ITA No.345/C/2016 IN INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH (SMC) KOCHI BEFORE SHRI GEORGE GEORGE K, Judicial Member ITA No 345/Coch/2016 (Asst Year 2011-12 ) Asst Commr of Income Tax Vs M/s Southshore Ice creams P Ltd Range 1 28/3080 Cheruparambath Road Thiruvananthapuram Elamakulam Kadavanthara Kochi 682 020 ( Appellant) (Respondent) PAN No. AAGCS6807A Assessee By Sh S Narayanamoorthy Revenue By Sh Dhanaraj Sr DR Date of Hearing 14th Oct 2016 Date of pronouncement 17th,Oct 2016 ORDER PER GEORGE GEORGE K,JM: This appeal, at instance of revenue, is directed against CIT(A) s order dated 25.2.2016. relevant assessment year is 2011-12. 2 effective grounds raised read as follows: 1) ld CIT(A) erred in deleting addition made by Assessing Officer towards lapsed liability of freezer charges, relying on decision of Hon ble ITAT Cochin Bench in asessee s own case wherein it was held that deposits collected by assessee for freezer cannot be considered as income of assessee. 2) CIT(A) ought to have found that issue of addition in respect of freezer charges has not reached finality and it being contested by 1 ITA No.345/C/2016 department before Hon ble High Court of Kerala in case of same assessee. 3) CIT(A) erred in allowing depreciation on expenditure written of in respect of moulds, tools and utensils. 3 Ground nos. 1&2: These grounds relate to taxability of freezer deposits received by assessee from its vendors. 3.1 Brief facts in relation to above grounds are as follows: assessee is in business of manufacturing and marketing of ice creams and other frozen foods. For relevant assessment year, return of income was filed on 1.12.2011, declaring total income of Rs. 10,96,924/-. assessment u/s 143(3) of Act was completed vide order dated 6.3.2014. In assessment completed Assessing Officer had brought to tax deposits received from its distributors for supply of freezer by stating as follows: 1 Income on account of lapsed liability in respect of freezer deposits: assessee is manufacturer and seller of ice creams. assessee, as part of trade promotion strategy, issues freezers to its distributors so that products of company can be prominently displayed and safely stored. assessee collects cost of freezers from distributors, value of freezer falls by 25% every year (part of year is treated as full year). That is to say, if distributor terminates his agreement with assessee company at end of 1st year, then he (i.e. distributor) can hope to recover only 3/4th of payment (deposit) that he made to assessee towards freezer. At end of 4th year, amount deposited for freezer becomes wholly non- refundable, even if agreement is terminated. 1.1 assessee treats deposit received from distributors for freezers as Liability and calls it 'Deposits 8: Advance from customers' and appears in balance sheet. In previous year liability shown is Rs.3,33,49,200/ - which was increase of Rs.38,14,977/- as compared to balance of Rs.2,95,34,223/- as at end of preceding assessment year. 2 ITA No.345/C/2016 1.2 relevant cause in agreement between assessee and distributor is reproduced below: "On termination of this agreement, distributor has to deliver back freezer together with accessories to principal at principal's premise and collect thereafter from principal security deposit amount after deducting amount calculated at rate of 25% on value of freezer for each year of use towards compensation for wear and tear. For this purpose fraction of year shall be counted as complete year. On non return of freezer, difference between value of freezer and deposit amount shall be made good to principal." 1.3 As per section 41 (1) of Income Tax Act, trading liability, which has ceased, can be regarded as income of assessee. In this case, liability that has ceased is not trading liability and therefore section 41 (1) may not apply. However, by virtue of Supreme Court's decision in CIT Vs. T.V. Sunderam Iyengar and Sons (1996) 222 ITR 344(SC), amount becomes taxable. relevant portion of judgment of apex court is reproduced here. . "If amount is received in course of trading transaction, even though it is not taxable in year of receipt as being of revenue character, amount changes its character when amount becomes assessee's own money because of limitation or by any statutory or contractual right. When such thing happens common sense demands that amount should be treated as income of assessee. " same principle was reiterated by Hon'ble High Court of Bombay in Slid Containers Ltd Vs. CIT (2009) 308 ITR 417(Bom). ratio of these decisions applies perfectly to instant case. 1.4 In this connection it has to be mentioned that 'income' has been given inclusive definition in section 2(24). Supreme Court in CIT Vs. Karthikeyan (1993) 201 ITR 866 (SC) has held that purpose of inclusive definition is not to limit meaning but to widen its net and several clauses therein are not exhaustive of meaning of income; even if receipt did not fall within ambit of any of clauses, it might still be income if it partakes character of income. issue at hand has to be seen in light of numerous apex court decisions holding that word 'income' has to be interpreted with widest amplitude. 