO erroneously
       took the figure of sales proceeds of the assets at Rs.70,36,357/- which
       included MODVAT, excise duty etc. as against the actual sale
       consideration of Rs.47,50,5001-. The Ld. AO also missed out the fact that
       the entire block was not sold out and there was an addition of Rs.29,5001-
       to the same during the year. The addition of plant and machinery of
       Rs.29,5001- had to be included to the block, as is evident from the block of
       fixed assets. Thus, the value of the said block of assets did not become NIL
       at the end of year and as such under the scheme of block of assets there
       was no scope to treat it as short term capital gains. Under the
       circumstances, the ld. AO was not right in invoking the provisions of
       section 50 of the Act to work out the short term capital gain of Rs.
       2,22,865/-. The same being wrongly done is directed to be deleted."6.2.   The finding of ld. CIT(A) that the block of assets did not become nil,
has not been controverted.6.3.   Having heard both the parties, we find that this issue is covered by the
ratio of decision of Hon'ble Delhi High court in the case ofCIT Vs. Eastman
Industries Ltd.(2008) 219 CTR 593 (Del.), holding as under:"Section 50 (2) of the Act comes into play only if assets of
       the same class "cease to exist" for the reason that all assets
       in that block are transferred during the previous year. The
       "block of assets" cease to exist in accordance with sub-
       section (2) of Section 50 only when, all assets in that block
       are transferred 'during' the 'previous year'. The expression
       'previous year' is preceded by the word 'during'. It is well
       settled that the intention of the legislature is best
       ascertained by resorting to the plain meaning of the words
       used in the legislation. The plain meaning of the word
       'during' clearly indicates that the provision refers to
       transfer of assets in the block, in a defined period and not at
       any particular point in time. Thus, it is only when the6ITA 1543/Del/2011
                                                  ITO Vs. Maharaja Appliances Ltd.following conditions are fulfilled does Section 50(2) get
triggered in i) all the assets in the block, ii) are transferrediii) throughout the course of or after the commencement
and before the expiration of iv) the financial year of the
assessee immediately preceding the assessment year. A
bare reading of the provision of sub-section (2) of Section
50 of the Act would show that, the very fact that, there is a
reference to, in arriving at the cost of acquisition, to the
written down value of the „block of assets‟ at the beginning
of the previous year as increased by actual cost of assets
falling within the "block of assets" acquired during the
previous year would show that what is required to be seen
is that whether at the end of the previous year, the „block of
assets‟ have ceased to exist or, in other words what is to be
seen is that whether „throughout the course of‟ or „after the
commencement and before the expiration of the previous
year‟ (i.e., the financial year immediately preceding the
relevant assessment year) there was an asset which fell
within the "block of assets". In the event the block of assets
i.e., a class of asset(s) bearing same rate of depreciation
exist(s) was with the assessee at the end of the previous
year, then the provision of Section 50 (2) would not apply.The Section creates a deeming fiction. It cannot be
extended beyond the purpose for which it has been enacted.
The section is a special provision, which provides for
bringing to tax by way of short term capital gains
depreciable assets which are transferred during the previous
year as against those provided in Section 2 (42A). As noted
by the Tribunal, as well as, the CIT that sub-section (2) of
Section 50 of the Act provides for the computation of
capital gains where "block of assets" ceases to exist "for
the reason that all the assets in the block are transferred in
the previous year". In the instant case, all the assets had not
been transferred during the previous year because of the
fact that some assets still remained in the block at the end
of the year. This fact, as noted by the Tribunal, is not7ITA 1543/Del/2011
                                                           ITO Vs. Maharaja Appliances Ltd.disputed. In our view, in the circumstance, that the assets
       were available in the "block of assets" at the end of the
       previous year, the provision of Section 50 (2) will not be
       applicable, as held by both the Tribunal and the CIT. In the
       circumstance, no substantial question of law has arisen for
       our consideration."6.4.   Respectfully following the decision of Hon'ble High Court, we see
no reason to interfere in the order of ld. CIT(A) on the issue in question.
Accordingly, ground nos. 3 & 3.1 stand rejected.7.     Ground no. 4: During the course of assessment proceedings the AO
noticed that depreciation of 3,11,661/- was claimed on plant and machinery.
