Karnataka H.C : deposits by distributors can not be added as income of company without examining book of accounts of distributors

High Court Of Karnataka

CIT vs. Brindavan Beverages (P.) Ltd.

Assessment Year 1993-94

Section : 28(i),37(1)

K. L. Manjunath And B. Manohar, JJ.

ITA No. 430 Of 2004

October  6, 2010

JUDGMENT
 
K. L. Manjunath, J. – The Revenue has come up in this appeal challenging the concurrent findings of the order passed by the Commissioner of Income-tax (Appeals), which has been affirmed by the Income-tax Appellate Tribunal, Bangalore, in I. T. A. No. 861/Bang/96 dated February 25, 2004. The dispute is pertaining to the assessment year 1993-94.

2. The facts leading to this case are as hereunder :

The assessee is the company registered under the provisions of the Companies Act, 1956. The assessee is engaged in the business of manufacturing of soft beverages. For the assessment year 1993-94, the assessee filed the return of income declaring loss. On March 30, 1993, the premises of the assessee as well as its directors were searched and certain incriminating documents were seized during the course of search. The matter was taken up for assessment. The Assessing Officer noticed that the books of account of the assessee-company disclosed that it had received an approximate amount of Rs. 90 lakhs as “security deposit” from some of the distributors towards wooden crates and bottles. Though there are several distributors to the assessee-company, the Revenue has entertained a doubt in regard to eight distributors on the ground that they are all fictitious persons and also on the ground that some of them are relatives of the directors of the assessee-company, some of them are retired employees of the assessee-company and some of them are employees. Based on the same, the amount of Rs. 90 lakhs received under the head “Security deposit” was treated as income of the assessee. Similarly, the Assessing Officer has deleted the expenditure claimed by the appellant under the head “Bottle breakage” amounting to Rs. 3,98,012 and also a sum of Rs. 4,37,571 claimed as deduction on account of damage caused to the wooden crates and the cost of repairs. Accordingly, these deductions were not accepted and they were treated to be capital expenditure and the same was disallowed. An order of assessment came to be passed on March 7, 1996.

3. Aggrieved by the order of assessment, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) (for short, “CIT(A)”) who allowed the claim of the assessee in regard to the addition of Rs. 90 lakhs under the head “Security deposit” towards the bottles and wooden crates and so also the amount claimed under bottle breakage and damage caused to wooden crates in a sum of Rs.4,37,571. Accordingly, the appeal filed by the assessee came to be allowed by order dated June 21, 1996. Being aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue filed an appeal before the Income-tax Appellate Tribunal (for short, “the ITAT”), which appeal also came to be dismissed by order dated February 25, 2004. Aggrieved by the concurrent findings of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, the present appeal is preferred by the Revenue raising the following three substantial questions of law :

“1. Whether the appellate authorities were correct in holding that the finding of the Assessing Officer that a sum of Rs. 90,00,000 cannot be treated as the income of the assessee despite the finding recorded that the distributors were fictitious and the deposits were mere book entries as admitted by Sri S. N. Ladhani the director of the assessee on mere conjectures and surmises and consequently recorded a perverse finding ?

2. Whether the appellate authorities were correct in holding that a sum of Rs. 3,98,012 claimed by the assessee towards ‘bottle breakage’ on an assumption that the same was an allowable deduction as the bottles usually break while washing, filling, etc., without there being any cogent evidence and consequently, recorded a perverse finding ? 3. Whether the appellate authorities were correct in holding that a sum of Rs. 4,37,571 towards wooden crates repairs is an allowable deduction on the assumption that the crates are manufactured out of jungle wood and cheap wood and therefore require frequent repairs without there being any evidence to support such a claim and consequently recorded a perverse finding ?”

4. We have heard the learned senior counsel Mr. Indra Kumar for the Revenue and the learned counsel Mr. Shankar for the assessee.

