Income Tax Appellate Tribunal - Mumbai
Essel Propack Ltd., Mumbai vs Assessee on 8 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'J' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI RAJENDRA (ACCOUNTANT MEMBER)
ITA No.3226/Mum/2006
Assessment Year: 2002-03
ACIT, Circle 6(2), M/s. Essel Propack Limited,
Aayakar Bhavan, M.K. Road, 135, Continental Building, Dr. A.B.Road,
Mumbai. Worli, Mumbai-400 018
Vs.
PA No.AAACE 1568 L
(Appellant) (Respondent)
ITA No.3319/Mum/2006
Assessment Year: 2002-03
M/s. Essel Propack Limited, ACIT, Circle 6(2),
135, Continental Building, Dr. Aayakar Bhavan, M.K. Road,
A.B.Road, Mumbai.
Worli, Mumbai-400 018 Vs.
PA No.AAACE 1568 L
(Appellant) (Respondent)
Assessee by : Shri Sanjiv M Shah
Respondent by: Smt. Kusum Ingale
Date of hearing: 8.5.2012
Date of pronouncement: 8 .6.2012
ORDER
Per B.R.Mittal, JM:
These cross appeals are filed by department and assessee against order of ld CIT(A) dated 16.3.2006 for assessment year 2002-03 disputing deletion/confirmation of additions made by Assessing Officer.
2. The assessee company is engaged in the business of manufacturing packing materials i.e. Multilayer collapsible tubes used for dentifrice, cosmetics and other 2 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 applications. The assessee filed return of income declaring total income of Rs.39,06,70,272. Subsequently, assessee filed revised return of income declaring income of Rs.41,32,04,297. The AO completed the assessment under section 143(3) of the Act on 24.3.2005 assessing income of the assessee at Rs.47,30,00,390 by making certain disallowances. In the appeal filed by assessee before the first appellate authority, ld CIT(A) allowed the appeal of the assessee in part confirming/deleting certain additions made by AO. Hence, department as well as assessee are in appeal before the Tribunal.
3. Firstly, we take up appeal filed by department being I.T.A. No.3226/M/2006.
4. In Ground No.1 of appeal, department has disputed the order of ld CIT(A) in treating the expenses of Rs.83,04,751 on repairs as revenue expenditure in stead of capital expenditure considered by Assessing Officer.
5. The relevant facts are that assessee claimed an expenditure of Rs.83,04,751 on repairs incurred on overhauling of THT-kit under section 31 of the Income tax Act. It was contended before the AO that THT-kit was not running at rated capacity and hence, needed for conversion of THT-main drive to the rated capacity of 60 cycles per minute. It was claimed that the old version of tube header (THT) was capable of running at the speed of 50 cycles per minute. Due to low speed, it lost in productivity. The new kit is designed to enhance the speed so that the header can operate at 60 cycles per minute. It was stated that during overhauling, assessee replaced the drive system of THT alongwith all moving parts, bearings, bushes, guide pins, spline shafts of C frame and all cam followers. It was clamed that no new asset had come into existence nor capacity of the asset had increased but it was only repairs done to old refurbishment of machine 3 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 after working for around 20 years. The AO has stated that the assessee itself submitted that during overhauling had replaced the total drive system of THT alongwith all moving parts. The AO has stated that except the frame, everything had been replaced. Considering the above fact, the AO has stated that the above expenditure is capital in nature. Moreover, the AO has also treated the said expenditure as capital expenditure and allowed depreciation @ 25% thereon which works out to Rs.20,76,188. Accordingly, AO made an addition of Rs.62,28,563 to the income of the assessee. Being aggrieved, assessee filed appeal before the first appellate authority.
6. On behalf of assessee, it was contended that THT drive is part of tube making machine. The whole process is done in tube making machine and machine produces about 60 tubes per minute and these are very highly sophisticated machines imported from KMK-Switzerland each costing about Rs.10-15 crores. It was contended that once in a while that THT parts are replaced of one of the machines out of 15 machines working with the company and all imported from KMK and technology and process is same. It was also contended that the percentage of total repairs to gross value of plant & machinery ranges between 0.23% to 0.39%, which is insignificant. Ld CIT(A) considered the above submissions vide paras 5.2 and 5.3 of the impugned order and deleted the said addition made by AO by treating the said expenditure as revenue expenditure. Hence, department is in appeal before the Tribunal.
