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Devi Lal Coop. Sugar Mills Ltd., Village Ahulana Teh. Gohana Distt., Sonepat. Vs ACIT, Sonepat Circle, Sonepat.
October, 27th 2014
             IN THE INCOME TAX APPELLATE TRIBUNAL
                    DELHI BENCH `B' NEW DELHI

          BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
                             AND
         SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER

                           I.T.A.No. 3130/Del/2010
                          Assessment Year : 2007-08

Devi Lal Coop. Sugar Mills Ltd.,     vs    ACIT,
Village Ahulana Teh. Gohana                Sonepat Circle,
Distt., Sonepat.                           Sonepat.
(PAN: AAATC3088Q)
(Appellant)                            (Respondent)

                                    Appellant by: Shri Manoj Kumar
                               Respondent by : Miss Ashima Neb, Sr.DR

                               ORDER


PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

      This appeal has been preferred by the assessee against the order of

CIT(A), Rohtak dated 06.05.2010 in Appeal No.322/SPT/09-10 for AY 2007-

08.


2.    The assessee has raised following grounds in this appeal:-


      "GROUND NO. 1
       That the Learned CIT(A) erred in law and in fact in enhancing
       disallowance made by the A.O. at Rs. 16,26,000/- to Rs.
       19,58,785/- i.e. by Rs. 3,32,785/- under the head "Repairs &
       Maintenance" of non-factory building of the appellant without
       giving any prior notice to the appellant to that effect on wrong
       and untenable grounds.


                                                                          1
               That the Ld. CIT(A) erred in law and in fact in
       confirming the disallowance of Rs.16,26,OOO/- under the head
       "Repair and Maintenance" as non-factory building on wrong
       and untenable grounds. He further erred in holding that the
       amount has been spent for bringing a new asset into existence
       i.e. the roof of the godown or for improving the existing assets
       that is godown and further erred in holding that it is capital
       expenditure and not allowable as deduction on account of
       repair and maintenance.
             As a matter of fact and law, the entire expenditure spent
       by the appellant is on account of Repair and maintenance of
       non-factory building amounting to Rs. 19,58,785/-and is
       allowable as a revenue expenditure.
       Ground No. 2
             That the Ld. CIT(A) erred in law and in fact in
       confirming the disallowing and adding back an amount of Rs.
       1,42,97,973/- made by A.O. out of interest account payable to
       Haryana Govt. u/s 43(B) of the I.Tax Act.
             That the Ld.CIT(A) admitted that the appellant's case
       apparently does not fall under any of the clauses mentioned u/s
       43(B) of the I.Tax Act.
             Under the fact and circumstances matter above the
       amount of Rs. 1,42,97,973/- payable to Haryana Govt. can not
       be disallowed u/s 43(B) deserve to be deleted.
       GROUND NO. 3
             That the Ld CIT(A) erred in law and in fact in confirming
       the disallowance and in adding back a sum of Rs. 3,00,000/-
       made by AO to the income of the appellant wrongly applying
       provision of section 43B to the same."
3.    Briefly stated the facts giving rise to this appeal are that the case was




picked up for compulsory scrutiny and notices u/s 143(2) and 142(1) of the

Income Tax Act, 1961 (for short the Act) along with detailed questionnaire

were issued to the assessee. The AO noticed that the assessee debited Rs.

23,21,314/- under the head of repair and maintenance to the profit and loss

                                                                              2
account which was very high as compared to last year figure of Rs. 6,95,345/-.

The AO observed that no justification has been given by the assessee in respect

of increase in these expenses and no bills and vouchers regarding these

expenses have been produced and the AO disallowed an amount of Rs.

16,26,000/- out of these expenses and added the same to the income of the

assessee. During the first appellate proceedings, the CIT(A) adjudicated the

issue and enhanced the disallowance to Rs. 19,58,785/- but the CIT(A) allowed

admissible depreciation thereon.


4.     The AO also noticed that the assessee has shown interest payment to the

bank and other financial institutions at Rs.4,98,20,072/- and the liability of

interest during the year under consideration has been increased amounting to

Rs. 1,43,95,657/- which are mainly in respect of loans taken from Banks and

financial institutions. The AO held that under the provisions of section 43B of

the Act, the liability should be discharged before the due date of filing of the

return and the AO allowed part payment of interest of Rs.98,584/- made during

the year to SBI and the balance liability of interest of Rs.1,42,97,073/- which

has been debited to the Profit & loss account and shown as payable in the

balance sheet was disallowed u/s 43B of the Act.