5. The main contention of the Revenue is that the findings of fact in regard to rejection of the claim of the assessee in a sum of Rs. 90 lakhs under the head “Security deposit” towards bottle from eight distributors passed by the Assessing Officer has been erroneously reversed by the Commissioner of Income-tax (Appeals) and further confirmed by the Income-tax Appellate Tribunal. According to him, the assessee has got more than 100 distributors and all of them have furnished the “security deposit” towards bottles and wooden crates. The Revenue has accepted the returns filed by the assessee in regard to the deposit made by most of the distributors except the eight distributors on the ground that those eight distributors are not at all doing any business and that they are the kith and kin of the directors of the assessee-company and some of them are retired employees and some of them are employees. Therefore, the amount of Rs. 90 lakhs shown in the “security deposit” towards bottles is fictitious in nature and that the findings of the Assessing Officer are based on facts and therefore the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal could not have reversed the well reasoned order of the Assessing Officer. In the circumstances, he requests the court to allow the appeal so far as substantial question No. 1 is concerned.

6. In regard to substantial question No. 2 is concerned, he contends that when no material is placed to show that really there was breakage of bottles, the deduction claimed under the said head in a sum of Rs. 3,98,012 has been wrongly claimed by the assessee. Therefore, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal have committed an error in not considering the order passed by the Assessing Officer. Similarly, he contends that the deletion of Rs. 4,37,571 in respect of damage caused to the wooden crates and repairs has also been wrongly set aside by the said authorities even though the amount spent by the assessee in regard to the repairs of the wooden crates has to be taken into account under the head “Capital asset” and not as revenue expenditure. In the circumstances, he requests the court to answer the substantial questions of law in favour of the Revenue, allowing the appeal.

7. Per contra, learned counsel for the respondent Mr. Shankar contends that the Assessing Officer did not record a finding with regard to the eight distributors, who have deposited Rs. 90 lakhs towards security deposit, that they did not have any transaction with the assessee during the relevant assessment year. According to him, they are the major distributors of the assessee and those distributors are assessed to tax and the books of account maintained by the assessee would disclose the total supply of beverages to these eight distributors which also disclose the total turnover made by the assessee from those eight distributors and considering the total turnover from these eight distributors, the amount of Rs. 90 lakhs paid as security deposit could not have been added by the Assessing Officer. He further contends that in respect of explanation called for by the Revenue, the assessee has furnished in detail the nature of transaction between the assessee and those eight distributors and it has also been brought to the notice of the Revenue that all those eight distributors are assessed to tax and that whether the amount of Rs. 90 lakhs paid by those eight distributors has been reflected in the books of account of those eight distributors could have been cross-checked or verified by the Assessing Officer or by the Department in order to find out whether they have paid Rs. 90 lakhs as security deposit or not. Without verifying the books of account of those eight distributors, only on the ground that some of them are relatives of the directors of the assessee-company and some of them are retired employees of the company and some of them are employees of the company, the Assessing Officer could not have added Rs. 90 lakhs as an income of the assessee during the relevant assessment year. He further contends that if a distribution is given to the relatives of the directors of the assessee-company or to the retired employees or to the employees, it is not for the Revenue to contend that there was no real transaction between the assessee and those eight distributors, which could have been cross-checked or verified by the Assessing Officer by looking into the business transaction of the assessee and also that of the eight distributors. In the absence of nonverification of the books of account of those eight distributors, who are also assessees under the Income-tax Act, the findings of the Assessing Officer have to be considered perverse and not based on proper appreciation of records. In the circumstances, he contends that the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal are held to be justified.

8. He lastly contends that Rs. 90 lakhs paid as security deposit is a question of fact and the same cannot be considered as a question of law and that when both the appellate authorities have concurrently held that the security deposits are made by those eight distributors, the same cannot be agitated by the Revenue as a question of law. He further contends that in regard to the bottles breakage, the very same Assessing Officer for the previous year has accepted the same as allowable deduction. Therefore, the findings of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal cannot be reversed by this court without there being any valid reason. He also contends that in regard to the cost of repairs to wooden crates, it is a day-to-day expenditure incurred by the assessee who is indulging in manufacturing of beverages. According to him, they are revenue expenditure incurred everyday and the same cannot be treated as a capital expenditure since as and when the wooden crates are damaged, it requires repairs without which the assessee cannot continue its business. In the circumstances, he requests the court to dismiss the appeal holding the substantial questions of law raised by the Revenue against the appellant.