7. During the course of hearing, ld D.R. relied on the order of AO and further relied on the judgment of Hon'ble Supreme Court in the case of Commissioner of Income- tax v. Saravana Spinning Mills P. Ltd., 293 ITR 201(SC) and contended that the AO was justified to treat the said expenditure as capital expenditure. He submitted that 4 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 Their Lordships have held in the above case that replacement of old assets could not be considered as current repairs. He submitted that the expenditure incurred by the assessee was not on account of repairs but to replace the THT drive machine and hence, had created new assets.
8. On the other hand, ld A.R. relied on the order of ld CIT(A).
9. We have carefully considered the submissions of ld representatives of parties, orders of authorities below and also the judgment of Hon'ble apex Court in the case of Commissioner of Income-tax v. Saravana Spinning Mills P. Ltd.(supra). We observe that ld CIT(A) has stated that total cost of machines imported from KMK Switzerland comes to Rs.15 crores (approx) and the part which has been replaced, is not an independent plant. He has further stated that the above part is not the independent plant producing any identifiable and marketable products but is a part of main tube making machine. We also observe that the assessee has not created any new asset by replacing THT drive machine and hence, no new asset has come into existence. The case laws relied by ld D.R. in the case of Commissioner of Income- tax v. Saravana Spinning Mills P. Ltd (supra) is not applicable to the present case as in that case Their Lordships observed that each ring frame constituted substitution of part of textile machine and replacement thereof created a new asset. We observe that the above case is not applicable before us. In the absence of any contrary decision on record, we do not find any infirmity in the order of ld CIT(A).
10. Before we part with this ground, we may state that the depreciation allowed by AO by treating the said expenditure as capital expenditure will be added back while 5 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 considering the expenditure aggregating to Rs.83,04,751 as revenue expenditure. Hence, ground No.1 is rejected.
11. In Ground No.2, department has disputed the action of ld CIT(A) in directing the AO to exclude the amount of sales tax and excise duty from the total turnover for the purpose of computation of deduction u/s. 80HHC of the Act
12. At the time of hearing, it was conceded by ld D.R. that the above issue is covered by the decision of Hon'ble apex Court in the case of Commissioner of Income-tax v. Lakshmi Machine Works, 290 ITR 667, wherein, it has been held that the excise duty and sales tax could not form part of total turnover while computing deduction allowable to the assessee u/s. 80HHC (3) of the Act. Hence, we uphold the order of ld CIT(A) by rejecting ground No.2 taken by department.
13. We now take up the appeal filed by assessee being I.T.A. No.3319/M/06.
14. In Ground No.1, assessee has disputed the confirmation of disallowance of Rs.13,729 being Rs.9,707 towards employer's contribution and Rs.4,022 towards employee's contribution for delay in payment to ESIC.
15. Ld A.R. submitted that the disallowance made in respect of employees contribution of Rs.4020 is not pressed for and whereas the disallowance in respect of employer's contribution confirmed by ld CIT(A) is not justified because the assessee made the payment within time and in any case before due date of filing the return of income. Hence, the case is covered by the decision of Hon'ble Supreme Court in the case of CIT Vs. Alom Extrusions Ltd. [(2009) 319 ITR 306 (SC)]. Ld D.R. has not 6 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 disputed the above submission of ld A.R. In view of above, we delete the disallowance of Rs.9707 in respect of employer's contribution to PF as the assessee made the payment before the due date of filing the return and as per decision of Hon'ble Apex Court in the case of Alom Extrusions Ltd (supra) 2nd proviso to section 43B is retrospective. Therefore, disallowance of Rs.4020 in respect of employee's contribution is confirmed in view of submission of ld A.R. and whereas Rs.9707 towards employer's contribution is deleted. Hence ground No.1 is partly allowed.
16. Ground No.2 is as under:
"The CIT(A) erred in law and facts in upholding the disallowance of following prior period expenses crystallized and settled during the year. The reasons given by him for doing so are improper and contrary to the facts of the case.
i) Expenses -non recoverable from Essel Deutchland
GMBH Rs. 8,02,884
ii) Repairs UPS -disputed bill Rs. 13,936
Rs.8,16,820"
17. The relevant facts giving rise to this ground of appeal are as under:
a) In respect of expenses of M/s. Essel Deutschland GMBH of Rs.8,02,884, it is stated that it is a joint venture company of the assessee in Germany and assessee holds 24.9% of equity of the joint venture company. The assessee raised debit notes during the period 1998 to 2001 on M/s. Essel Deutschland GMBH on account of various expenses and stated that the same were incurred wholly and exclusively for the purpose of business of the assessee but directly debited to the account of M/s. Essel Deutschland GMBH in the respective years. The assessee did not debit the said expense in the respective years as it wanted to recover from M/s. Essel Deutschland GMBH. However, out of the expenses incurred, expenses of Rs.8,02,884 were not accepted by the party and not paid.