1.5 arguments of assessee in brief are as under: * assessee argued that it recognizes income on account of freezers when agency is terminated, that it is wrong to tax income before termination of agreement. 3 ITA No.345/C/2016 * decision of Supreme Court in (IT Vs. T.V. Sunderam Iyengar and Sons is distinguishable. According to assesse case law pertains to situation where assessee has unilaterally credited income in P&L Account on account of deposits received from customers but did not offer same for tax. system of accounting regularly employed by assessee should not be upset and that department did not reject books. 1.6 These arguments are without merit for following reasons: *I t is not correct to say that income accrues only when agreement is terminated. agreement itself says that after 4 years there is no liability on part of assessee towards franchisees/ retailers because of freezer deposits. * assessee is needlessly prolonging recognition of revenue by recognizing it only at termination of agency. * Again, if dealership is not terminated, no income is recognized from lapsing of liability because of freezer deposits. * In addition, it is wrong in saying that Supreme Court decision in TVS Sunderam Iyengar & Sons does not apply. ratio of decision clearly applies even if facts are different. In fact, facts of two cases will never completely agree. 1.7 In light of foregoing discussion, it is evident that dealer deposits become taxable with efflux of time. amount that is taxable worked out as Rs.31 ,59,354/-. 3.2 Aggrieved by addition made by Assessing Officer, assessee preferred appeal to first appellate authority. CIT(A), following order of Tribunal in assessee s own case for AY 2010-11, decided issue in favour of assessee (the tribunal was considering batch of cases in ITA Nos.73 to 79/Coch/2014 for AY 2008-09 and 2010-11) in which assessee was also party. 3.3 Aggrieved by order of CIT(A), revenue is in appeal before Tribunal. ld DR relied on grounds raised in appeal memo. On 4 ITA No.345/C/2016 other hand, ld counsel for assessee submitted that issue in question is squarely covered in favour of assessee by order of Tribunal in assessee s own case, cited supra. ld Counsel also submitted that said issue is pending for adjudication before Hon ble Kerala High Court and no decision has been taken by Hon ble Court. 3.4 I have heard rival parties and perused material on record. In assessee s own case, division bench of Tribunal have decided matter in favour of assessee, by following earlier orders of Tribunal. relevant findings of Tribunal in assessee s own case read as follows: 4. We have considered rival submissions on either side and relevant material on record. issue arises is whether deposits in respect of freezer has to be considered as income of assessee or not. As rightly submitted by Ld. AR of assessee that this issue was considered by Tribunal in one of assessees for earlier assessment year and found that such deposits cannot be considered as income of assessee. For sake of convenience, we extract below order dated 08.08.2012 passed by Tribunal in case of M/s. Kreem Foods (P) Ltd. In ITA No. 597/Coch/2010 relating to assessment year 2007-08:- 3. At time of hearing, Ld. Counsel for assessee submitted copy of order dated 25-05-2012 passed by this Bench in case of Jojo Frozen Food (P) Ltd. and Cream Packs (P) Ltd. in I.T.A. Nos. 655 & 654/Coch/2010 wherein Tribunal has considered identical issue and decided same in favour of assessee. For sake of convenience, we extract below operative portion of said order in respect of above said issue. 6. We have considered rival submissions and carefully perused record. We have also gone through copy of order passed by co-ordinate bench of Tribunal in case of High Range Foods (P) Ltd, referred supra. In respect of first issue, i.e., Whether deposits received from dealers can be 5 ITA No.345/C/2016 considered as income of assessee, Tribunal has observed as under. assessee received Deposit for supply of freezer from concerned vendors. freezers are required to safe keep edible ice-creams. They are required for purpose of business. small vendors may not be inclined to purchase freezers as they are not affordable to them considering their status. This made assessee company to supply freezer on receipt of fixed deposit and compensation of spread-over period. They are attached with liability. accrual comes only on termination of agreement. business necessity requires cordial relationship with vendors. assessee cannot treat these two amounts as receipts in nature of income unless so-called agreement terminated. In other words it is not debt owned by assessee. Hence, under above facts and circumstances of case, this issue to be decided in favour of assessee by setting aside orders of authorities. Besides assessee never treated this as income in books. assessee consistently holding it so as amount attached with liability to refund. assessee never admitted this amount as income in books. Only accrued income arose to assessee during relevant previous year also can be brought to tax under Income-tax provisions which is settled law. In other words, there must be debt owned to assessee and until this is created in favour of assessee as debt due to assessee, it cannot be said