Income Tax Appellate Tribunal - Mumbai
Excel Industries Ltd, Mumbai vs Assessee on 31 July, 2012
ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench
IN THE INCOME TAX APPELLATE TRIBUNAL
"E" Bench, Mumbai
Before Shri B.R. Mittal, Judicial Member and
Shri B. Ramakotaiah, Accountant Member
ITA Nos.7049, 6723 & 7050/Mum/2008
(Assessment years: 2000-01, 2001-02 & 2002-03)
Excel Industries Ltd, 184-187 Vs. Asstt. CIT, Central Circle-38
S.V. Road, Jogeshwari (West) Aayakar Bhavan, Room
Mumbai 400012 No.112 1st Floor, MK Road,
PAN: AAACE 2488 F Mumbai 400050
(Appellant) (Respondent)
ITA No.137/Mum/2009
(Assessment year:2002-03)
Asstt. CIT, Central Circle-38 Vs. Excel Industries Ltd, 184-
Aayakar Bhavan, Room No.112 187 S.V. Road, Jogeshwari
1st Floor, MK Road, Mumbai (West) Mumbai 400012
400050 PAN: AAACE 2488 F
Assessee by: Shri Kirit R. Kamdar
Department by: Shri B. Jaya Kumar, CIT(DR)
Date of Hearing: 31/07/2012
Date of Pronouncement: 31/08/2012
ORDER
Per B. Ramakotaiah, A.M.
These are appeals by assessee for assessment years 2000-01 to 2002-03 and cross appeal by Revenue in assessment year 2002-
03. Since common issues are involved, these appeals were heard and decided as under.
2. The learned Counsel placed on record a chart indicating the grounds and the list of orders covered in assessee's own case in earlier years. The learned DR and the learned Counsel were heard, their arguments were incorporated wherever required.
ITA No. 7049/Mum/2008:( AY 2000-01)3. This is an appeal against the orders of the CIT (A) Central Circle-6, dated 24.09.2008 on the orders of AO under section 143(3) Page 1 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench r.w.s. 147. In the order of the CIT (A), the CIT (A) adjudicated the new issues arising out of the proceedings under section 147, whereas the issues which are already covered by the orders under section 143(3) referred to his predecessor's order dated 29.01.2007 stating that the findings given in the said order are applicable to this appeal and are not being repeated. Assessee has raised the grounds from 2 to 5 on the issues which are under section 143(3) as well. That appeal was heard by the ITAT in ITA Nos. 2825/Mum/2007 and 2841/Mum/2007 vide orders dated 15/06/2012. The grounds raised in Ground Nos.2 to 5 in this appeal are on the same issues arising in the order u/s 143(3) and are decided in that appeal. Hence there is no need to re-adjudicate the issue. Therefore, AO is directed to follow the orders of the ITAT referred supra on these grounds.
a) Ground No.2: Disallowance out of interest paid `.64,66,850/-.
b) Ground No.3: Disallowance of expenditure considered as incurred in connection with exempt income
c) Ground No.4: Deduction in respect of items covered by section 43B not debited to the Profit & Loss A/c but paid in the previous year `.61,49,374/-.
d) Ground No.5: Wealth Tax payment `.3,27,823/-.
That leaves us with only Ground No.1 which is as under:
"1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in confirming the action of the Asstt. Commissioner of Income-Tax in reducing the entire deduction under section 80-IB of `.4,35,10,523/- from the profits of the business while computing deduction/s 80HHC".
4. This ground relates to the action of AO in computing deduction under section 80IB by adjusting the profits which are already allowed as deduction under section 80HHC. Originally assessee claimed deduction under section 80HHC amounting to `.3,43,82,784/-. In the assessment passed under section 143(3) r.w.s 147 the deduction was computed at `.2,99,53,108/-. After considering the submissions of assessee, the learned CIT (A) relying Page 2 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench on the decision of the ITAT in the case of Modi Export vs. ACIT and the judgment of the Hon'ble Madras High Court in the case of SCM Creations vs. ACIT and further the Special Bench in the case of Rohini Garments, rejected assessee grounds.
5. At the outset it was submitted that this issue is covered in favour of assessee by the decision of the Hon'ble Bombay High Court in the case of Associated Capsules (P) Ltd vs DCIT & Anr 332 ITR 42 (Bom). In the above referred case it was held "that unless it is specifically provided by the statute, the profits of the business for the purpose of s.80HHC cannot be reduced by any amount save and except the amount specified in cl.(baa) of s.80HHC itself and that section 80-IA(9) does not expressly or impliedly provide that the amount of profit allowed as deduction under s. 80-IA(1) should be reduced from the profits of the business for the purpose of computing deduction under s. 80HHC of the Act. The object of s. 80-IA(9) being not to curtail the deductions computable under various provisions under head 'C' of Chapter VI-A, it is reasonable to hold that s. 80-IA(9) affects allowability of deduction and not computation of deduction. To illustrate, if Rs.100 is the profits of the business of the undertaking, Rs.30 is the profits allowed as deduction under section 80-IA(1) and the deduction computed as per s. 80HHC is Rs.80, then, in view of s.80-IA(9), the deduction under s.80HHC would be restricted to Rs.70, so that the aggregate deduction does not exceed the profits of the business."
6. Respectfully following the above, we modify the order of the CIT (A) on this issue and direct AO to work out the deduction accordingly, keeping in mind the principles laid down by the above judgment. Ground is considered allowed.
7. In the result the appeal is considered allowed.
ITA No.6723/Mum/2008 (AY 2001-02)8. This appeal is against the order of CIT(A), Central VI, Mumbai dt.15-09-08. The assessee raised the following grounds.
