Gei Hamon Industries Ltd. Vs. Joint Commissioner of Income Tax - Court Judgment

Excerpt:
1. this appeal is filed by the assessee against the order of cit(a), bhopal, dt. 16h feb., 1989. the assessee has assailed the order of the cit(a) on the following grounds : "1. that the learned cit(a) has erred in maintaining the prima facie adjustment under section 143(1)(a) made by the ao by disallowing claim of late delivery damages rs. 58,79,839 and penal interest of rs. 14,69,905. 2. that the learned cit(a) has erred in maintaining prima facie adjustments referred in ground no. 1 without appreciating that the power of the ao, of making such adjustments under section 143(1)(a) is restricted by statute only to rectify apparent errors as enumerated under section 143(1)(a) and such power does not cover power to deal with legal and contentious issues. 3. that the learned cit(a) has not appreciated that claim of late delivery damages rs. 58,79,839 and penal interest rs. 14,69,905 was based on mercantile system of accounting both the claims having accrued during the previous year and making of book entries is neither germane nor relevant for claiming deduction under the act." 2. before arguing in support of the above grounds, the learned authorised representative of the assessee raised a legal issue submitting that the intimation under section 143(1)(a) itself was illegal it was pointed out that the intimation, dt. 17th nov., 1998, was served on the assessee on 4th jan., 1999. before that, notice under section 143(2), dt. 20th nov., 1998, was already served on 24th nov., 1999. it was submitted that intimation under section 143(1)(a) was backdated only to show that it was issued before service of notice under section 143(2), otherwise there is no explanation for the delayed service of intimation on 4th jan., 1999, whereas notice under section 143(2), dt. 20th nov., 1998, was served within the quickest time i.e.on 24th nov., 1998. it was further argued that even if intimation was prepared on 17th nov , 1995, as claimed by the department, it could be effective only after it was served since it was served after service of notice under section 143(2), it was illegal. in support of the claim, the learned authorised representative of the assessee relied on several judicial pronouncements including the judgment of the hon'ble m.p. high court in the case of cit v. regional soyabean products co-op. union ltd. (1999) 239 itr 217 (up).3. the learned departmental representative argued that there is no basis on the allegation of the learned authorised representative of the assessee that intimation under section 143(1)(a) was back-dated to show that it was issued before service of notice under section 143(2). it was argued that the ao had a plausible reason to serve the notice under section 143(2) as quickly as possible because as per time-limit prescribed, the notice under section 143(2) was to be served before the expiry of 12 months from the end of the month in which the return was furnished. the assessee had filed its return on 28th nov., 1997, and, therefore, notice under section 143(2) was to be served before 27th of nov., 1998. therefore, there was a need of urgency for serving notice under section 143(2), whereas there was no such urgency for serving intimation under section 143(1)(a), which could be served till 31st march, 2000. under the circumstances, it was argued that there was nothing illegal about the intimation under section 143(1)(a).4. we have carefully considered the rival submissions and the facts of the case. on this issue, the hon'ble m.p. high court in the case of regional soyabean co-operative union ltd. (supra) have held that the issue of intimation under section 143(1)(a) after issue of notice under section 143(2) is not in consonance with law. the ao can send intimation under section 143(1)(a) before issue of notice under section 143(2) but once he has already exercised his power under section 143(2), then in that case, he cannot send intimation under section 143(1)(a). in assessee's case, as mentioned above notice under section 143(1)(a) was issued on 17th nov., 1998, and notice under section 143(2) was issued subsequently on 20th nov., 1998. therefore, in the light of the judgment of the hon'ble jurisdictional high court, we do not find any infirmity in the issue of notice under section 143(1)(a).we also find that the allegation of learned authorised representative of the assessee regarding backdating of the intimation under section 143(1)(a) is not substantiated with any evidence. therefore, the same cannot be accepted.5. the substantive grounds mentioned above are against the following disallowances made under prima facie adjustment under section 143(1)(a) :(i) liability on account of liquidated damages rs. 58,79,839(ii) liability on account of additional/penal the above claims were made by the assessee in the computation of income, though they were not accounted for in the accounts. the ao treated the liabilities as contingent liability and disallowed the claim mainly on the basis of the following notes of the auditors in schedule 16 of the balance-sheet : "(v) liabilities on account of liquidated damage due to the delay in supply amounting to rs. 58,79,839 not accounted for as in the opinion of the management the same is fully, recoverable once the equipments are erected and commissioned. (vi) additional/penal interest charged by the bank on additional borrowings during the year due to various reasons amounting to rs. 14,69,904.95 not accounted for as the management has made the representation and in their opinion the same will be waived by the bank." 6. against the order of the ao, the assessee went on appeal before the cit(a) and submitted before him that the assessee manufactures its products on the basis of purchase orders placed by the customers. the purchase orders contain clause of damages to be charged from the appellant for delay/defect in supply. the assessee raises bill on customers, who exercise their right under the contract and recover damages for delay/defect in supply. the customers sometimes indicate the amount of damages deducted in the covering letters and some-times only the payment