Keeping in view the fact that assessee was no more involved in any
manufacturing activity, the AO required the assessee to show as to why
depreciation claimed on plant & machinery should not be disallowed. The
assessee, inter alia, pointed out that company had temporarily stopped its
manufacturing and started      more concentration on trading activity. The
management was looking for starting manufacturing a new business line in
appliance industry in which company had expertise. The AO, however, did
not accept the assessee's contention and, inter alia, pointed out that such sale
formed 70% of the total plant and machinery, that too at the beginning of the
previous year i.e. 1-4-2006. After such sales, assessee was only left with
30% of the plant and machinery. He, therefore, disallowed the assessee's
claim of depreciation of Rs. 3,11,660/- .7.1.   Ld. CIT(A), taking note of the fact that assets were kept ready for use,
allowed the assessee's claim of depreciation, observing in para 6.6 as under:6.6    I have considered the submissions of the appellant,8ITA 1543/Del/2011
                                                           ITO Vs. Maharaja Appliances Ltd.various judicial pronouncements relied upon by the Id. AR,
       the findings recorded by the Id. AO as per the assessment
       order and the facts of the case on record. It has been
       consistently. held by various judicial authorities that if the
       assets are kept ready for use, the claim of depreciation is
       allowable to an assessee. The same view was held by the
       Jurisdictional High Court in the cases relied upon by the
       appellant. In the instant case, although, there was no
       manufacturing activity during the year under consideration
       but in the next year the same took place as can be seen
       from the submissions filed by the Id. AR. The appellant has
       submitted the details of raw material consumption and
       manufacturing of goods for the succeeding year when the
       plant and machinery was actually put to use. This
       establishes the fact that during the year under
       consideration, the assets were, in fact kept ready for use.
       Therefore, in the light of the rulings of the Hon'ble
       Jurisdictional High Court relied upon by the appellant and
       after considering the submissions filed by the Ld. AR, I am
       of the opinion that the claim of depreciation is legitimately
       allowable to the appellant. The addition of Rs.311661/-
       made by the Ld. AO is, therefore, deleted.7.2.   Having heard both the parties, we do not find any reason to interfere
with the order of ld. CIT(A). Firstly, because the block of             plant and
machinery continued to exist and the manufacturing activities had
temporarily been suspended and the business was not closed down.
Secondly, the machinery was kept ready for future use and, therefore, in
view of the decision in following cases, the assessee's claim was rightly
allowed by ld. CIT(A) :-Capital Bus Service (P) Ltd. v. CIT123 ITR 404 (Del.);-CIT Vs. Yamaha Motor India Pvt. Ltd.183 Taxmann 291 (Del.);-CIT V. Refrigeration & Allied Industries Ltd.113 Taxmann 103
     (Del).9ITA 1543/Del/2011
                                                           ITO Vs. Maharaja Appliances Ltd.7.3.   The order of ld. CIT(A) on the issue in question is upheld. Ground is
rejected.8.     Ground no. 5 & 5.1.: The AO noticed that assessee had debited in its
P&L A/c with a sum of Rs. 74,04,151/- on account of sales service charges
under the head "Selling and Distribution Expenses". The assessee justified
its claim, inter alia, pointing out that assessee company was in business of
manufacturing and marketing of home appliances since last many years,
having strong network of distributors and dealers all over India. Besides,
assessee had good working       network of providing after-sale services to
customers through its franchisees, having strength of providing these facility
all over India. It was further explained that assessee was buying products
from its principal suppliers with understanding that after sales services was
to be provided by the company itself. After sale services were provided
through service franchisers who were paid on fixed & variable basis.
Assessee had claimed part of expenses from its main distributors Far East
Marketing Pvt. Ltd., which was also an existing Income Tax Paying
Assessee. The assessee pointed out that it could produce confirmation from
both the above concern in that regard.8.1.   The AO, however, did not accept the assessee's contention and after
considering the service charges to be divided between assessee and
distributor, held that expenditure on account of sales services to the extent of
Rs. 31,89,625/- was excessive and disallowed the same u/s 37(1).