Page 3 of 26ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench Ground Nos. 1 & 2:
"1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in confirming the action of the Dy. Commissioner of Income Tax in disallowing the claim for deduction of `.2,58,35,618/- in respect of data compensation charges and toxicological expenses incurred during the year.
2. Without prejudice to the above ground of appeal and in the alternative, the CIT (A) erred in not appreciating the fact that if the aforesaid expenditure is to be treated as capital expenditure, the appellant ought to be granted depreciation in respect of the said expenditure".
9. In ground of appeal No.1 & 2 assessee challenged addition of `2,58,35,618/- in respect of claim for deduction of expenses treated as deferred revenue expenditure in the accounts. The AR submitted that the entire Data Compensation charges paid pursuant to an arbitration award made in June, 2000 and toxicological expenses aggregating to `2,58,35,618/- i.e. (`1,81,66,258 + `76,69,360/-) claimed as a deduction under section 37(1) had been wrongly disallowed by AO.
10. In the assessment order passed under section 143(3) in respect of data compensation charges and toxicological expenses, AO has observed that the payment was made by assessee as one time payment and that no recurring payment was required to be made on year to year basis. AO therefore, held that assessee got an advantage of enduring benefit and accordingly the same ought to be treated as capital expenditure. AO also quoted various case laws in support of his decision.
11. Before the CIT (A), during the course of the appellate proceedings, the Authorized Representative submitted that assessee had incurred toxicological expenses of `.76,69,630/-. Out of the said amount `.25,56,452/- was debited to the Profit & Loss A/c and the balance amount of `.51,12,908/- was deferred over a period of two years. It was submitted that assessee was a manufacturer of agrochemicals and before commercialization of any product, it was mandatory to register the product to the Central Insecticide Board Page 4 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench and Registration Committee formed under the Insecticides Act, 1968. The product registration was done under different sections of the Act and each section had its requirements for toxicity, bio- efficiency residue/persistence and chemistry data. To fulfill these requirements for product registration, the company had to generate data on above parameters. The AR contended that the said toxicological expenses were incurred on toxicology test of existing products and accordingly were revenue in nature and ought to be allowed as a deduction.
12. In this connection reliance was placed on the decision of the Mumbai Tribunal in the case of DCIT vs. United Phosphorus Limited (ITA No.3298/Mum/2005) for assessment year 2001-02 wherein it has been held that the product registration expenses are revenue in nature and allowed as a deduction. Further the AR has also relied on the appellate order passed by the CIT (A) in the case of Excel Crop Care Limited for assessment year 2003-04 wherein identical toxicological expenses have been held to be revenue in nature and allowed as a deduction.
13. With regard to data compensation charges, It was submitted that assessee had incurred expenditure of `.1,81,66,258/- on account of data compensation charges. Out of the said amount `45,41,565/- was debited to the Profit & Loss A/c and the balance amount of `.1,36,24,693/- was deferred over a period of three years. The said data compensation charges were paid pursuant to an arbitration made in June, 2000.
14. The CIT (A) rejected the claim by stating as under:
'9. I have considered the facts of the issue as well as the written submissions made by the AR of the appellant but do not find merit in them. The payments made towards conducting toxicological tests as well as data compensation charges are undoubtedly an expenditure in the capital field since these expenses lead to the creation of a right with the appellant to sell these products in certain markets for a certain number of years. The benefit accruing to the appellant is clearly of an enduring nature Page 5 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench and in the capital field. I fully agree with the findings given by AO that this expenditure cannot be allowed as revenue expenditure. The alternate plea of the appellant regarding allowance of depreciation cannot be conceded in the absence of any specific provision to allow such depreciation.
9.1 The case laws quoted by the appellant are distinguishable on facts and hence cannot be relied upon in deciding this issue.
9.2 This ground of appeal is therefore, dismissed".
15. It was submitted that the expenditure under the head Toxicological expenses were incurred on Toxicology test of existing product and accordingly are of revenue nature. The learned Counsel relied on the following judgments.
i) DCIT vs. United Phosphorus Ltd - AY 2001-02 (Para Nos.1-3) (ITA No.3298/Mum/2005)
ii) DCIT vs. United Phosphorus Ltd - AY 1997-98 (Para Nos.14-17) (ITA No.783/Ahd/2001)
iii) M/s Biotech International Ltd (Para Nos.7-11)(ITA No.3113/Del/2009)
16. With reference to the data compensation charges it was submitted that this expenditure was incurred for sale of products in Australia and the expenses are to be allowed as a deduction under section 37(1). He relied on the same cases where similar issues were discussed.
17. The learned DR however submitted that the expenditure is in the nature of capital expenditure, hence cannot be allowed as revenue expenditure.
18. We have considered the issue and examined the nature of charges. As far as the expenditure in Toxicological expenses are concerned, these are incurred for testing the existing products and accordingly the expenditure is a revenue in nature. Even though assessee under the Companies Act has treated the amount as differed revenue expenditure, the basic nature of expenditure is revenue in nature. This issue on expenditure incurred on efficacy study under the head R&D expenses were discussed by the ITAT in Page 6 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench the case of Biotech International Ltd (ITA No.3113/Del/2009) dated 8.1.2010 wherein the Coordinate Bench has held as under:
"11. We have heard the rival submissions and have gone through the material available on record. We find that there is no finding given by the authorities below that these expenses were incurred for developing any new product. It was the submission of the assessee before the Assessing Officer that these expenses were incurred on upgradation of company's product and conducting trial for field efficacy. We find that similar expenses were incurred in the earlier years also as per the details appearing on page No.127 of the paper book. Regarding details of expenses of the present year which is available on page No.126 of the paper book, we find that these expenses are regarding product fess including payment to research fellow, cost of accessories, chemicals, brass-wares and other misc. expenses. In the absence of any finding that any new product was developed by incurring these expenses, we feel that the authorities below were not justified in treating these expenses as capital in nature. We, therefore, delete this addition. This ground of the assessee is allowed.