9. Having heard the learned counsel for the parties and having perused the order passed by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, we are of the opinion that the substantial questions of law raised in this appeal are to be answered against the Revenue for the following reasons :

10. So far as substantial question No. 1 is concerned, admittedly, pursuant to an enquiry made by the Revenue, a reply was sent by the assessee on May 24, 1994, wherein it is stated those eight distributors are not the benamis of the assessee and the business of each distributor is an independent entity controlled by its proprietors/partners and the income earned by those distributors are absolutely enjoyed by the respective proprietors/ partners. He further states that the quantum of deposit collected from the dealers depends on the number of crates held by them, credit facility enjoyed and other equipment like bottle coolers, ice boxes, vehicles and other sales promoting assets held by them.

11. From the above, it is clear that the assessee has made a categorical statement that the income earned by those eight distributors is enjoyed by them only and the quantum of deposit would vary and depends upon the actual business of each of the distributor. Then again on January 24, 1996, the assessee has furnished the details of income-tax returns filed by those eight distributors. These facts are not in dispute. If the eight distributors are considered as benamis of the assessee by the Revenue, in all fairness, it was for the Revenue to find out whether really those eight distributors have done business in their individual names and whether the assessee has supplied the beverages to those eight distributors and if it is supplied, what is the total quantity of beverages supplied by the assessee and the total turnover in that particular year, in order to find out whether those eight distributors could pay a security deposit of Rs. 90 lakhs as contended by the assessee and if they are assessed to tax and in the books of account of those eight distributors, the amount of Rs. 90 lakhs is reflected under the head “Security deposit” towards bottles and wooden crates, the case of the Revenue cannot be accepted at all. If the Revenue had considered these points and passed an order collecting information from those eight distributors in regard to their business, then this court could have accepted the arguments advanced by the learned senior counsel Mr. Indra Kumar. Admittedly, there are more than 100 distributors to the assessee-company. The Revenue accepted the security deposit in respect of all the distributors except these eight distributors on account of their closeness to the company. But there is no prohibition under the law that an assessee-company cannot give its distribution either to the relatives of the directors or to its retired employees or to its employees. If the company is of the opinion that those persons are capable of doing business and are getting better turnover for an assessee, it is always open for the company to give distribution to any person of its choice. Therefore, this court cannot accept the arguments advanced by the learned counsel for the appellant and in view of the concurrent findings of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, we have no reason to interfere with the said findings and according to us, the question whether there is a deposit of Rs. 90 lakhs under the head “Security deposit” towards bottles and crates is a question of fact and not a question of law. At this stage, learned counsel appearing for the assessee submits that for the subsequent years, the deposit of those eight distributors has been accepted by the Revenue. Whether it is accepted by the Revenue for the subsequent years is not a criteria for this court to consider the first substantial question of law. If really the Revenue has accepted the security deposit of those eight distributors with the assessee-company, then it would only improve the case of the assessee.

12. So far as the bottle breakage charges are concerned, whenever the bottles are used for the business by the assessee-company, in the usual wear and tear either while transporting or washing or filling, the bottles are bound to break and the bottle breakage charges are treated as allowable deduction for the earlier years and also for the later years of the assessee-company and therefore without assigning any reason, the Assessing Officer could not have added an amount of Rs. 3,98,012 under the said head. In the circumstances, the said question is also held against the Revenue.

13. So far as the last substantial question of law whether the cost of repairs to wooden crates has to be taken under the head “Capital asset or revenue expenditure” is concerned, the repairs cannot be treated as a capital asset since as and when these wooden crates are broken while using the said crates in the business of the assessee-company, repairs are bound to happen. All these repairs are treated as revenue expenditure and cannot be treated as capital expenditure. In the circumstances, the said question is also answered against the Revenue.

14. In the result, the appeal is dismissed.

[Citation : 335 ITR 163]

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