5. The AO also noticed that the assessee has made audit fees provision of Rs. 3

lakh in the liability side of Balance sheet but the AO concluded that since the

assessee had not discharged this liability before the due date of filing the return, hence,

                                                                                          3
the same was disallowed and added to the income of the assessee. The AO

also noticed that the assessee has made the payment of old liability of audit

fees of Rs. 3 lakh during the year under consideration but the AO also

disallowed the credit of the same by holding that the assessee did not add back

the same amount in the income of the earlier years.


6.    Aggrieved, the assessee preferred an appeal before the CIT(A) which

was also disallowed by enhancing the assessment as stated above. Now, the

empty handed assessee is before this Tribunal with the grounds as reproduced

hereinabove.


Ground No.1

7.    Apropos ground no.1, we have heard arguments of both the sides and

carefully perused the relevant material placed on record. Ld. AR has drawn

our attention towards Paper Book page no. 76 to 84 and submitted that the

assessee submitted all the details pertaining to the impugned claim made by the

assessee towards repair and maintenance but the same was not considered. The

AR further contended that the CIT(A) erred in law and on fact in enhancing

disallowance made by the A.O. at Rs. 3,32,785/- under the head "Repairs &

Maintenance" of non-factory building of the appellant without giving any prior

notice to the assessee to that effect on unsustainable and unjustified grounds.

The AR also contended that the CIT(A) erred in law and on fact in confirming

the disallowance of Rs.16,26,000/- by holding that the amount has been spent

                                                                              4
for bringing a new asset into existence i.e. the roof of the godown or for

improving the existing assets that is godown and further erred in holding that it

is a capital expenditure and not allowable as deduction on account of repair and

maintenance. The AR vehemently contended that as a matter of fact and law,

the entire expenditure was incurred by the assessee on account of repair and

maintenance of non-factory building which is allowable as a revenue

expenditure under the provisions of the Act.


8.    The AR has also drawn our attention towards appellant's submissions

available on page no. 4 to 10 and submitted that the assessee owns a non-

factory building in the form of godown no. 1, 2 and 3 for storing sugar into it.

The building was constructed and capitalized during the financial year 2002-03

and 2003-04 and subsequently in a strong storm on 25.5.2004, the roof of

godown no. 1 and 3 was badly damaged, hence the assessee constructed roof

thereon and incurred total expenditure of Rs. 19,58,735/- on reconstruction of

it. The AR also submitted that the approval of this expenditure has been given

by the Haryana State Federation of Cooperative Sugar Mills Ltd. Panchkula

vide its letter dated 6.6.2006 and 15.11.2006.      The assessee also claimed

insurance against the said damages caused due to storm on 25.05.2004 which

was sanctioned at Rs.7,14,479/- and credited to the repair and maintenance

account (Paper Book page no. 84).




                                                                                5
9.    Replying to the above, ld. DR supported the orders of the authorities

below and submitted that the authorities below rightly noticed that the

impugned expenditure incurred by the assessee was capital in nature which

cannot be allowed as revenue expenditure and the CIT(A) rightly held the same

as capital expenditure.


10.   On careful consideration of above submissions and perusal of the

assessment order, we observe that at page no. 2 of the assessment order, the

AO had observed that the assessee did not furnish any justification of these

expenses whereas the turnover of the assessee had decreased in comparison to

the last year. The AR during arguments before us submitted that there was a

substantial damage to the factory and non-factory building of the assessee due

to storm, therefore, regular work of the company was obstructed for a long

time, therefore, there was a decrease in the turnover of the assessee in

comparison to the previous year and the cause was beyond the control of the

assessee.





11.   From the impugned order, we also observed that the CIT(A) enhanced

the disallowance by Rs.3,32,785/- by holding that an amount of Rs.19,58,735/-

shown under the repair and maintenance was actually pertaining to purchase of

ACC sheets for making a roof of the godown and the amount has been spent

for bringing a new asset into existence i.e. roof of the godown or for improving

the existing asset i.e. godown, therefore, the same was expenditure capital in

                                                                               6
nature which is not allowable as repair and maintenance. From a perusal of the

relevant part of the impugned order, we observe that the CIT(A) has not

afforded   due    opportunity    of   hearing   for   the   assessee   prior   to

enhancing assessment on this issue which is a clear violation of the principles

of natural justice and provisions of the Act.