19. Respectfully following the same, as principles are equally applicable to toxicological expenses, we hold that the expenditure is revenue in nature. AO is directed to allow the same.
20. With reference to the data compensation charges it was submitted that the expenditure was incurred in respect of data compensation charges for sale of products in Australia. Before AO it was submitted as under:
"Our Endosulfan in Australia is registered as a "me-too"
product with AgrEvo being the original first registrant of the product.
In recent years there has been growing concern on the harmful long term effects arising out of use of certain class of pesticides. As a result use of pesticides is constantly reviewed by registration authorities in different countries.
Endosulfan is a pesticide which has been reviewed recently in Australia A major concern in Australia is presence of Endosulfan residues in beef, arising out of exposure of cattle to Endosulfan during aerial spraying of broad acre farms.
Page 7 of 26ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench The NRA in Australia concluded that use of Endosulfan in Australia would be allowed only if the registrants of Endosulfan in Australia provide data defending the continued use of Endosulfan. The data normally pertains to studies on toxicology, residue generation, environmental impact, occupational health and safety etc. It takes 2 to 4 years and large sums of money to generate such data and once a review is initiated and data submission invited, the NRA grants protection for such data which has been accepted. The protection lasts upto 7 years and during the protection period, other registrants who wish to access protected data have to pay compensation to the original registrant for access of data by the NRA.
Most multinational companies have recently begun to use data protection as an effective tool to monopolise the market and restrict entry of other companies into their markets. Where competition exists, data compensation is used to either drive away competition or make it more expensive for them to defend their market presence. In Australia AgrEvo has in the recent past submitted data which has been granted status of "Protected Registration Information" (PRI). AgrEvo submitted a total of 350 studies out of which 147 studies have been granted protection.
To continue our sales and our registration for Endosulfan in Australia, it is now necessary for us to compensate AgrEvo to allow NRA to access this PRI.
The guidelines to data compensation are outlined in Agrochemicals Code which contains the regulation guidelines issued by the NRA in Australia.
Arising out of the review, we are now in a situation where sales of Endosulfan in Australia could continue only if we compensate AgrEvo for access of their PRI.
We have since Feb.1999 entered into data compensation discussions with AgrEvo for access of their data by the NRA.
AgrEvo have, on the basis of our market share in Australia, which is approximately 20% asked for compensation to the extent of A$1.2 million (`.3.36 crores).
AgrEvo have asked for this amount on the basis that
a) They have acquired their PRI at a cost of A$6 million (`.16.8 crores).
Page 8 of 26ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench
b) It would cost any company an amount of approximately A$20 million (`.56 crores) and a time frame of 3 to 5 years to generate similar data today.
c) All Registrants of Endosulfan in Australia should, in their opinion, share the burden of defending Endosulfan proportionate to their market share.
d) They have already negotiated with another registrant for access of their PRI at a cost and have obtained a compensation of A$2.5 million (`.7 crores).
In view of the above, the payments for data compensation charges is nothing but payments for allowing sale of our products in Australia and accordingly, it should be allowed as deduction under section 37(1) of the Income Tax Act, 1961".
21. As can be seen from the above submissions made before AO, it can be seen that there is no new product developed and in order to market the existing products these amounts are to be paid based on sale proceeds. In view of this, we are of the opinion that the amount is revenue in nature as no asset has been created by incurring these expenditures but helped in increasing assessee's business of sale of endosulfan. In view of this, we allow the expenditure as revenue expenditure and direct AO to give necessary deduction. Ground is allowed.
22. Ground No.3 relates to deduction in respect of items covered by section 43B not debited to the Profit & Loss A/c but paid in the previous year `71,46,767/-. In the return of income the assessee has claimed deduction under Section 43B being payments made in respect of items shown as prepaid expenses. Before the Assessing Officer, following note was given in this regard:-
"During the previous year relevant to assessment year 2000-01, the company has paid an aggregate amount of `.71,46,767/- in respect of items covered under section 43B. The aforesaid amount has been considered as prepaid and has not been debited to the Profit and Loss Account. Accordingly, the said amount has been deducted while computing the total income since it has been paid during the previous year and is allowable under section43B."Page 9 of 26
ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench
23. The Assessing Officer rejected the said contention on the ground that only expenses incurred during the year can be allowed under Section 43 B. Before the CIT(A), it was reiterated that as per the provision of Section 43B, deduction should be allowable in the year in which the sum is actually paid, irrespective of the year in which the liability to pay such sum is incurred according to method of accounting regularly employed by the assessee. The details of items covered under section 43B not debited to the Profit and Loss Account but paid in the previous year were filed before the CIT(A). The Learned CIT(A) too rejected the contention of the assessee and held that deduction under Section 43B could be allowed only in respect of items debited to the Profit and Loss Account and not otherwise. Since the prepaid expenses have not been debited to the Profit & Loss A/c, the same are not otherwise under section 43B.
24. Before us, learned AR submitted that since these expenses though relating to earlier years but were paid during the year, the same has to be allowed under Section 43B. It was also submitted that in the subsequent years, this amount though debited in the profit loss account, however, it has been disallowed by the assessee itself. In support of his contention, he relied upon the following decision:-
i) DCIT Vs. M/s Glaxo Smithkline Consumer healthcare Ltd. (107 ITD 343)(SB)(Chd);
ii) Nivi Trading Limited vs DCIT (ITA No.5455/Mum/2010); iii) CIT Vs C.L.Gupta & Sons (259 ITR 513)(All); and iv) SRF Ltd Vs. DCIT (34 SOT 1)(Del).