as income accrued. Hence, decision relied by Jr. D.R. in case of CIT vs. T.V. Sundaram Iyengar and Sons cited supra, is clearly distinguishable on facts. In that case, assessee itself admitted this as income as per book entries. Hence, it is distinguishable. decision relied by ld. counsel for assessee in case of CIT vs. Realest Builders and Services Ltd. 307 ITR 202 (SC) in addition to following cases (a) Siddheswar Sahakari Sakhar Karkhana Ltd. vs. CIT & Others 270 ITR 1 (SC); (b) Bharat Petroleum Corporation Ltd. vs. CIT 202 ITR 492 (Cal). (c) Sugauli Sugar Works (Impugned) Ltd. 236 ITR 518 (SC); 5 I.T.A. Nos. 73-79/Coch/2014 (d) Star India P. Ltd. vs. Addl. CIT 311 ITR (ST) 235 (Mumbai). (e) Govind Prasad Prabhu Nath 171 ITR 417 (All.); 6 ITA No.345/C/2016 (f) Hindustan Housing and Land Development Trust Ltd. 161 ITR 524 (SC); (g) Ace Builders Pvt. Ltd. vs. CIT 225 ITR 746 (SC); (h) Mantra Tanta Yantra Vigyan vs. CIT 300 ITR 140 (Raj.); and (i) Guardian Industries Corpn. vs. Assistant Director of Income-tax 7 DTR 594 (Del.). are also supports plea of assessee. accrual has been dealt with in relied judgments. Hence, under given set of facts and circumstances, we by relying on above decisions set aside orders of authorities and allow this ground of assessee as it cannot be treated as income for year relevant under appeal. 7. Since co-ordinate bench has already taken view on identical issue, by following said decision, we hold that deposits collected from vendors cannot be considered as income of assessee so long as agency agreement continues. Accordingly, we set aside order of Ld CIT(A) on this issue in hands of both assessees and direct AO to delete addition made on this issue in hands of both assessees herein . 5. only objection of Ld. DR is that appeal was filed against order of Tribunal and same is pending before High Court. But on query from Bench, Ld. DR submitted that he does not have knowledge of any stay granted by Hon ble High Court on operation of earlier order of Tribunal. Since Ld. CIT(A) has followed order of Tribunal, we 6 I.T.A. Nos. 73-79/Coch/2014 are of considered opinion that mere pending of appeal before High Court against order of Tribunal cannot be reason to take different view. Therefore, by following order of Tribunal for earlier assessment year, this Tribunal is of considered opinion that deposits collected by assessee for freezer cannot be considered as income of assessee. 6. In view of above facts and circumstances of case and in view of order of Tribunal, we do not find any infirmity in order of Ld. CIT(A) and accordingly, same is confirmed. 7. In result, all appeals filed by revenue stand dismissed. 3.5 Admittedly, issue in question is covered in favour of assessee by order of division bench of Tribunal, cited supra. Both parties have 7 ITA No.345/C/2016 submitted that issue is pending for adjudication before Hon ble jurisdictional High Court. No contrary High Court judgment has been cited. Hence, respectfully following order of division bench of Tribunal, in assessee s own case ( supra), I uphold order of first appellate authority as correct and in accordance with law and no interference is called for. It is ordered accordingly. 4 Ground no.3: Assessing Officer, while completing assessment had disallowed expenditure of Rs. 2,46,223/- by observing as under: Moulds, tools and utensils written off: assessee has claimed amount of Rs. 2,46,223/- by way of moulds, tools and utensils written off as expenses. As this treatment is not as per Income Tax Act, claim is disallows. 4.1 On further appeal, CIT(A) held that said expenses are capital expenditure and directed Assessing Officer to grant depreciation on same. CIT(A), in taking above view, had followed his predecessor s order in assessee s own case for earlier assessment year. 4.2 Aggrieved by above direction, revenue is in appeal before Tribunal. ld DR supported order of Assessing Officer. ld counsel for assessee, on other hand, has submitted that order of CIT(A) for earlier assessment year in assessee s own case has been accepted by department and no further appeal has been filed. 8 ITA No.345/C/2016 4.3 I have heard rival submissions and perused material on record. It is admitted fact that assessee had treated moulds and utensils, which are used for making choc-bar and similar types of ice creams, had treated same as current assets. These moulds and utensils were valued at cost or realizable value whichever is lower. CIT(A) had categorically found that these items did not last very long and are easily breakable. CIT(A) had only held that these items are current assets and depreciation on same is to be allowed. I find that reasoning of CIT(A) is correct and no interference is called for. It is ordered accordingly. 4.4 Hence, ground no. 3, raised by revenue is also rejected. 5 In result, appeal filed by revenue is dismissed. Order pronounced in open Court on this 17th day of Oct 2016. ( GEORGE GEORGE K) Judicial Member Cochin: Dated 17th Oct 2016 Raj* 9 ITA No.345/C/2016 Copy to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT, 5. DR 6. Guard File By order Assistant Registrar ITAT, COCHIN 10 Asst Commr of Income-tax, Range 1, Thiruvananthapuram v. M/s Southshore Ice creams P Ltd