8.2.   Ld. CIT(A) sustained the addition to the extent of 4,26,887/- by
observing as under:7.2 During his submissions before me, the Ld. AR argued that the10ITA 1543/Del/2011
                                                                    ITO Vs. Maharaja Appliances Ltd.apportionment of sales and service expenses was made on the basis of
       region wise sales achieved by the appellate and FEMPL. He also produced
       a station wise list of sale and service franchisee to which apportionment
       was made as under:51.     Centre       Franchisee                                    Sales      service
 No.                                                                    claim
 1       Lucknow       MIs. Electrical solutions                        144296/-
 2       Kolkatta      M/s.Europa sales & service                       2165001-
 3       Indore        M/s.Glacier Aircon                               1500001-
 4       Jaipur        M/s.Maharaja Services point                      123365/-
 5       Ludhiana      M/s.Orion Appliances                             116459/-6       Chennai       M/s.G.K.M. Customer Care Centre                  2750001-1025620/·


       7.3 While discussing the submissions and on verification of the documents
       like copy of a/c of sales and services charges,· it was noticed that a further
       sum of Rs.4,26,887/- was attributable to FEMPL as payment made to the
       following concerns which were acting on its behalf:M/s. Helping Hands (Service)           Rs. 1,37,450/-
       M/s. Hi Tech Electric Service-(S)      Rs. 2,28,410/-M/s. Jai Sales (Service)                       Rs. 61,027/-
                                                      Rs. 4,26,887/-The appellant was, therefore, asked to explain as to why the same be not
       disallowed. The Ld. AR later on admitted that the aforesaid payments of
       Rs. 4,26,887/- actually pertained to FEMPL only and were wrongly
       remained to be apportioned to it. Therefore, further a sum of Rs.
       4,26,887/- is held to be sales and service charges attributable to FEMPL
       apart from Rs. 1025620/- shown by the appellant. Thus, a total amount of
       Rs. 14,52,507/- (10,25,620+4,26,887) pertains to FEMPL as against a
       sum of Rs. 31,89,625/- disallowed by the AO. Hence, the addition to the
       extent of Rs. 4,26,887/- is sustained.8.3.   Ld. counsel for the assessee clarified that the sales service charges
not related to franchise have been confirmed by ld. CIT(A) and to this extent
the AO has also confirmed the sales and service charges in AY 2009-10 and
2010-11 at Rs. 12,20,768/- and Rs. 8,75,535/- respectively.11ITA 1543/Del/2011
                                                          ITO Vs. Maharaja Appliances Ltd.8.4.   Having heard both the parties, we do not find any reason to interfere
with the order of ld. CIT(A) because the AO has not disputed the rendering
of after sales service by assessee. His only objection was that assessee was
not bearing the entire cost of rendering after sales service and same ought to
have been met partly by other distributors. We find that ld. CIT(A) has
rightly restricted the disallowance only relating to non-franchise. We
accordingly, confirm the order of ld. CIT(A) on the issue in question.
Ground is rejected.9.     Ground no. 6: During the course of assessment proceedings, the AO
pointed out that while examining the transactions with related parties, it was
found that the address of assessee i.e. 1/7, West Patel Nagar, New Delhi
was being shared by the assessee with five of its sister concerns viz. M/s
Empire Home Appliances Ltd., M/s Omex Industries and M/s Far East
Marketing Pvt. Ltd.' M/s Asiatic Engineers Pvt. Ltd., M/s Hindustan
Appliances. As regards the issue of sales service charges, he pointed out that
the transactions of the assessee with its sister concerns were found to be not
at arm's length. He apportioned the following expenses between assessee
and sister concerns, as under:Personnel Expenses              Rs. 1069844/-
       Books & periodicals             Rs. 894/-
       Telephone Expenses              Rs. 485219/-
       Office Water & Electricity      Rs. 1147076/-
                   Total:              Rs. 2692133/-9.1.   The AO, accordingly, allowed the expenses of Rs. 4,48,688/- being
1/6th of such expenditure and the balance sum of Rs. 22,43,445/- was
disallowed.12ITA 1543/Del/2011
                                                                  ITO Vs. Maharaja Appliances Ltd.9.2.   The ld. CIT(A) restricted the disallowance to Rs. 98,123/- by
observing as under:"8.2.1 The Ld. AR in his submissions before me contended that
       the addition was arbitrary in nature. He stated that the expenses
       claimed as per the P&L account pertained not only to the premises
       situated at 1/7, West Patel Nagar, New Delhi but to other premises
       also. He produced detailed working showing head wise and
       premises wise bifurcation of the total expenses claimed as under:-Particulars   Salary      Staff     Security       Telepho- Office         Total      Income
                           Welfa-    Exp.           ne     & water &        income as tax
                           re expo                  Mobile    electrici-    per ROI   paid
                                                    Exp.     ty
 Incurred
 at 1/7,
 west patel
 nagar
 MA              43283      40107     74061          397055      91640        410580      154849
 EHAL           2934766      3197       -            137549        -            (-)          -7404212
 Omex            678220     30114     194237         328139        -         191735407
 Industries
 FEMPL          32142363   130015     66581          122833       87126 .     521710      195161
 Asiatic           -          -         -               -          -             -           -
 Engineers
 Pvt. Ltd .