Hence, as mutually agreed to, the debit notes were cancelled. Thus, the said amount was written off by the assessee in the assessment year 7 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 under consideration and claimed as allowable under section 37 of the Act. However, AO stated that no documentary evidences in respect of the claim have been filed by the assessee and, accordingly, it could not be established that the expenses accrued during the year. The AO has stated that assessee is following mercantile system of accounting and thus expenses are not allowed.
b) In respect of claim of Rs.13,936, it was stated that the repairing of UPS of Murbad unit was carried out in F.Y. 1999-2000 from local vendor. Since the bill was in dispute it was not paid and the amount was settled during the year. Hence, the liability was crystalised or arose during the year. The AO rejected the claim of the assessee on the ground that no details have been filed.
18. Being aggrieved, assessee filed appeal before the first appellate authority.
19. Ld CIT (A) has stated in respect of amount relating to expenses incurred and not recovered on behalf of M/s. Essel Deutschland GMBH that these expenses were incurred for the business of EDG Germany and were not claimed by the assessee in earlier year. He has stated that the assessee's claim in respect of loss incurred in not recouping these expenditures, which has been incurred for its subsidiary or for claiming deduction u/s.37, it is necessary to show that the expenditure has been incurred by the assessee in the normal course in the capacity as a trader and no other capacity. Ld CIT(A) has stated that assessee has not been able to prove as to how the expenditure has been incurred in the normal course of assessee's business, because it cannot be held that business of assessee company and subsidiary company is one and the same. He has stated that these two companies are entirely different and whatever may be business need or otherwise of not recovering the amount due from EDG but the claiming deduction u/s.37, it is required to be shown by the assessee that these expenditures 8 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 have been incurred wholly and exclusively for the purpose of assessee's business. Ld CIT(A) is of the view that these expenditures cannot be considered as an admissible deduction u/s.37 or u/s.28 as it has not been shown by the assessee that it is business of the assessee to incur expenditure on behalf of subsidiary which could not be recovered subsequently. Therefore, ld CIT(A) has confirmed the action of AO.
20. In respect of claim of Rs.13,936, ld CIT(A) has stated that no evidence could be produced by the assessee that the bill was in dispute in earlier year(s) and in the current year, the same was paid. Hence, action of the AO has been confirmed by him.
21. Being aggrieved, assessee is in further appeal before the Tribunal.
22. During the course of hearing, ld A.R. reiterated the above facts as stated before authorities below and submitted that claim of Rs.8,02,884 on account of amount paid to subsidiary company is allowable as per decision of Hon'ble apex Court in the case of S.A. Builders, 288 ITR 1 (SC). However, in respect of Rs.13,996, there were no submissions save and except stating that this was the expenditure in respect of disputed bills for repair of UPS.
23. On the other hand, ld D.R. submitted that no evidences have been filed by the assessee that the expenditure has been incurred by the assessee on behalf of M/s. Essel Deutschland GMBH in the ordinary course of business of assessee. He further submitted that even in respect of claim of Rs.13,996, no evidences have been filed by the assessee. Hence, ld CIT(A) was justified to confirm the action of AO. 9 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006
Assessment Year: 2002-03
24. Considering the above submissions of ld representatives of parties that the assessee has not been able to justify that the expenditures on behalf of subsidiary was incurred by the assessee in the ordinary course of its business, we agree with ld CIT(A) that in the absence of any details, the claim of the assessee cannot be allowed. We also hold that the reliance placed by ld A.R. in the case of S.A. Builders (supra) has no relevance to the facts of the case before us. However, ld A.R. has not placed any evidence that the bills in respect of repair of UPS relating to F.Y. 1999-2000 was under
dispute and the liability was settled during the assessment year under consideration. In view of above, we do not find any reason to interfere with the order of ld CIT(A).
Accordingly, Ground No.2 is rejected.
25. Ground No.3 is as under:
"Ld CIT(A) erred in law and facts in upholding the disallowance of Rs.91,25,512 of the appellants claim for deduction of capital expenditure on research and development u/s.35(1)(iv) of the Act holding that the equipment was not used for research work."