25. On the other hand, learned CIT(DR) relied upon the findings of the CIT(A) and submitted that admittedly the assessee has not debited expenses itself in the profit loss account, hence, cannot be allowed.
26. We have carefully considered the rival submissions and also the findings of the CIT(A) as well as the Assessing Officer. Section 43B is a non obstante clause and provides that a deduction under this Act shall be allowed irrespective of the previous year in which the Page 10 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him while computing the income under Section 28 of that previous year in which such sum is actually paid by him.
27. It is undisputed that these amounts in respect of which deduction has been claimed are covered under Section 43B and have actually been paid during the year. Thus, the sum which is actually paid irrespective of the year in which the liability to pay such sum had incurred even according to the method of accounting regularly employed by the assessee, has to be allowed in view of the provisions of Section 43B. Further, it has also been clarified by the learned AR that these amounts which has been debited in the profit and loss account has not been claimed in the subsequent year and has been accepted by the department as well as by the assessee. Thus, we hold that the assessee is entitled for deduction for the sums paid during the year under Section 43B and the disallowance made at `71,46,767/- is uncalled for. In the result, ground No.3 is allowed.
28. Ground No.4 Non granting of deduction in respect of TDS written of `.29,954/-. Assessee has written off an amount of `.29,954/- in respect of tax deducted at source for which certificates were not received from the parties. Since the entire income has been offered to tax, it was submitted that the said write off is in the nature of bad debt and returns are to be allowed as a deduction. In support the learned Counsel relied on the decision in the cases of Add. CIT vs. Yahoo Web Services (P) Ltd (ITA No.2042/Mum/2010), Indian Products Trading Co. (P) Ltd vs. Income Tax Officer (ITA No.4509/Mum/2009 and CIT vs. Shreyans Industries Ltd (303 ITR 393) (P&H). The learned Counsel further submitted that the Hon'ble Bombay High Court in the case of Yashpal Sahni vs. ACIT considered the purposes of issue of TDS certificates and held that the amount cannot be recovered from assessee. Relying on the above it was the submission that the Page 11 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench amount has to be allowed as bad debt. The learned DR however, objected to the write off of asset and relied on the orders of the CIT (A).
29. We have considered the issue. As far as the legal principles are concerned, the Hon'ble Punjab & Haryana High Court ( supra) has allowed write off of TDS as business loss as deduction. Even though we are of the opinion that the tax is a charge on the business profits and TDS not recovered cannot be in the nature of a business loss, respectfully following the decision of the Hon'ble Punjab & Haryana High Court (Supra), we have to allow the amount as business loss to assessee. However, as seen from the order of AO, the details of necessary TDS amounts have not been on record. AO is directed to verify the nature of the TDS amount and whether assessee could get credit in any of the year and if not, allow the amount as business loss. Ground is considered allowed.
30. Ground No.5 Disallowance of expense considered as incurred in connection with exempt income by applying Rule 8D - `63,43,918/.
31. The issue in this ground is disallowance of expenditure considered as incurred in connection with exempt income at `63,43,918/-.The assessee contended that no expenditure ought to be disallowed in respect of earning exempt income as the same has not been incurred for the purpose of earning dividend income and the assessee relied upon the following decisions :
(i) Godrej Industries Ltd. vs. DCIT - ITA.1090/Mum/2009
(ii) Godrej Agrovet Ltd. vs. ACIT - ITA.1629/Mum/2009
(iii)DCIT vs. Philips Carbon Black Ltd. (Third Member)
(iv) DCIT vs. Vatican Commercial Ltd. ITA.880/Kol/2011
(v) Civil Engineers Ltd. vs. DCIT ITA.859/Kol/2001
(vi) ITO vs. BPS Securities (P) Ltd. ITA.123/Kol/2010
(vii)Thirumalai Chemcials Ltd. ITA.2072/Mum/2009
32. We have considered the issue. It is fairly admitted that the issue is covered by the decisions of various High Courts in favour of the assessee. Further, it was considered that in the assessment year Page 12 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench 1995-96, the Tribunal vide Para no. 20 and 21 has upheld the disallowance to the tune of 0.5% of the gross income which was earned to the extent of Rs.94,81,601/-. In assessment year 1996-97 the same was also followed directing the Assessing Officer to re- calculate the disallowance at 0.5% of the gross dividend income. It was fairly admitted in the case of Godrej vs. ACIT in ITA.1629/Mum/2009 and Godrej Industries Ltd. Vs. DCIT ITA.No.1090/Mum/2009 that the expenditure on dividend income was estimated at 5% of the gross dividend income. Considering the fact that in assessee's own case 0.5% was allowed in earlier years while considering the amount of dividend earned at Rs.9,26,746/-, and in other cases at 5%,we estimate the expenditure relatable to earning the exempt income at 2% of the amount, which in our view is a reasonable amount considering the investment of Rs.13.32 crores made and dividend earned thereon. Accordingly, the Assessing Officer is directed to recalculate the disallowance as above at 2% of gross dividend. The ground is partly allowed.
33.Ground No.6 Disallowance of bad debts written of `.2,00,000/-.