12.   In view of foregoing discussion, we are inclined to hold that as per

factual matrix as stated by the assessee, there was a substantial damage to the

non-factory building i.e. godowns of the assessee which were constructed

during earlier financial years and assessee had to incur substantial amount for

repair and maintenance of roof of these godowns. Neither the AO nor the

CIT(A) have doubted the quantum of the expenditure so incurred by the

assessee and the authorities below have also not considered the fact that the

assessee adjusted the amount of claim which was received from the insurance

company as compensation for the damages caused due to storm. Under these

circumstances, we are inclined to hold that such kind of expenditure incurred

towards major repair and maintenance to restore the proper functioning and

useability of the non-factory building of the assessee company cannot be held

as capital expenditure because we are unable to see any fact brought out by the

authorities below to support this contention of the department that either the

capacity was increased or any new asset came into existence as a result of

expenditure so incurred by the assessee.


                                                                                7
13.   Under these circumstances, we are of the considered view that the

explanation, details, bills and vouchers of the assessee and adjustment of

insurance claim require examination and verification at the end of the AO for

proper quantification of the revenue expenditure on the basis of relevant

principles for allowability of the claim of the assessee as discussed above.

Therefore, orders of the authorities below are set aside and ground no. 1 of the

assessee is restored to the file of AO for a fresh adjudication after affording due

opportunity of hearing for the assessee and without being prejudiced by the

observation and claim of the assessment order and the impugned order.

Accordingly, ground no. 1 of the assessee is deemed to be allowed for

statistical purposes.


Ground no. 2

14.   Apropos ground no.2, we have heard arguments of both the sides and

carefully perused the relevant material placed before us, inter alia, provision of

section 43B of the Act. Ld. AR submitted that the CIT(A) erred in law and on

facts in confirming the disallowance made by the AO out of interest payable to

Haryana Government by invoking the provisions of section 43B of the Act.

The AR also pointed out that the CIT(A) admitted that the assessee's case

apparently does not fall under any of the clauses mentioned under section 43B

of the Act and under the facts and circumstances of the case, the impugned

amount payable to Haryana Government cannot be disallowed u/s 43B of the

                                                                                  8
Act. The AR has drawn our attention towards para no. 4 of the impugned order

and submitted that in spite of the fact that the CIT(A) agreed to the contention

of the assessee, the first appellate authority upheld the contention without any

basis.


15.      Replying to the above, ld. DR supported the orders of the authorities

below and submitted that the onus was on the assessee to show that the

provisions so made by the assessee do not fall under the provisions of section

43B of the Act and the CIT(A) was right in upholding the addition keeping in

view the object of insertion of section 43B of the Act to ensure the return of

government dues.


16.      At the outset, we find it appropriate to reproduce the relevant provisions

of section 43B(d) of the Act which reads as under:-


         "43B

         (a) Xxxxxxxx

         (b) Xxxxxxxxxx

         (c) Xxxxxxxxxx

         (d) (d) 5 any sum payable by the assessee as interest on any loan or
             borrowing from any public financial institution 6 or a State
             financial corporation or a State industrial investment
             corporation], in accordance with the terms and conditions of the
             agreement governing such loan or borrowing,]
         (e) Xxxxxxxxxxxxx
         (f) Xxxxxxxxxxxxx

             shall be allowed (irrespective of the previous year in which the
            liability to pay such sum was incurred by the assessee according

                                                                                  9
         to the method of accounting regularly employed by him) only in
         computing the income referred to in section 28 of that previous
         year in which such sum is actually paid by him:

          Provided that nothing contained in this section shall apply in
         relation to any sum referred to in clause (a) 8 or clause (c)] 9 or
         clause (d)] which is actually paid by the assessee on or before the
         due date applicable in his case for furnishing the return of
         income under sub- section (1) of section 139 in respect of the
         previous year in which the liability to pay such sum was incurred
         as aforesaid and the evidence of such payment is furnished by
         the assessee along with such return:]"


17.   From bare reading of the impugned order, we observe that the CIT(A)

upheld the addition with following observations and conclusion:-

             "4. Ground of appeal no. 2 pertains to disallowance of
      Rs.1,42,97,973/- u/s 43B of the IT Act. The AO has discussed
      the issue in para 3 of the assessment order and has disallowed
      the amount because the same is 'payable'.

             As per the appellant this is not a statutory liability
      coming under section 43B of the IT Act. It has been submitted
      that the Mill has taken loan from Haryana Govt. for making the
      cane payment of Sugar Cane growers in different financial
      years and on the loan, interest of Rs. 1,42,97,973/- has been
      claimed because it has accrued to the Govt. It has also been
      submitted that the sanction of the loan in the form of financial
      assistance was approved vide order dated 18.2.2003 according
      to which the loan was to be repaid along with interest @ 11.5%
      within a period of 5 years in annual equal instalments along
      with interest. As per the appellant the loan has been given by
      Registrar Co-op Societies Haryana which is neither a
      Scheduled Bank nor any Financial Institution.