26. In respect of above claim, the assessee has given written submissions which have been stated by ld CIT(A) in para 4.1 which reads as under:
"EPL (Essel Propack Limtied) is in the business of manufacturing Lamitubes, it provides packaging solutions in dentifrice, cosmetics and pharmaceutical sectors to global major in these businesses. Lamitubes are required to be printed as per each customer unique designs, drawing shade and other artwork given by each customer. The process of printing is carried by rotary letter printing press printing method which involves a central impression drum involving 6 stations of which the last station is varnishing station. The drying mechanism is with the help of UV radiation and graphic is the back bone of printing process before printing it is necessary to develop the basic design, negatives, positives, step and repeat and nyloplates for printing department.10 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006
Assessment Year: 2002-03 During the year the assessee has incurred a capital expenditure of Rs.91,25 lakhs by installing Barco Graphics with an image setter processor and package software and chemical auto processor machines for research in printing and designing technology.
By installing the silicon graphics, the assessee has entered into research in vectoring of the design and text, steps and repeat of the design colour, corrections in colours layouting as per tubing and printing technology, customers designs with Mac format can be taken for design correctness and lay outing. Various types of design in different software and be used simultaneously. These will also be useful for scanning of various artworks. This will also helpful for lay outing and colour corrections for facilitating online computer printing. This will facilitate creating design in different software and creating design in PC format.
In the instant case, Assessee have installed Barco graphics with image setter to make research and development in designs, drawing and artwork at Vasind Laboratory. This will be helpful for studying other chemical effect like temperature, side effect of printing in the various kind of laminates used for making lamitubes by different industries. This will be helpful for developing new and complicated designs, reducing defects and rejections hence advantage for the business of the assessee.
Without prejudice it was also contended that the AO has allowed depreciation @ 20% whereas the expenditure incurred on purchases and installing barco graphics with an image setter processor and package software for chemical auto processor are required to be considered as part of computer software which are entitled for deduction @ 60% and as such the AO may be directed to allow depreciation @ 60%."
27. The AO has stated that assessee had incurred expenditure incurred for Silicon Graphic computers and had made a claim that it is incurred on scientific research. He has stated that this itself suggest that the assessee had incurred expenditure for 11 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 upgradation of technology and not on scientific research carried out by it. He has stated that as per provisions of section 35(1)(iv), the expenditure must directly be on scientific research. The AO has stated that assessee itself has stated that it is in the business of printing and packaging industry, pre-press graphics does the work of research and development of designs and software's help to do it scientifically. He has stated that assessee has installed software as suggested by it to upgrade technology for better business results, process and print quantity. He has stated that it is something like installing the higher version of software for better results and nowhere has it suggested that the expenditure is having direct nexus with the scientific research. He has stated that no documentary evidence proving the fact that this installation of upgraded software is basically for scientific research. The AO has stated that onus on the assessee to prove that the expenditure was incurred for scientific research has not been discharged, therefore, claim of the assessee for deduction u/s.35(1) (iv) of Rs.91,25,512 is disallowed being it is a capital expenditure. The AO has stated that the assessee is entitled for depreciation @ 25%, which works out to Rs.22,81,378 and, accordingly, made net addition of Rs.68,44,134 to the total income of the assessee. Being aggrieved, assessee filed appeal before the first appellate authority.
28. Ld CIT(A) has agreed with the view of AO to reject the claim of the assessee considering it is an expenditure for research and development and admissible deduction under section 35(1)(iv) of the Act. However, ld CIT (A) agreed with the assessee that the image setter and software would be definitely required to be considered as part of computer and software and would be eligible for deduction @ 60% and, accordingly, directed the AO to allow depreciation @ 60% against 25% allowed by him. 12 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006
Assessment Year: 2002-03
29. Being aggrieved, assessee is in further appeal before the Tribunal.
30. During the course of hearing, ld A.R. reiterated the submissions as made before authorities below that it was an expenditure for research and scientific development. He further submitted that even if it is not considered as an expenditure for scientific development but for improving the software and computer hardware, it is still a revenue expenditure as the expenditure has been incurred for improving the assessee's software technology. Ld A.R. placed reliance on the decision of Hon'ble Madras High Court in the case of CIT vs. Southern Roadways, 282 ITR 379(Mad), wherein, it was held that the expenditure for upgradation of computer technology could not be considered as capital expenditure giving rise to enduring benefit to the assessee. He submitted that even otherwise the entire expenditure is allowable as revenue expenditure for the assessment year under consideration. Ld D.R. placed reliance on the decision of ld CIT(A).