of reduced amount is received. the assessee has no right to recover such deducted amount, which is covered by the commercial contract but it makes representation to customers explaining reasons for delay. sometimes, the delay is condoned by the customers and delivery period is extended by amending the contract. the assessee has, however, ho right to receive the amount till the contract is amended and delivery period is extended. since the management was of the opinion that late delivery damages would be recovered by getting contracts amended from customers, no provision was made in the accounts for the accrued damages. it was also argued by the assessee before the cit(a) that even though the damages were not accounted for it did not mean that in law the damages did not accrue and become the liability of the assessee. it was further pointed out that the penal interest was charged by the bank for various reasons, like, non-creation of mortgage in time, non-submission of various reports in time or for exceeding sanctioned limits and such penal interest amounting to rs. 14,69,905 was debited by the bank to the assessee's account and recovered on various dates during the financial year 1996-97 relevant to asst. yr.1997-98. the assessee had made representation to the bank to exempt it from such levy and in the hope of favour had not accounted for the same in the accounts for financial year 1996-97. the request was finally rejected. it was further argued that since the assessee was following mercantile system of accounting, the liabilities which had accrued has to be allowed even though they were not accounted in the books. the learned cit(a) did not accept the contention of the assessee. in view of the comments of the auditors and the admitted opinion of the management, he was of the view that the liabilities had not accrued and crystallised during the year. he also held that the assessee had wrongly made the claim in the computation of income in spite of the categorical comments of the auditors treating the liability as contingent liability, which is inadmissible. accordingly, he upheld the adjustment made by the ao under section 143(1)(a). against this order of the cit(a), the assessee has come on appeal before the tribunal.7. during the course of hearing, the learned authorised representative of the assessee reiterated the arguments advanced before the cit(a). it was submitted by the learned authorised representative of the assessee that the assessee had approached the customers and the bank for waiver of damage charges and penal interest and had hoped for sympathetic consideration from them. it was pointed out that so far no waiver had taken place and the assessee has not received rs. 58,79,839 deducted by different customers and the bank has also recovered the interest on various dates during the year. it was argued by the learned authorised representative of the assessee that the above liabilities have already accrued during the year, as they were backed by contracts and the assessee had no right to receive the amount till the contracts were amended. it was further argued that book entries are not conclusive. if under the act any liability has accrued, it can be claimed and allowed even if no entry is passed in the books. it was further argued that the ao could not treat the liability as contingent liability on the basis of information available in the return and accompanying documents and hence, could not disallow the claim under prima facie adjustment. the issue of liability of these claims is a legal issue and can be determined only after applying judicial mind in course of regular assessment.8. it was submitted by the learned departmental representative that the assessee itself had not made the provision in the accounts for liquidated damages, as in the opinion of the management the same was fully recoverable. similarly it had not provided for the penal interest charged by the bank as in the opinion of the management the penal interest was to be waived by the bank. in view of these facts, it was submitted that the assessee had not admitted about the liability and, therefore, it has rightly been disallowed as contingent liability. it was also pointed out by the learned departmental representative that the assessee had not given any explanation whatsoever while claiming the deduction in the computation of income. therefore, he argued that the ao had correctly made the disallowance under prima facie adjustment under section 143(1)(a) and the cit(a) had rightly upheld the order of the ao.9. we have carefully considered the rival submissions and the facts of the case. from the perusal of the notice on accounts, on the basis of which disallowance has been made it cannot be said that the liability had not accrued during the year (sic) it can be said that it has already accrued, but the auditors have not accounted for in the books simply on the ground that the management is hopeful of some recovery/waiver from the customers and banks. only on the basis of such expectation, the accrued liability cannot be treated as contingent liability specially in view of the fact that the assessee has claimed the deduction in the computation of income. it will not be proper only to take note of the note on accounts and to ignore the claim made in the computation of income the real nature of liability and their crystallisation can be known only after scrutiny of the terms and conditions of supply, correspondence made by the assessee with the customers/bank representing for reduction/waiver and after examining as to whether the assessee had disputed the claim and as to whether he has a right to recover/waiver. such scrutiny can be done only during the regular assessment after calling for necessary details and after hearing the assessee from information available in the return and accompanying documents, the liability claimed cannot be treated as contingent liability and disallowed as prima facie inadmissible. under the circumstances, we hold that the adjustments made by the ao are not the kind of adjustments contemplated under section 143(1)(a).accordingly, the additions made under prima facie adjustment are to be deleted.