34. Assessee has claimed an amount of `.2.00 lakhs as bad debts written off on the ground that the debts written off pertain to various sale parties except in the case of Rolla Industries Corporation. AO did not allow the amount as assessee is not in the business of money lending and corresponding incomes have not been communicated for. The CIT (A) after considering the facts of the issues and submissions made by assessee held that assessee has not been able to bring out the facts as to how the advances was related to the business. Before us, no further details have been furnished so as to allow the amount under section 36(1)(iii) r.w.s. 36(2). In view of the absence of details, we are unable to allow the claim of bad debt. Accordingly the ground is rejected.
Page 13 of 26ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench
35. Ground No.7 Disallowance out of interest paid `.36,88,160/-.
36. Both the parties fairly agreed that this issue has come up for consideration before the ITAT in the assessment year 1996-97, 1997-98, 1998-99 and 1999-2000, wherein this issue has been restored to the Assessing Officer. The relevant observation of the ITAT in order dated 4-5-2012 for the assessment year 1998-99 and 1999-2000, are as under:-
"6. Ground No.5: Disallowance of interest of Rs.50,57,260/-.
The Assessing Officer had discussed this issue in page no. 7 and 8 of the assessment order wherein it was noticed by the Assessing Officer that the assessee had made advances in the form of loans to two subsidiary companies @ 6%. The subsidiary companies are West Coast Oxygen Ltd. and Kamal Jyot Investment Pvt. Ltd. The assessee-company paid interest at the average rate of 16% on the borrowings. Interest expenses were of Rs.28,39,43,707/-. The Assessing Officer required the assessee to explain why the difference of 10% of interest paid should not disallowed. As per the assessment order no satisfactory explanation was furnished. The Assessing Officer relied upon the decision of Allahabad High Court in the case of Saria Sugar Mills P. Ltd. (193 ITR 375) and also on the decision of jurisdictional High Court in the case of Phalton Sugar Works Ltd. 201 ITR 711. The disallowance made in respect of the interest attributable to the funds lent to two subsidiary companies was of Rs.47,84,717/-. It was also noticed by the Assessing Officer that interest free loans were also given to M/s. Agrocel Pesticides Ltd. Rs.17,03,397/- and M/s. Truly Creative Builders Rs.20,00,000/-. It was submitted that advance to Truly Creative Builders is for the purchase of property and not a loan. No satisfactory explanation was furnished regarding interest free loans to M/s. Agrocel Pesticides Ltd. Interest @ 16% attributable to the interest free loans to M/s. Agrocel Pesticides Ltd. was also disallowed. It amounts to Rs.2,72,543/-. It was submitted by assessee before CIT(A) that the loans to the subsidiary companies and the loan to Agrocel Pesticides Ltd. were made from the assessee's mixed funds and no specific borrowings were made for advancing the said loans. It was also submitted that the entire interest payment was eligible for deduction under section 36(1) (iii) of the Act and the Assessing Page 14 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench Officer erred in computing notional interest @ 16% and disallowing the excess of the said amount over the interest received out of interest paid. Further, it was submitted that during the course of assessment proceedings, vide letter dated 20th November, 2000, assessee submitted details of loans to subsidiary companies explaining the sources of funds from which the loans were given and rate of interest charged, details of advances recoverable in cash or in kind or for value to be received along with statement showing details of interest received. The assessee vide letter dated 2nd March, 2001 also furnished a statement showing notional interest at the rate of 10% on loans given to subsidiary companies, as required by the Assessing Officer. On an appeal before the CIT(A), the learned CIT(A) confirmed the same following the orders of his predecessors. 6.1. It was submitted that the issue was restored to the Assessing Officer in earlier years and the amount was allowable following the principles laid down by Hon'ble Supreme Court in the case of S.A.Builders vs. CIT 288 ITR 1 (S.C.). It was further submitted that the amount of Rs.17,03,397/- in respect of Agrocel Pesticides shown as 'sundry loan' was not a loan but represents outstanding amount in the ordinary course of business and amount of Rs.2,72,583/- on the above amount at 16% was wrongly disallowed. As the issue of disallowance of interest u/s. 36(1)(iii) was restored to the Assessing Officer in earlier years, which we were informed that no order has been passed yet by the Assessing Officer, in the interest of justice, we restore the matter to the file of Assessing Officer for fresh consideration. Assessing Officer is directed to consider the facts, submissions and case law relied on the issue and decide accordingly. The ground is allowed for statistical purposes."
37. Thus, respectfully following the aforesaid decision, this issue is restored to the file of the Assessing Officer to do as per the direction given in the aforesaid order, in this year also. In the result, this ground is allowed for statistical purposes.
38. Ground No.8 Non granting of deduction in respect of wealth tax paid `.3,76,705/-.
39. The Learned Counsel for assessee fairly admitted that this issue is covered against the assessee in the assessee's own case for the Page 15 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench assessment year 1998-1999 and 1999-2000 by the order of ITAT and also the decision of Mumbai Bench in the case of Bachcharj Factories Ltd. Vs ACIT (56 ITD 225) (Bom). The relevant observations of the ITAT in the assessee's appeal for the earlier years are as under:-
28. Ground No.11 pertains to claim of wealth tax payment of Rs.1,72,123/-. Even though it was contended that provisions of section 40a(iia) are not attracted on the ground that Explanation to section 40a(iia) specifically excludes any tax chargeable with reference to the value of any particular asset of the business or profession, it was fairly conceded that this issue is decided against the assessee by the Coordinate Bench in the case of Bacharaj Factories Ltd. vs. ACIT 56 ITD 225 (Bom.). In view of the above, we uphold the Order of the CIT(A) and dismiss the ground raised by the assessee.
Thus, respectfully following the above decision, this issue is decided against the assessee and ground No.8 is dismissed.