31. We have carefully considered the submissions of ld representatives of parties and orders of authorities below. We agree with ld A.R. that even if it is considered that the expenditure incurred by the assessee is on account of upgradation of technology for better business results, process and print quantity, which is something like installing the higher version of software for better results, it is allowable as revenue expenditure as held by Their Lordships of Hon'ble Madras High Court in the case of CIT vs. Southern Roadways (supra). In view of above, we allow Ground No.3 taken by the assessee to hold that the said expenditure is allowable as revenue expenditure to the assessee. However, before we part with this ground, may state that the depreciation which has been allowed to the assessee by considering the above expenditure as capital expenditure should be adjusted while giving effect to this order. 13 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006
Assessment Year: 2002-03
32. Ground No.4 is as under:
"Ld CIT(A) erred in law and facts in confirming the addition to income on account of unutilized Modvat credit. The addition ought to have been deleted as it is contrary to the provisions of Sec. 145A of the Act."
33. The AO has made an addition of Rs.1,47,40,215 in respect of unutilized modvat credit. He has stated that the assessee is following exclusive method of valuation and it is contrary to the provisions of section 145A. Therefore, it is mandatory to increase the valuation of closing stock of inputs by the debit balance of cenvat credit receivable account appearing on the asset side of the balance sheet. He stated that it should be further increased by cenvat credit on raw material utilized in payment of duty of finished goods. He has stated that if any excise duty is paid on finished goods cleared from the bonded warehouse but held in stock and such duty is appearing as advance in the balance sheet, it should be added in the valuation of such finished goods. Therefore, AO made addition of Rs.1,47,40,215.
34. In the appeal filed before Ld CIT(A), assessee explained that it is following exclusive method of accounting and if the modvat element which is required to be added in the closing stock, as the modvat credit yet to be availed on account of purchases shown in the balance sheet, no addition on account of applicability of section 145 A could be made. However, ld CIT(A)has stated that if the modvat element to be included in the closing stock is more than the modvat balance available in the modvat credit account occurring on the asset side of the balance sheet, the balance is required to be added. Therefore, the closing stock is required to be increased by modvat element included in the closing stock of raw material and the purchases are required to be increased by modvat credit available on the asset side of balance sheet. Hence, net 14 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 addition would be only excessive of modvat excise duty required to be added to closing stock of raw material over the modvat excise duty occurring on the asset side of balance sheet in view of section 145A of I.T.Act. He has stated that the said details are not available; the AO may obtain the details in respect of modvat excise duty element, which is required to be added in the closing stock of raw material, work-in-progress and packing material. If the above amount is more than the modvat excise duty credit yet to be availed occurring on the asset side of balance sheet only the excess is required to be added. He has stated that AO may carry out the exercise and take action accordingly. It is relevant to state that ld CIT(A) has also directed the AO to increase the opening stock by increase in the closing stock for A.Y. 2001-02 as the same issue was also considered by ld CIT(A) in A.Y. 2001-02. He has further stated that assessee has given no detail, and in case the assessee gets relief in further appeal proceedings, the opening stock would be reduced by increase made in accordance with the direction given. Hence, ground taken by the assessee before ld CIT(A) was allowed in part. Being aggrieved, assessee is in further appeal before the Tribunal.