Judgment:
1. This appeal is filed by the assessee against the order of CIT(A), Bhopal, dt. 16h Feb., 1989. The assessee has assailed the order of the CIT(A) on the following grounds : "1. That the learned CIT(A) has erred in maintaining the prima facie adjustment under Section 143(1)(a) made by the AO by disallowing claim of late delivery damages Rs. 58,79,839 and penal interest of Rs. 14,69,905.

2. That the learned CIT(A) has erred in maintaining prima facie adjustments referred in ground No. 1 without appreciating that the power of the AO, of making such adjustments under Section 143(1)(a) is restricted by statute only to rectify apparent errors as enumerated under Section 143(1)(a) and such power does not cover power to deal with legal and contentious issues.

3. That the learned CIT(A) has not appreciated that claim of late delivery damages Rs. 58,79,839 and penal interest Rs. 14,69,905 was based on mercantile system of accounting both the claims having accrued during the previous year and making of book entries is neither germane nor relevant for claiming deduction under the Act." 2. Before arguing in support of the above grounds, the learned authorised representative of the assessee raised a legal issue submitting that the intimation under Section 143(1)(a) itself was illegal It was pointed out that the intimation, dt. 17th Nov., 1998, was served on the assessee on 4th Jan., 1999. Before that, notice under Section 143(2), dt. 20th Nov., 1998, was already served on 24th Nov., 1999. It was submitted that intimation under Section 143(1)(a) was backdated only to show that it was issued before service of notice under Section 143(2), otherwise there is no explanation for the delayed service of intimation on 4th Jan., 1999, whereas notice under Section 143(2), dt. 20th Nov., 1998, was served within the quickest time i.e.

on 24th Nov., 1998. It was further argued that even if intimation was prepared on 17th Nov , 1995, as claimed by the Department, it could be effective only after it was served since it was served after service of notice under Section 143(2), it was illegal. In support of the claim, the learned authorised representative of the assessee relied on several judicial pronouncements including the judgment of the Hon'ble M.P. High Court in the case of CIT v. Regional Soyabean Products Co-op. Union Ltd. (1999) 239 ITR 217 (UP).

3. The learned Departmental Representative argued that there is no basis on the allegation of the learned authorised representative of the assessee that intimation under Section 143(1)(a) was back-dated to show that it was issued before service of notice under Section 143(2). It was argued that the AO had a plausible reason to serve the notice under Section 143(2) as quickly as possible because as per time-limit prescribed, the notice under Section 143(2) was to be served before the expiry of 12 months from the end of the month in which the return was furnished. The assessee had filed its return on 28th Nov., 1997, and, therefore, notice under Section 143(2) was to be served before 27th of Nov., 1998. Therefore, there was a need of urgency for serving notice under Section 143(2), whereas there was no such urgency for serving intimation under Section 143(1)(a), which could be served till 31st March, 2000. Under the circumstances, it was argued that there was nothing illegal about the intimation under Section 143(1)(a).

4. We have carefully considered the rival submissions and the facts of the case. On this issue, the Hon'ble M.P. High Court in the case of Regional Soyabean Co-operative Union Ltd. (supra) have held that the issue of intimation under Section 143(1)(a) after issue of notice under Section 143(2) is not in consonance with law. The AO can send intimation under Section 143(1)(a) before issue of notice under Section 143(2) but once he has already exercised his power under Section 143(2), then in that case, he cannot send intimation under Section 143(1)(a). In assessee's case, as mentioned above notice under Section 143(1)(a) was issued on 17th Nov., 1998, and notice under Section 143(2) was issued subsequently on 20th Nov., 1998. Therefore, in the light of the judgment of the Hon'ble jurisdictional High Court, we do not find any infirmity in the issue of notice under Section 143(1)(a).

We also find that the allegation of learned authorised representative of the assessee regarding backdating of the intimation under Section 143(1)(a) is not substantiated with any evidence. Therefore, the same cannot be accepted.

5. The substantive grounds mentioned above are against the following disallowances made under prima facie adjustment under Section 143(1)(a) :(i) Liability on account of liquidated damages Rs. 58,79,839(ii) Liability on account of additional/penal The above claims were made by the assessee in the computation of income, though they were not accounted for in the accounts. The AO treated the liabilities as contingent liability and disallowed the claim mainly on the basis of the following notes of the auditors in Schedule 16 of the balance-sheet : "(v) Liabilities on account of liquidated damage due to the delay in supply amounting to Rs. 58,79,839 not accounted for as in the opinion of the management the same is fully, recoverable once the equipments are erected and commissioned.