40. In the result, appeal is partly allowed.
ITA No.7050/Mum/2008 - AY 2002-0341. This appeal is against the order of CIT(A), Central VI, Mumbai dt.08-10-08. The assessee raised the following grounds.
42. Ground No.1 :
On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the action of the Dy. Commissioner of Income-tax in allowing the claim for deduction of `.62,93,030/- in respect of toxicological expenses incurred during the year".
Ground No.2 :
"Without prejudice to the above ground of appeal and in the alternative the CIT(A) erred in not appreciating the fact that if the aforesaid expenditure is to be treated as capital expenditure, the appellant ought to be granted depreciation in respect of the said expenditure".Page 16 of 26
ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench
43. This issue in these grounds is similar to the issue discussed in Ground No.1 above in ITA No.6273/M/08 in AY 2001-02. Respectfully following the decision therein, we direct AO to allow the amount of claim on toxicological expenses. Since the amount is allowed as revenue expenditure, there is no need to adjudicate ground no. 2 which is an alternate ground.
44. Ground No.3:
"On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the action of the Dy. Commissioner of Income-tax to recomputed the disallowance under section 14A in respect of expenditure incurred for earning tax-free income as per Rule 8D of the Income-Tax Rules 1962 as inserted by the Income-tax (fifth amendment) Rules 2008".
45. This issue is similar to Ground No.5 discussed in the above referred appeal ITA No.6723/Mum/2008 (Para 32) and as decided therein, this ground is also partly allowed. AO is directed to workout the disallowance accordingly.
46. Ground No.4 On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the action of the Dy. Commissioner of Income-tax in disallowing a sum of `.69,58,000/- out of interest paid.
47. Similar issue was discussed as Ground No.7 in the above appeal in ITA No.6723/Mum/2008. Respectfully following the above, we restore the issue to the file of AO to decide it fresh accordingly.
48. Ground No.5 On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the action of the Dy. Commissioner of Income-tax in rejecting the claim for deduction of an amount of `.2,58,714/- in respect of expenditure on fines and penalties.
Page 17 of 26ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench
49. In this connection, before the CIT (A), the assessee submitted that during the previous year relevant to A.Y 2002-03, assessee had incurred expenditure in respect of fines and penalties aggregating to `.2,58,714/-. The details of the said expenditure were given in Annexure-XVII of the Tax Audit Report which is also part of the compilation filed before the CIT (A).
50. In the return of income while computing the total income, assessee had added back the aforesaid amount out of abundant caution. Further, in note No.1 of the notes to computation of total income, it was submitted that the nature of fines and penalties should be examined and the amount which are compensatory in nature ought to be allowed as a deduction relying on the decision of the Hon'ble Supreme Court in the case of Prakash Cotton Mills Ltd (201 ITR 684) and Lachmandas Mathuradas vs. CIT (254 ITR 799).
51. The CIT (A) following the orders passed by his predecessor in earlier years, confirmed them as a disallowance. It was submitted that this issue is covered in favour of assessee by the orders in ITA No.2825/Mum/2007 and others dated 15/06/2002. In that the issue was decided as under:
"28. We do not find any infirmity in the order of the CIT(A) in view of the fact that the amount of `6,73,258/- is compensatory in nature and, therefore, the decision of the Hon'ble Supreme Court referred to above, squarely applies and, accordingly, there is no substance in the ground raised by the department. Hence, ground No.11 is hereby dismissed".
52. The issue in the above order is with reference to the penalty paid under the Gujarat Sales Tax Act which the CIT (A) has allowed as a deduction being compensatory in nature and not as a penalty. In the Revenue appeal, the opinion of the CIT (A) was confirmed. We are unable to understand on what basis the present CIT (A) stated that he has followed earlier year order in rejecting the claim, when the amounts were allowed by the CIT (A) in earlier year. Be that as it Page 18 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench may, we have seen that the amounts paid as penalties mostly pertaining to Gujarat Sales Tax Act. In addition there are payments to Regional Transport Office, fine under Metrological Act, fine under the Motor Vehicle Act and penalty under weights & measurements Act and also under the Provident Fund Act, which are not for any statutory violation but are compensatory in nature. Since the amounts are of similar nature, as considered in earlier year, we direct AO to allow the amount as claimed. Ground is allowed.
53. Ground no 6. On the facts and in the circumstances of the case and in law, the CIT (A) erred in rejecting the claim for deduction in respect of wealth tax paid amounting to `.2,00,692/-.
54. Similar issue was discussed as Ground No.8 in the above appeal (ITA No.6723/Mum/2008). Respectfully following the above decision, this issue is decided against the assessee and ground No.8 is dismissed
55. Ground No.7: On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the action of the Dy. Commissioner of Income-tax in levying interest under section 234D.
56. This issue arises out of the levy of interest under section 234D. Originally the order was passed and an amount of `.2,50,60,658/- was granted as refund to assessee vide the order passed under section 154dated 30-04-2003. After completion of the assessment under section 143(3) AO levied interest amounting to `.14,79,844/-. It was the contention that the computation of interest has not been furnished and further provision was brought on statute w.e.f. 01- 06-2003 which cannot be applied to the assessment year prior to assessment year 2002-03. In this regard reliance was placed on the decision of the Special Bench of the Delhi in the case of Income Tax Officer vs. Ekta Promoters Pvt. Ltd. The CIT (A) however, did not agree and submitted that since the refund was issued after the provisions were made applicable, amended section would applicable Page 19 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench at the time of passing the order and the interest was correctly charged. He dismissed the ground.