35. During the course of hearing, ld A.R. submitted that the addition made to the closing stock on account of unutilized modvat credit is tax neutral and placed reliance on the decision of Hon'ble Delhi High Court in the case of CIT vs. Mahaveer Aluminium Ltd , 297 ITR 77,(Del) and decision of Hon'ble Jurisdictional High Court in the case of CIT vs. Mahalaxmi Glass Works P Ltd.,318 ITR 116(Bom). He further submitted that if the valuation of closing stock is increased, modvat purchase is also to be increased by similar amount. However, ld D.R. relied on the order of ld CIT(A). 15 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006
Assessment Year: 2002-03
36. We have considered the submissions of ld representatives of parties and orders of authorities below. We observe that Hon'ble Delhi High Court in the case of Mahaveer Aluminium Ltd (supra) have held after considering the decision in the case of CIT v. Ahmedabad New Cotton Mills Co. Ltd., AIR 1930 PC 56, that a mistake in the method of valuation cannot be rectified by refusing the valuation of closing stock only but the valuation of opening and closing stock had to be revised. In the case of Mahalaxmi Glass Works Pvt Ltd., (supra), the issue related to closing stock valuation of adjustment of unutilized modvat credit. The Tribunal for the assessment year 2001-02 after considering the above decisions of Hon'ble Delhi High Court and Hon'ble Jurisdictional High Court (supra) in assessee's own case, restored the issue to the file of AO to re- compute the adjustment in respect of unutilized modvat credit for fresh adjudication in the light of above decisions. Since the Tribunal for assessment year 2001-02 restored the issue to the AO for fresh consideration in the light of above decisions of Hon'ble Delhi High Court and Hon'ble Jurisdictional High Court (supra) and also considering the fact that the opening stock of previous year relevant to assessment year under consideration, is to be the closing stock of the preceding assessment year i.e. 2001-02, we consider it prudent to restore the issue to the file of AO for his fresh adjudication in view of order of the Tribunal for A.Y. 2001-02 dt.4.3.2011 in I.T.A. No.1064/M/05 in assessee's own case. Hence, ground No.4 of appeal is allowed for statistical purposes.
37. Ground No.5 is as under:
"Ld CIT(A) erred in law and facts in upholding the addition of Rs.37,36,439 of entitlement of advance license as income accrued to the appellant. The CIT(A) ought to have considered the same as contingent & notional income and taxed on utilization of advance license."
38. At the time of hearing, ld A.R. submitted that the above ground is covered in favour of assessee by earlier decision of the Tribunal in assessee's own case for A.Y. 16 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 2001-02 and referred to paras 16 to 19 of the order dated 4.3.2011. Ld D.R. has not disputed the above contention of ld A.R.
39. On consideration of order of the Tribunal dated 4.3.2011 (supra) placed at pages 247 to 264 of PB, wherein, after considering judgment of Hon'ble Jurisdictional High Court in assessee's own case for A.Y. 1999-2000, copy placed at pages 289 to 295 of PB dt.22.3.2010, we hold that no real income accrued to the assessee on entitlement of duty free advance license unless the same is utilized. Ttherefore, we allow ground no.5 of appeal taken by the assessee by deleting the addition made by authorities below. Ground No.5 is accordingly allowed.
40. Ground No.6 is as under:
"The CIT(A) erred in law and facts in confirming the disallowance of interest u/s.36(1)(iii) of the Act out of Rs.36,44,880 on the outstanding from subsidiaries on account of expenses and other payment on behalf of these subsidiaries cum customers. The disallowance ought to have been deleted as the amount recoverable is non-interest bearing as on account of business transactions."
41. At the time of hearing, ld A.R. submitted that similar issue was considered by the Tribunal in AY 2001-02 in assessee's own case vide order dated 4.3.2011 and the Tribunal has restored this issue to the file of AO for fresh consideration to decide the same denovo with a direction as the assessee has to demonstrate that for giving advances to its sister concern, were out of the interest free funds. It is further directed that if the assessee takes plea of commercial expediency for giving interest free advances to sister concerns, assessee has to demonstrate how the same can be treated on account of commercial expediency. It was contended that this ground may be restored to the AO following the order of the Tribunal for A.Y. 2001-02. 17 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006
Assessment Year: 2002-03
42. Ld D.R. has not disputed the above contention of ld A.R. save and except relying on the orders of authorities below.
43. Considering above submissions of ld representatives of parties and earlier order of the Tribunal dated 4.3.2011 in assessee's own case for A.Y. 2001-02(supra), we restore this issue to the file of AO for his fresh consideration with the same direction as mentioned hereinabove. Ground No.6 is allowed for statistical purposes.
44. Ground No.7 is as under:
"Ld CIT(A) erred in law and facts in upholding disallowance of interest u/s.14A of the Act out of Rs.2,99,041 on the strategic investment in shares of Aypee Lamitubes Limited."