 . Hindustan       -          -         -               -          -             -           -
 Appliances.
 Incurred
 at other
   premises.
 MA                -       177620     734773         88164      1045436          -           -
 EHAL           8642120    321008     584545         75285      9146510          -           -
 Omex           12059508   295947     518051        1963332     3917252          -           -
 Industries
 FEMPL             -          -         -               -          -             -           -
 Asiatic           -          -         -               -          -             -           -
 Engineers
 Pvt. Ltd ..
 Hindustan          -         -         -               -          -             -           -
 Appliances13ITA 1543/Del/2011
                                                          ITO Vs. Maharaja Appliances Ltd.8.2.2 The Ld. AR also mentioned that the sister concerns of the
       appellant were also assessed at the same rates of income tax.Hence, there was no intention/ requirement to transfer the
       booking of the expenditure incidence in a tax neutral scenario.8.3 The Ld. AR further submitted that out of the total expenses
       of 2692133/- allocated by the Ld. AO., only Rs.?,46,146/- relate
       to the premises located at 117, West Patel Nagar, New Delhi
       and, therefore, there was no question of allocation of the
       expenditure of Rs.20,45,993/- incurred at other premises to the
       sister concerns situated at 117, West Patel Nagar, New Delhi.8.4 I have carefully considered the detailed submissions made
       by the appellant and findings recorded by the Id. AO as per the
       assessment order and the facts of the case on record. As
       mentioned earlier, the Ld. AO has disallowed a 5/6th of the total
       administrative expenses of Rs.26,92,133/-. While doing so he
       mistakenly took the whole amount as pertaining to the premises
       situated at 1/7, West Patel Nagar, New Delhi, where it can be
       seen from the submission of the appellant that only an amount
       of Rs.6,46, 146/- was incurred for the said premises. Thus, there
       was no justification for considering the whole amount for
       disallowance. Moreover, premises it is seen that most of the
       sister concerns have booked expenditure under most of the
       heads. On the perusal of the chart produced in the submissions,
       it is however, seen that in the case elf some of the sister
       concerns, the expenditure on the heads as discussed below have
       not been booked for the said premises situated at 1/7, West
       Patel Nagar, New Delhi. The disallowance under the following
       heads is therefore considered necessary."9.3.   Ld. counsel for the assessee submitted that following the ld. CIT(A)'s
findings for A.Y. 2007-08 the AO has restricted the disallowance to Rs.
26,03,867/- and Rs. 10,17,800/- in A.Y. 2009-10 and 2010-11 respectively.14ITA 1543/Del/2011
                                                         ITO Vs. Maharaja Appliances Ltd.9.4.   Having heard both the parties, we find that the findings of ld. CIT(A)
regarding allocable expenses to sister concerns have not been controverted
by the department. Therefore, we confirm the order of ld. CIT(A) in
restricting the addition on account of administrative expenses to Rs. 98,123/-
Ground is rejected.10.    In the result, revenue's appeal is dismissed.
Order pronounced in open court on 20-02-2015.Sd/-                                                Sd/-
 (ABY. T. VARKEY )                                 ( S.V. MEHROTRA )
JUDICIAL MEMBER                                ACCOUNTANT MEMBER
Dated: 20-02-2015.
MP: Copy to :
   1. Assessee
   2. AO
   3. CIT
   4. CIT(A)
   5. DR