             The issue involved and the submissions made by the
      appellant have been considered. Section 43B pertains to
      statutory liabilities which are allowable only on actual payment
      basis and on the amounts of interests etc. which the appellant"
      should pay to financial institution etc. on the loans given to it.
      The purpose of the section is to ensure payment of dues to the
      Govt. and the financial institutions etc. The appellant's case,
      apparently does not fall under any of the clauses mentioned u/s

                                                                               10
       43B of the IT Act; however keeping in view the object of
       inserting this section i.e. to ensure the return of Govt. dues, and
       the terms & conditions of the order dated 18.2.2003 giving the
       loan, the claim of the assessee does not appear to be admissible
       since it has not paid the loan installments along with interest
       during the previous year relevant to the assessment year; rather
       it has been submitted during appeal proceedings that no
       installment of loan or interest was paid by the appellant and the
       entire loan was converted into equity capital of the appellant
       keeping in view the financial status of the appellant. In view of
       the aforesaid, keeping the objects/purpose of section 43B of the
       IT Act the disallowance made by the AO is confirmed and the
       ground of appeal is dismissed."


18.    From the operative part of the impugned order, we clearly observe that

the CIT(A) has noted that the assessee's case apparently does not fall under any

of the clauses mentioned u/s 43B of the Act which is not a proper and judicious

approach. Keeping in view the provisions of section 43B of the Act and proviso

attached to that, it is very clear that the main intention of the legislature is that

deduction otherwise is allowable under the provisions of the Act in respect of

the sum paid and shall be allowed only in computing the income referred to in

section 28 of the Act of that previous year in which such the sum was actually

paid. But the proviso clarifies that nothing contained in this section shall apply

in relation to any sum referred to in clause (a) or clause (c) or clause (d) which

is actually paid by the assessee on or before the due date applicable in his case

for furnishing the return of income under sub- section (1) of section 139 of the

Act.   On the basis of foregoing discussion, we are of the view that the

authorities below have not adjudicated the issue as per letter and spirit of the


                                                                                  11
provisions of section 43B of the Act. The AO ought to have verified and

examined the claim of the assessee mainly on two counts: i) whether the

claimed sum was actually paid and; ii) the amount was actually paid by the

assessee on or before the due date applicable in its case for furnishing the return

u/s 139(1) of the Act. Thus, we find it just and proper to restore the issue to the

file of AO for proper verification and examination of the claim of the assessee

in the light of provisions of section 43B of the Act. Accordingly, orders of the

authorities below on the issue are set aside and the issue is restored to the file of

AO for a fresh adjudication as per directions as stated above after affording due

opportunity of hearing for the assessee.

19.   In the result, ground no. 2 of the assessee is also deemed to be allowed

for statistical purposes.

Ground no.3

20.   Apropos ground no.3, ld. AR submitted that the assessee actually paid

audit fees of Rs.3 lakh to the auditor which is an allowable expenditure as per

provisions of the Act and the same cannot be disallowed merely on the basis

that the assessee did not discharge his liability before due date of filing of

return. The AR also contended that if there was any old liability against the

assessee due to financial constraint with regard to audit fees and the same was

paid in subsequent year, then this also cannot be a basis for making

disallowance. Replying to the above, ld. DR fairly accepted that the assessee



                                                                                  12
actually paid an amount of Rs.3 lakh towards auditor's fees and the AO has not

raised any doubt about the genuineness of this payment.

21.        On careful consideration of above submissions, we are of the view that

the auditor's fees is a necessary business expenditure which is allowable u/s

37(1) of the Act and additions made in this regard are not sustainable and we set

aside the same by directing the AO to allow the expenditure incurred by the

assessee towards payment of auditors fees. Accordingly, ground no. 3 of the

assessee is allowed.

22.        In the result, the appeal of the assessee is partly allowed on ground no. 3

and deemed to be partly allowed for statistical purposes on ground no. 1 & 2.

           Order pronounced in the open court on 20.10.2014.

       Sd/-                                                    Sd/-

(G.D. AGRAWAL)                                    (CHANDRAMOHAN GARG)
VICE PRESIDENT                                         JUDICIAL MEMBER

DT. 20th OCTOBER, 2014
`GS'
Copy forwarded to:-

      1.   Appellant
      2.   Respondent
      3.   C.I.T.(A)
      4.   C.I.T.
      5.   DR
                                                        By Order



                                                        Asstt.Registrar



                                                                                   13
14

 
 
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