(vi) Additional/penal interest charged by the bank on additional borrowings during the year due to various reasons amounting to Rs. 14,69,904.95 not accounted for as the management has made the representation and in their opinion the same will be waived by the bank." 6. Against the order of the AO, the assessee went on appeal before the CIT(A) and submitted before him that the assessee manufactures its products on the basis of purchase orders placed by the customers. The purchase orders contain clause of damages to be charged from the appellant for delay/defect in supply. The assessee raises bill on customers, who exercise their right under the contract and recover damages for delay/defect in supply. The customers sometimes indicate the amount of damages deducted in the covering letters and some-times only the payment of reduced amount is received. The assessee has no right to recover such deducted amount, which is covered by the commercial contract but it makes representation to customers explaining reasons for delay. Sometimes, the delay is condoned by the customers and delivery period is extended by amending the contract. The assessee has, however, ho right to receive the amount till the contract is amended and delivery period is extended. Since the management was of the opinion that late delivery damages would be recovered by getting contracts amended from customers, no provision was made in the accounts for the accrued damages. It was also argued by the assessee before the CIT(A) that even though the damages were not accounted for it did not mean that in law the damages did not accrue and become the liability of the assessee. It was further pointed out that the penal interest was charged by the bank for various reasons, like, non-creation of mortgage in time, non-submission of various reports in time or for exceeding sanctioned limits and such penal interest amounting to Rs. 14,69,905 was debited by the bank to the assessee's account and recovered on various dates during the financial year 1996-97 relevant to asst. yr.

1997-98. The assessee had made representation to the bank to exempt it from such levy and in the hope of favour had not accounted for the same in the accounts for financial year 1996-97. The request was finally rejected. It was further argued that since the assessee was following mercantile system of accounting, the liabilities which had accrued has to be allowed even though they were not accounted in the books. The learned CIT(A) did not accept the contention of the assessee. In view of the comments of the auditors and the admitted opinion of the management, he was of the view that the liabilities had not accrued and crystallised during the year. He also held that the assessee had wrongly made the claim in the computation of income in spite of the categorical comments of the auditors treating the liability as contingent liability, which is inadmissible. Accordingly, he upheld the adjustment made by the AO under Section 143(1)(a). Against this order of the CIT(A), the assessee has come on appeal before the Tribunal.

7. During the course of hearing, the learned authorised representative of the assessee reiterated the arguments advanced before the CIT(A). It was submitted by the learned authorised representative of the assessee that the assessee had approached the customers and the bank for waiver of damage charges and penal interest and had hoped for sympathetic consideration from them. It was pointed out that so far no waiver had taken place and the assessee has not received Rs. 58,79,839 deducted by different customers and the bank has also recovered the interest on various dates during the year. It was argued by the learned authorised representative of the assessee that the above liabilities have already accrued during the year, as they were backed by contracts and the assessee had no right to receive the amount till the contracts were amended. It was further argued that book entries are not conclusive. If under the Act any liability has accrued, it can be claimed and allowed even if no entry is passed in the books. It was further argued that the AO could not treat the liability as contingent liability on the basis of information available in the return and accompanying documents and hence, could not disallow the claim under prima facie adjustment. The issue of liability of these claims is a legal issue and can be determined only after applying judicial mind in course of regular assessment.

8. It was submitted by the learned Departmental Representative that the assessee itself had not made the provision in the accounts for liquidated damages, as in the opinion of the management the same was fully recoverable. Similarly it had not provided for the penal interest charged by the bank as in the opinion of the management the penal interest was to be waived by the bank. In view of these facts, it was submitted that the assessee had not admitted about the liability and, therefore, it has rightly been disallowed as contingent liability. It was also pointed out by the learned Departmental Representative that the assessee had not given any explanation whatsoever while claiming the deduction in the computation of income. Therefore, he argued that the AO had correctly made the disallowance under prima facie adjustment under Section 143(1)(a) and the CIT(A) had rightly upheld the order of the AO.9. We have carefully considered the rival submissions and the facts of the case. From the perusal of the notice on accounts, on the basis of which disallowance has been made it cannot be said that the liability had not accrued during the year (sic) it can be said that it has already accrued, but the auditors have not accounted for in the books simply on the ground that the management is hopeful of some recovery/waiver from the customers and banks. Only on the basis of such expectation, the accrued liability cannot be treated as contingent liability specially in view of the fact that the assessee has claimed the deduction in the computation of income. It will not be proper only to take note of the note on accounts and to ignore the claim made in the computation of income The real nature of liability and their crystallisation can be known only after scrutiny of the terms and conditions of supply, correspondence made by the assessee with the customers/bank representing for reduction/waiver and after examining as to whether the assessee had disputed the claim and as to whether he has a right to recover/waiver. Such scrutiny can be done only during the regular assessment after calling for necessary details and after hearing the assessee From information available in the return and accompanying documents, the liability claimed cannot be treated as contingent liability and disallowed as prima facie inadmissible. Under the circumstances, we hold that the adjustments made by the AO are not the kind of adjustments contemplated under Section 143(1)(a).

Accordingly, the additions made under prima facie adjustment are to be deleted.