57. It was submitted that this issue is in favour of assessee by the decision of the Hon'ble Delhi High Court in the case of DIT vs. Jacabs Civil Incorporated (235 CTR 123) and also by the Special Bench of the ITAT. Respectfully following the above, we direct AO not to charge interest for the impugned assessment year. Ground is considered allowed.
In the result, appeal is partly allowed.
ITA No.137/Mum/2009 (AY 2002-03)58. This is a cross appeal for the assessment year 2002-03 by the Revenue. Ground Nos. 1 & 2 are as under:
"1. On the facts and circumstances of the case and in law, the CIT (A) erred in allowing deductions of `.33,62,629/- in respect of the advance licence benefits receivable by assessee".
2. On the facts and circumstances of the case and in law, the CIT (A) erred allowing deductions in respect of pass book benefit receivable amounting to `.3,00,88,705/- by assessee".
59. At the outset, it was stated that these issues are covered in favour of assessee by the Hon'ble Bombay High Court in the case in assessment year 2001-02 in ITA No.1183 of 2011 and also for assessment year 2004-05. This issue was elaborately discussed in ITA No.4240/Mum/2003 in assessment year 1998-99 (where the Accountant Member is the Author) as under:
3.2. There is a long discussion in the assessment order in respect of the grounds taken in the appeal. However, both the grounds are covered in favour of the assessee by the earlier orders of the Tribunal in the assessee's own case. So far as Ground No.1 is concerned, which relates to the taxability of advance licence benefits receivable, the Tribunal has decided that no income accrues until the imports are made and the raw Page 20 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench materials are consumed. In the year before us, it is not in dispute that the imports were made and the raw materials were consumed in the subsequent year. In such circumstances the earlier orders of the Tribunal in the assessee's own case apply. The first of such orders was passed on 6th October 2003 in ITA No:
4346/Mum/1997 for the assessment year 1992-93. In this order the Tribunal applied and followed the decision of the Mumbai Bench of the Tribunal in Jamshri Rajitsinghji Spg. & Wvg. Mills Ltd. vs. IAC (1992) 41 ITD (Bom) 142, in which it was held that until the goods are imported and the raw materials are consumed, no income by way of advance licence benefit accrues to the assessee. This order was followed by the Tribunal in its order dated 27th January 2004 for the assessment year 1993-94 in ITA No.4145/Mum/1998. For the assessment year 1995-96 the issue again came before the Tribunal in ITA No.2067/Mum/2000. This appeal was disposed of by the Tribunal on 7th March 2005.
This order took the same view as in the earlier years. What is significant in this order is that the department relied on the decision of the Ahmedabad Bench of the Tribunal in the case of United Phosphorus Limited vs. JCIT (2002) 81 ITD 553 (Ahd), in which a view was taken that the advance licence benefit was taxable in the year in which it was received, without waiting for the actual imports and the consumption of the raw material. This order of the Ahmedabad Bench of the Tribunal was strongly relied upon by the revenue in the appeal for the assessment year 1995-96. The Tribunal in its order for the assessment year 1995-96 has dealt with the arguments of the revenue based on the Ahmedabad Bench of the Tribunal in paragraphs 13 onwards. It was held by the Tribunal that every aspect highlighted in the order of the Ahmedabad Bench has been duly explained on behalf of the assessee. In fact the Tribunal took the view that there was no distinction between the facts of the assessee's case and the facts of the case before the Ahmedabad Bench of the Tribunal in the case of United Phosphorus Limited (supra) and that it was in order for the Ahmedabad Bench to have referred the issue to a Larger Bench for the sake of consistency, having regard to the orders of the Mumbai Benches of the Tribunal in Page 21 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench Jamshri Rajitsinghji Spg. & Wvg. Mills Ltd. (supra). In this view of the matter and finding no difference in the facts relating to the assessment year 1995-96 and the facts for the earlier assessment years, the Tribunal held that there was no reason to take a different view of the matter on the basis of the order in the case of United Phosphorus Limited, Ahmedabad Bench. After this order of the Tribunal, the Tribunal disposed of the appeals relating to the assessee for the assessment years 1996- 97 and 1997-98 by order dated 12th January 2009, in which the Tribunal followed its own order for the assessment year 1995-96 passed on 7th March 2005, to hold that the advance licence benefit was not taxable unless the goods have been imported and the raw materials are consumed. A similar view was taken by the Tribunal again for the assessment year 2004-05 in ITA No:2251/Mum/2009, dated 29th July 2010.
3.3. Thus, in a series of orders passed in the assessee's own case, the Tribunal has taken a consistent view in favour of the assessee even after considering the order of the Ahmedabad Bench of the Tribunal in the case of United Phosphorus Limited (supra). We may add that the order of the Tribunal for the assessment year 1993-94 and the order for the assessment years 1996-97 and 1997-98 were appealed against by the revenue before the Hon'ble Bombay High Court but since no steps had been taken by the revenue to challenge the first order of the Tribunal, the Hon'ble High Court did not consider it fit to admit the appeals. Copies of all the orders of the Tribunal and the judgments of the High Court have been filed before us.
3.4. It was the submission of the learned D.R. that in view of the Special Bench Decision of Mumbai in the case of Topman Exports vs. ITO 124 ITD 1 (Mum.) (S.B.) particularly in Paras 33 and 34 of the Orders, it was submitted that income on advanced licence will accrue to the assessee when the exports were made and accordingly, following the principles laid down by the Special Bench which was in fact upheld ultimately by the Hon'ble Supreme Court, the issue is to be decided against the assessee holding that income on advance Page 22 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench licence arises, the moment exports were done and application was made and not at the time of actual imports as contended by the assessee. Further, referring to the Orders in ITA. No. 6969/Mum/2008, It was specially submitted that the ITAT referred to the Judgment of the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours& Chemicals 328 ITR 451 (Bom.) to dismiss the revenue's contention in view of the then existing Bombay High Court Judgment referred above, which was reversed by the Hon'ble Supreme Court in the case of Topman Exports vs. CIT & Others in Civil Appeal No.1699/2012. In view of the above, it was submitted that Special Bench decision got approved by the Hon'ble Supreme Court. Therefore, the issue is to be decided in line with the Special Bench decision that income accrues in the year in which exports were made and assessee got entitlement for advance licensing.