45. The AO has stated that assessee invested in equity shares of subsidiaries/joint venture companies amounting to Rs.4,37,65,89,666. Assessee was asked to show as to why amount invested in equity shares of its subsidiaries should not be disallowed under section 14A r.w.s. 36(1)(iii) of the Act. It was contended that the amount invested in its subsidiaries is out of own accruals and borrowed funds. The assessee further stated that in case interest is disallowed on the investments made in its subsidiaries under section 36(1)(iii) of the Act, the same should be allowed under section 57(iii) as the dividend received from subsidiaries is taxable and not exempt under section 10(33) of the Act. The AO has stated that the assessee has invested Rs.27,53,600 in M/s. Ayepee Lamitubes Limited on 31.3.1999 which is an Indian company and dividend received from this company is not exempt under section 10(33). The AO has stated that for the reasons given in the assessment order for A.Y. 2001-02, interest paid on investments in M/s. Ayepee Lamitubes Limited is disallowed u/s.14A r.w.s. 36(1)(iii) of the Act by taking the average rate of interest @ 10.86% for the year, which works out to 18 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 Rs.2,99,041. Being aggrieved, assessee filed appeal before ld CIT(A). Ld CIT(A) has stated that he has considered similar issue for A.Y. 1999-2000 and, accordingly, directed the AO to re-compute the disallowance made on the decision given by him for A.Y. 1999-2000. Hence, assessee is in further appeal before the Tribunal.
46. At the time of hearing, ld A.R. stated that reasonable disallowance may be made as the assessee has not disputed the order of ld CIT(A) for A.Y.1999-2000 in further appeal before the Tribunal. On the other hand, ld D.R. submitted that ld CIT(A) has followed his order for A.Y. 1999-2000 which has been accepted by the assessee, hence same should be confirmed.
47. Considering above submissions of ld representatives of parties and orders of authorities below, we do not find any infirmity in the order of ld CIT(A). Therefore, we uphold his order. Hence, Ground No.7 is rejected.
48. In Ground No.8, assessee has disputed computation of deduction allowable u/s.80 HHC of the Act. The said ground is comprised of two parts i.e. in sub-ground (a), assessee has disputed the order of ld CIT(A) in respect of treatment given for the amount of interest(s) and exchange gain for the purpose of computing deduction uy/s. 80HHC of the Act and in sub-ground (b), the reduction to be made as per section 80IA of the Act when the assessee is eligible for deduction u/s.80IA and Section 80 HHC of the Act.
49. Firstly, we consider sub-ground (a) of ground No.8 of appeal which comprises of
(i) to (vi).
19 ITA No.3226/Mum/2006ITA No.3319/Mum/2006
Assessment Year: 2002-03
50. In clauses (i) to (iv), the issue is as to whether 90% of interest received is to be reduced as per explanation (baa) of Section 80 HHC of the Act from the gross amount or the net amount.
51. We after considering submissions of ld representatives of parties, hold that the said issue is now covered by the decision of Hon'ble apex Court in the case of ACG Associated Capsules vs CIT, 343 ITR 89, wherein, it has been held that 90% of net receipts are to be excluded under explanation (baa) to Section 80 HHC of the Act for determining the profits of the business. Respectfully following the order of Hon'ble apex Court (supra), we direct the AO accordingly.
52. In respect of clause (v) as to whether 90% of exchange gain of Rs.23,48,702 is to be reduced from the profits of the business, it was submitted that the same very issue has been considered by the Tribunal in assessee's own case for A.Y. 2001-02 by order dated 4.3.2011 (supra), wherein, vide para 13, it was held as under:
"We have heard the parties. The A.O. has excluded 90% of the exchange gain of Rs. 30,58,419/- by applying Explanation (baa) as he is of the opinion that it partakes the character of other items/receipts specified in expl. (baa) to sec. 80HHC; like brokerage, commission, interest, rent charges etc. In our opinion, such approach is not correct. Admittedly, exchange gain is on account of fluctuation of the foreign currency rates in the market after considering market rates of Indian currency and it is nothing but a part of the sale consideration. We, therefore, direct the A.O. that 90% of the exchange gain should not be excluded by applying Explanation (baa) to section 80HHC and no reduction on that account should be made for computing the profits of the business. Accordingly, ground 2(vi) is allowed. "
52.1. Hon'ble Jurisdictional High Court has also considered the same very issue in the case of CIT vs. United Riceland Ltd (Income tax Appeal No.6997 of 2010) by its order dated 31.3.2012 and decided the issue in favour of the assessee by considering its 20 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 earlier decision in the case of CIT vs. Rachna Udyog(2010) 230 CTR 72, wherein, it was held as follows:
"We are of the view that the difference on account of exchange rate fluctuation is liable to be allowed under s.80-IB. The exchange rate fluctuation arises out of and is directly related to the sale transaction involving the export of goods of the industrial undertaking. The exchange rate fluctuation between the rupee equivalent of the value of the goods exported and the actual receipts which are realized arises on account of the sale transaction. The difference arises purely as a result of a fluctuation in the rte of exchange between the date of export and the date of receipt of proceeds, since there is no variation in the sale price under the contract. The view which we have taken is also consistent with the view taken by a Division Bench of this court on 15th dec.2009 in the case of Syntel Ltd (IT Appeal NBos.1974, 1976 and 1978 of 2009). In the circumstances, we would affirm the judgment of the Tribunal insofar as the question of exchange rate fluctuation is concerned.' Therefore, Their Lordships held that issue of currency exchange gain is covered in favour of the assessee by the decision of this Court in the case of Rachna Udyog (supra) and Syntel Ltd (supra).