3.5. The learned Counsel, however referred to the principles laid down by the Coordinate Benches in assessee's own case and also submitted that the issue in Topman Exports was with reference to the taxability and bifurcation of the DEPB proceeds while computing deduction under section 80HHC and nowhere concerned with the issue before us which itself was upheld by the Hon'ble Bombay High Court in assessee's own case.
3.6. We have considered the issue and perused the record. As already stated above, the issues in assessee's own appeal is consistently held in favour of the assessee following the decision of the Mumbai Bench of the Tribunal in Jamshri Rajitsinghji Spg. &Wvg. Mills Ltd. vs. IAC (1992) 41 ITD (Bom) 142. As already stated, the issue was confirmed by the Hon'ble jurisdictional High Court which dismissed the Revenue's appeal vide orders ITA.1183/Mum/2011 dated 25-11-2011. In that, the question referred specifically is as under:
"Whether the advance licence and the DEPB receivable by the assessee are liable to be assessed to tax in the year in which the licence is granted to the licensee or liable to be taxed in the year in which the benefits actually accrue after the Page 23 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench imports are effected, is the question raised in this appeal."
3.7. The Hon'ble High Court held as under:
"2. The Income Tax Appellate Tribunal following its decision in the case of Jamshri Rajitsinghji Spg. &Wvg. Mills Ltd. vs. IAC reported in 41 ITD 142 held that the said amounts are liable to be taxed in the year in which the benefits actually accrue to the assessee and not in the year in which the licence is granted. This Court in the case of Commissioner of Income Tax vs. M/s. Mafatlal Industries Ltd, being Income Tax Appeal No. 424 of 2009 decided on 22nd September, 2009 has upheld the decision of the Income Tax Appellate Tribunal in the case of Jamshri Rajitsinghji Spg. & Wvg. Mills Ltd. (supra).
3. In this view of the matter, we see no merit to entertain this appeal. The appeal is accordingly dismissed with no order as to costs."
3.8. Therefore, this issue is no longer survives for consideration as far as the Income Tax Appellate Tribunal is concerned as it has consistently held the issue in favour of the assessee and was also upheld by the Hon'ble High Court. We may also note that even though the issue of accrual of income on DEPB was discussed by the Special Bench in Paras 33 and 34, the present issue is not with reference to DEPB but advance licences which is not transferable unlike the DEPB benefits granted under the scheme. The Hon'ble Supreme Court in the case of Topman Exports vs. CIT, Mumbai and others had not dealt with accrual of income but dealt with the issue of bringing to tax the sale proceeds of the DEPB, profit on sale of DEPB and how they can be considered under section 28. The issue was not about the accrual of income but bifurcation of proceeds of DEPB/DFRC into face value and profit and year of taxability.. In view of this, to the extent of accrual of income is concerned, we are of the opinion that issue was decided in favour of the assessee in assessee's Page 24 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench own case by the Hon'ble High Court in the orders referred (supra). Respectfully, following the same, we allow the grounds raised by the assessee. Assessing Officer is directed to do the needful in accordance with the Orders on the issue as in the earlier years and make necessary adjustments, if any required in the computation. With these directions, grounds are considered as allowed".
60. Respectfully following the same, we reject the Revenue grounds with a direction to AO to re-compute the deduction if required to be consistent with earlier year. Ground is rejected.
61. Ground No.3:
"On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in allowing assessee employer's contribution to labour welfare fund and employees contribution to PF and Pension Fund paid after the due date but within the grace period under section 43B/36(1)(va) ignoring the decision of the Bombay High Court in the case of Pamwi Tissues Ltd (ITA No.1014 of 2004 dated 04.02.2008)".
62. AO disallowed an amount of `8,726/- in respect of employers contribution to labour welfare fund paid beyond the due date but within the previous year and also an amount of `.6,519/- in respect of Employee and Employers Contribution to PF paid beyond due date but within the grace period. The CIT (A) after examining the dates of payment and the amendment brought to section 43B omitted the said proviso directed AO to allow the amounts. Revenue is aggrieved.
63. This issue is covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd. [2009] 319 ITR 306 (SC) in favour of assessee. Similar view is also taken by the Delhi High Court in the case of CIT & Others vs AIMIL Limited (2010) 321 ITR 508, 229 CTR 418 and Hon'ble Karnataka High Court in the case of CIT vs. Sabari Entrepreneurs 298 CTR 141. Respectfully following the above decisions, we do not see any reason Page 25 of 26 ITA Nos.7049, 6723 & 7050 of 2008 and ITA No.137 of 2009 Excel Industries Ltd Mumbai E Bench to interfere with the order of the CIT (A). Accordingly the ground is rejected.
Accordingly Revenue appeal is dismissed.
64. In the result appeals filed by assessee in ITA Nos.7049, 6723 and 7050/Mum/2008 are partly allowed, while the Revenue appeal in ITA No.137/Mum/2009 is dismissed.
Order pronounced in the open court on 31st August, 2012.
Sd/- Sd/-
(B.R. Mittal) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 31st August, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "E " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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