53. In view of above, we allow clause (v) of Ground No.8(a) of the assessee.
54. In respect of clause (vi) of Ground No.8(a), the same was considered by the Tribunal in assessee's own case for A.Y. 2002-03 by order dated 23.2.2011 and the Tribunal confirmed the orders of authorities below that the interest on sales tax is an incidental activity and has no connection with the business of exports and, accordingly, action of the AO in excluding 90% of the said amount of interest as per explanation (baa) for computing deduction u/s. 80HHC of the Act is justified. We observe that similar issue again came before the Tribunal in assessee's own case in I.T.A. No.2762/M/08 dt.20.5.2011 for assessment year 2004-05 & rejected the ground of apepal taken by assessee by confirming the order of AO & CIT(A). Respectfully following the said order of the Tribunal, we confirm the order of ld CIT(A) and reject clause (vi) of Ground No.8(a).
21 ITA No.3226/Mum/2006ITA No.3319/Mum/2006
Assessment Year: 2002-03
55. In respect of Ground No.8(b) of appeal, for considering deduction to be allowed u/s. 80IA and 80HHC of the Act, vis-à-vis section 80IA(9) of the Act, we observe that the said issue has recently been considered by Hon'ble Jurisdictional High Court in the case of Associated Capsules vs DCIT, 332 ITR 429(Bom), wherein, it has been held that Section 80IA(9) is not applicable at the stage of deduction u/s. 80 HHC(3) but is applicable at the stage of allowing of deduction u/s.80HHC(1). Sub-section(9) of Section 80IA provides that where any amount of profits and gains of an industrial undertaking is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading "C. - Deductions in respect of certain incomes" and subject to the condition that total deduction should not exceed the profits and gains of the undertaking or enterprise, as the case may be. Therefore, the provision has been inserted with a view to avoid double benefit under the Act of the same profits of an undertaking or enterprise. Hence, section 80IA(9) relates to deduction and not to computation of deduction. It does not refer to method of computing deduction under any provisions heading -C of chapter VIA. It is relevant to state that Hon'ble Jurisdictional High Court in the case of Associates Capsules (supra) has given an illustration in para 41 that if Rs. 100 is the profit of the business of the undertaking, Rs. 30 is the profits allowed as deduction u/s. 80 IA(1) and the deduction computed as per Section 80 HHC is Rs. 80, then, in view of Sec. 80 IA (9) the deduction u/s. 80 HHC would be restricted to Rs.70, so that the aggregate deduction does not exceed the profits of the business. Hence, we are of the considered view that when the deduction under section 80 HHC of the Act is to be considered, it is to be allowed in proportion to export turnover to the total turnover of an undertaking and, accordingly, 22 ITA No.3226/Mum/2006 ITA No.3319/Mum/2006 Assessment Year: 2002-03 that proportion of the deduction allowed under section 80 HHC is to be considered and reduced while allowing deduction under section 80 IA of the Act, subject to the condition that total deductions will not exceed the eligible profits of the undertaking. Therefore, we hold that the entire deduction allowed under section 80 IA of the Act should not be reduced while computing deduction under section 80 HHC of the Act subject to condition that total deduction should not exceed 100% of the profits of the said undertaking. Therefore, Ground No.8(b) is allowed in favour of the assessee subject to above observations.
56. In the result, appeal filed by the department is rejected and whereas appeal filed by assessee is partly allowed.
Pronounced in the court on 8th June, 2012
Sd/- Sd/-
(RAJENDRA) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 8th June, 2012
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),VI, Mumbai
4. Commissioner of Income Tax, City-VI , Mumbai
5. Departmental Representative, Bench 'J' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI