Income Tax Appellate Tribunal - Ahmedabad
Gujarat Insecticides Limited, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH " B "
Before Shri MUKUL Kr. SHRAWAT, JUDICIAL MEMBER and
Shri D.C. AGRAWAL, ACCOUNTANT MEMBER
Date of hearing : 25/4/11 Drafted on: 24/5/11
Sl. ITA No(s) Assessment Appeal(s) by
No(s). Year(s)
Appellant (s) Respondent(s)
1. 460/Ahd/2008 2001-02 M/s.Gujarat Dy.CIT
Insecticides Ltd. Bharuch
Plot No.805/806 Circle
GIDC Estate, Bharuch
Ankleshwar
Dist.Bharuch
P AN: AAACG 8436D
2. 499/Ahd/2008 2001-02 Revenue Assessee
3. 461/Ahd/2008 2002-03 Assessee Revenue
4. 500/Ahd/2008 2002-03 Revenue Assessee
Assessee by : Shri M.G. Patel
Revenue by : Shri Alok Johri, CIT-D.R.
ORDER
PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :
These cross appeals for Assessment Years 2001-02 & 2002-03 have arisen from the orders of the Learned CIT(Appeals)-VI, Baroda identically dated 15/11/2007. Since the grounds have emanated from the common facts, therefore, these appeals have been consolidated and hereby decided by this common order.
(A) Assessee's appeal, i.e. ITA No.460/Ahd/2008 - A.Y. 2001-02
2. Ground No.1 reads as under:
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03 -2-
1. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by holding that the Appellant has transferred borrowed funds to holding company as the Appellant has not collected sale amount form the said company in time and has allowed undue credit and accordingly has erred in directing the Assessing Officer to rework disallowance of interest after allowing four months credit period for each transaction with the holding company.
2.1. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the I.T.Act, 1961 dated 18/03/2004 were that the assessee-company was established as a joint sector company in 1980 to manufacture pesticides. The promoters of the company, on one hand, were Gujarat Agro Industries Corporation Limited (A Government of Gujarat Enterprise) and, on the other hand, Gharda Chemicals Ltd., Bombay. Later on, in the year 1986 all the shares of Government were purchased by Gharda Chemicals Ltd., with the result the assessee-company had become a 100% subsidiary of M/s.Gharda Chemicals Ltd. The result of the said change was that the assessee-company had become a closely held company. Assessee's business is manufacturing of pesticides and intermediates. In respect of the above ground, the observation of the AO was that the assessee has obtained demand loan and working capital facility from Bank of Baroda. The assessee has debited interest and financial charges to the tune of Rs.2,16,75,000/-. On the other hand, it was found by the AO that the amount receivable ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03 -3- from Gharda Chemicals Ltd. (in short GCL) appearing under the head "sundry debtors" were as under:
"[Figures in 000s] GCL Others Total
------------ --------------- --------------
Over six months Rs.25,610 Rs.217,017 Rs.242,627
Others Rs.57,716 Rs.168,676 Rs.226,392
------------ ------------- --------------
Total..... Rs.83,326 Rs.385,693 Rs.469,019"
2.2. It was noted by the AO that the company has made purchases of Rs.6.15 crores from GCL against that payments were made of Rs.2.38 crores. On further analysis, it was also noted by the AO that sales to the tune of Rs.17.58 crores were made to GCL, however, against those sales payments were received of Rs.3.72 crores only. It was also found that the assessee had paid marketing charges to GCL of Rs.1.34 crores. Thus the observation of the AO was that on one hand the assessee was incurring huge expenditure towards payment of interest but on the other hand there was substantial amount receivable of Rs.8.33 crores from its holding company M/s.GCL. The AO has also pointed out that the assessee- company had charged interest from customers on delayed payments of Rs.20,44,152/- which was credited in the Profit & Loss account under the head "interest income". The AO has thereafter noted the date-wise sales made to GCL and the date-wise payments received and then he has observed that against the sales effected to the tune ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03 -4- of Rs.13.40 crores till early October-2000 the assessee-company had received payment of Rs.50.35 lacs only. Again it was pointed out that the assessee had borrowed funds towards working capital facility but made huge sales on credit to its holding company. Hence as per A.O., in that manner, the assessee had given undue advantage to its holding company. The AO has made disallowance of interest by adopting the rate of 15% p.a. and the relevant observations were as under:-
"5.4. Thus, it can be seen that against the sales effect5ed to the tune of Rs.13.40 crores till early October 2000, the assessee company has received payment of Rs.50.35 lacs only in the months of April & May 2000. Further, the sales realization for the entire year is too meager as compared to the quantum of sales. It would be pertinent to state here that the assessee company has borrowed funds towards working capital facilities. However, by effecting such huge sales on credit, and that too at the prevailing market rates, the assessee company has given an undue advantage to its holding company. It would be interesting to note that the total outstanding of GCL as at the end of the year is Rs.8.33 crores, whereas the total borrowings, including demand loan and working capital facilities, are to the tune of Rs.6.29 crores. Thus, if the assessee company had not resorted to such diversion of funds and had been regular in receiving payments against the sales effected to GCL, it would not be required to bear huge interest burden, which has a direct bearing on its profitability. Since, GCL is a holding company falling within the proviso of sec. 40A(2)(b), the entire interest payments cannot be allowed in totality. In order to arrive at the disallowance interest payment during the year under ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03 -5- consideration, a chart is prepared, which is enclosed along with this order. While computing the disallowance interest, a credit period of 30 days is reckoned. The rate of interest is adopted at 15% per annum. Further, in respect of the marketing expenses to the tune of Rs.1.33 crores claimed to have been paid to GCL, since the same has been disallowed for reasons discussed in detail in para-5.5 of this order, the same has not been considered while computing the disallowance of interest. Since the assessee company has borrowed funds in the form of demand loan and working capital facilities from bank and paid interest thereon, the assessee company is not entitled to claim the entire interest expenditure since it has diverted its borrowed funds to its holding company. In view of these facts and the above discussion, the interest @ 15% on such diversion of funds is required to be disallowed. Therefore, the disallowance of interest at the rate of 15% p.a. works out to Rs.1,28,86,599/-, as per chart attached marked as 'Annexure-A', which is added to the returned income."
2.3. Being aggrieved the matter was carried before the first appellate authority. Before ld.CIT(A) it was informed that the normal sales realisation from other customers were ranging from 4 to 12 months on which no interest was charged. It was also argued that the transaction with GCL was a business transaction, therefore, it was wrongly considered as a loan for the purpose of disallowance of interest. Reliance was placed on the decision of Hon'ble Calcutta High Court in the case of CIT vs. Britania Industries Ltd. reported at (2005)198 CTR 426(Cal.) and decision of Hon'ble Supreme Court in the case of S.A. Builders vs. CIT(Appeals) & Anr. reported at (2007) 288 ITR 01(SC). However, ld.CIT(A) was ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03 -6- of the view that the assessee used to grant credit period to other customers on an average of four months, therefore, he has directed the AO to re-compute the interest disallowance after granting four months credit period as per the following relevant paragraphs; reproduced below:
"4.3. I have carefully considered the rival contentions. It has been fairly admitted in appeal that the credit period allowed to other customers is on an average of 4 months. Although in some cases it was higher also. It has also been admitted that total borrowings including demand loans and working capital facility from bank to the turn of Rs.8.99 crores and had the fund been received from the holding company i.e. Garda Chemicals Ltd. the interest liability would have reduced.
4.3.1. Under the circumstances the Assessing Officer is directed to rework the interest disallowance after allowing for 4 months credit period for each transaction with the holding company as is the norm with other customers. The ground is thus partly allowed.
3. From the side of the assessee, ld.AR Mr. M.G.Patel appeared and his foremost argument was that the transaction with GCL was a commercial transaction and there was no element of grant of loan. His next plank of argument was that the assessee has granted such facility to other customers as it was a prevailing market practice. AR has placed a comparative chart of sales to demonstrate the outstanding balance with GCL and outstanding balances of ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03 -7- others. He has emphasised that in comparison to the total turnover the percentage of outstanding balance on sale account from GCL was hardly 18.02%, as against that outstanding balances with other debtors were 81.98%. Therefore, he has emphasised that there was no special concession or benefit granted to GCL but it was a prevailing market practice which was observed by the assessee- company in respect of all the customers including GCL. He has pleaded to allow the ground.
4. From the side of the Revenue, ld.DR Mr.Alok Johri has vehemently supported the findings of the AO and the CIT(A). He has emphasised that the assessee is nothing but a 100% subsidiary of GCL therefore the advantage in the shape of unrecovered sales were given to GCL, however, on the other hand, the assessee was under
stringent liability of payment of interest to Bank. He has argued that the Income Tax Act otherwise do not permit to grant dividends to the sister-concerns or subsidiary companies. By the said method undue dividends were granted by the assessee to its sister concern. He has mentioned that non-recovery of sale amount was nothing but it was an advance to the sister-concern. According to him, the analogy drawn by the CIT(A) to grant benefit of four months credit vis-à-vis other customers was also incorrect because the facility granted to a holding company should not be treated at par with the sales made to other debtors.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03 -8-
5. We have heard both the sides at some length. We have also carefully perused several evidences placed on record. It is not in dispute that the sales made to GCL remained outstanding and on the other hand, the assessee had a bank liability. The fundamental objection of the AO was that had the assessee recovered the outstanding dues from GCL, then there would not be the liability of that extent of interest of the bank as it was debited to Profit & Loss account under the head "interest and financial charges". That objection was dealt with in the following manner. That as far as the liability towards bank was concerned, the ld.AR has placed on record certain figures to demonstrate that the said bank liability had gone down in comparison to the last year. That it has also been argued before us that even the notional interest @ 15% was incorrect because the prevailing rate charged by the Bank was only 11.25% during the year. That the assessee was otherwise having a regular business transactions of purchase and sales with GCL. That the said GCL was the major customer during that year. That it has also been placed on record that the assessee was purchasing certain raw-material from GCL which was its monopoly product. That the vehement contention was that in the like manner the assessee was also enjoying credit facility against purchases made from GCL. That it was not a case of mere purchase and sale as it has happened with other debtors or customers ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03 -9- but the business relationship with GCL was on different terms being a holding company and in that capacity GCL has provided specialized services to assessee in the field of manufacturing and marketing. All these facts were narrated to ld.CIT(A) through written submissions which were placed before us on page Nos.138 to 190 of paper-book. From this discussion, it is evident that the assessee-company had a regular business transaction and it was not for any extraneous consideration. In the regular course of business purchases and sales have been made with the said concern and not with the intention to siphon out the borrowed funds. The factum of the case thus demonstrated that the assessee has taken a commercial decision keeping in mind the interest of its business and the other surrounding circumstances under which the assessee was getting facilities. Once it was a commercial decision, then the Courts have held that it is not proper for the revenue authorities to step into the shoes of a business man to decide whether such a commercial decision was advantageous or not. Rather, we are of the view that the AO has proceeded merely on this presumption that the borrowed funds of Bank of Baroda have been siphoned to GCL, but no specific instance or transaction was demonstrated. As far as the ld.CIT(A)'s view was concerned, the grant of four months credit facility also appeared to be on presumption because that facility must not be applied in uniform manner to all the parties. In general, as per the business trend, each customer has its own terms and ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 10 -
condition and, therefore, the terms of payment differ from one party to another party. A businessman's view point must be seen and for that, the test of commercial expediency to be adjudged from business benefit. Therefore by one single yard-stick all the transactions having different nature of character or modalities must not be measured. We are of the view that this is not the case where some undue advantage was passed on to the said holding company. In the light of the above discussion, we therefore conclude that the disallowance was made merely on certain presumptions which could not be substantiated through some cogent evidence therefore the view taken by the AO deserves to be reversed. Likewise, we are also of the view that the part relief granted by the ld.CIT(A) was also on a presumption that the credit facility to all the customers against sales was uniform, so the assessee should have given the credit facility of four months to GCL as well. This presumption had no substance, therefore, considering the totality of the circumstances of the case, we hereby reverse the said view of the ld.CIT(A) as well. This ground of the assessee is, therefore, allowed.
6. Ground No.2 reads as under:
2. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.1,33,99,935/- made by the Assessing Officer in respect of reimbursement of marketing ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 11 -
expenses to Gharda Chemicals Ltd. after invoking provisions of Section 40A(2)(b) of the Income Tax Act, 1961and holding that the expenditure in question is unreasonable and excessive.
6.1. Certain payments have been made to holding company GCL. It was found by the AO that the assessee had incurred Rs.1.33 crores towards marketing expenses paid to GCL. As per AO, the claim of expenditure was unreasonable and without any supporting evidence. By invoking the provisions of section 40A(2)(b) of the Act and following the past history of the case disallowed the impugned amount of Rs.1,33,99,935/. When the matter was carried before the first appellate authority, it was noted by ld.CIT(A) that the claim of the said expenditure was exactly at 10% of the total sales of Rs.13.399 crores claimed to have been effected through the said holding company. The explanation of the assessee was that the impugned expenditure was in the nature of reimbursement but as per ld.CIT(A) it was difficult to believe that those expenses under several heads would have the exact percentage of the total amount expended. He has therefore affirmed the disallowance.
7. With this brief background, we have heard both the sides. For AY 1999-2000 in assessee's own case the ITAT Ahmedabad in ITA No.1438/Ahd/2007 order dated March-2010 held vide paragraph No.14 that the assessee had failed to prove any nexus between the payment to holding company and the expenditure ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 12 -
incurred for the purpose of business of the assessee. The relevant conclusion is reproduced below:-
"14. We have considered rival submissions and material available on record. Learned Counsel for assessee referred to agreement dated 7.04.1997 (PB-131) executed between assessee and the holding company through which the holding company M/s.Gharda Chemical Company Ltd. was appointed as marketing agent for the assessee to carry out the task of marketing of the products of the assessee. In this agreement, it is mentioned that the marketing efforts and for the product developments efforts by the marketing agent, the assessee being manufacturer shall compensate the marketing agent/holding company by way of payment of one time fees of Rs.2 crores (Clause-8). This payment shall be made after successful placement of the product in concerned State. The assessee shall keep the above amount as security deposit and that will be adjusted against the fees of Marketing Agent and Marketing Agent shall pay interest @ 13.5% per annum to the assessee from the date of receipt to the date of adjustment. We may mention that none of the clauses in this agreement have explained reimbursement of any marketing expenditure by the assessee to the holding company. The assessee explained that after this agreement, another supplementary agreement was executed on 9.10.1998 for payment on marketing expenses @ 10% of sales of formulation (Tollpack). However, such a supplementary agreement or the justification to enter into such agreement, which is contrary to the main agreement dated 7.04.1997 is not explained before the authorities below and did not find mention in the impugned orders. By supplementary agreement dated 9.10.1998, the assessee has completely changed the earlier agreement dated 7.04.1997. During the course of the agreement, the learned counsel for assessee has not pointed out any justification for ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 13 -
executing such a supplementary agreement by which entire main agreement was reviewed/changed except that it was mentioned in the note on marketing commission PAGER- BOOK-167. Only debit note was produced before the authorities below to show that the payment is made to the holding company. Learned Commissioner of Income Tax (Appeals) specifically noted the observation of the Assessing Officer that assessee is an independent company engaged in its manufacturing, sale and export of the products for which it has own marketing network. Learned Counsel for assessee did not dispute the above findings of the authorities below during the course of the argument. It is therefore, clear that assessee was doing the same marketing activities of its product which work was assigned to the holding company through the supplementary agreement. In the main agreement, no such payment was agreed for reimbursement of marketing expenses. Learned Counsel for assessee though referred to note on marketing commission PB-167, but no submissions are made as regards justifiability of the expenditure under the head sales promotion, travelling, conveyance, telephone, etc. and vehicle maintenance, because these are the common expenditure, which is to be spent by the holding company for its business also. Therefore, assessee was required to file sufficient evidence before the authorities below to claim that some services are rendered by the holding company for the assessee in this way to claim reimbursement of the expenditure but no such efforts have been made. Even no such evidences were filed before the Tribunal. It is also not explained as to why the 10% of the sales have been claimed as reimbursement of the expenditure on the above expenses only. It is also not explained whether holding company has exactly incurred the same expenditure on the above heads at 10% of the sales for and on behalf of the assessee. The explanation of the assessee is thus, not believable that the holding company exactly spent expenditure of 10% of the sales on the above expenditure. As noted above, ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 14 -
the nature of the expenses shows that the same would be spent by the holding for its own purposes therefore, in the absence of specific evidence that the amount is spent by the holding company for the purpose of business of the assessee, the explanation of the assessee could not have been accepted. The assessee has failed to prove any nexus between the payment to the holding company and the expenditure incurred for the purpose of business of the assessee. We therefore do not find any justification to interfere with the orders of authorities below. The decision cited by learned Counsel for assessee and the circular of the board, would not advance the case of the assessee in view of the facts and circumstances noted by the authorities below. We accordingly, confirmed the findings of authorities below and dismiss this ground of appeal of the assessee."
8. Since the authorities below have made the impugned disallowance following the past history of the year 1999-2000 and in that assessment year a view has already been taken against the assessee by the Respected Coordinate Bench, as cited supra, therefore, respectfully following that view, we hereby hold that the claim of alleged reimbursement of expenses to GCL remained unsubstantiated, therefore, rightly disallowed by the Revenue Authorities. This ground of the assessee is, therefore, dismissed.
9. Ground No.3 reads as under:
3. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of commission of Rs.18,67,600/-
made by the Assessing Officer.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
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9.1. The observation of the AO was out of the total commission paid, the assessee was unable to substantiate the sales commission of Rs.18.67 lacs paid to Nipun Finvest Pvt.Ltd. The observation of the AO was that only the credit-notes in support of the commission payment were furnished. As per AO, there were no details of the services rendered by Nipun Finvest Pvt.Ltd. It has also been noted that in the past for AYs 2000-01 the said disallowance were continuously made by the AO. In appeal, ld.CIT(A) has opined that considering several other factors the said payment of commission was not genuine. The ld.CIT(A) has given certain reasons such as the terms of payment as per the agreement stated to be on percentage basis on the sales, but contrary to that, payments were made in round figures. It has also been noted by the ld.CIT(A) that no details were furnished except credit notes issued. The action of the AO was affirmed and now the assessee is in appeal.
10. On hearing both the sides it is worth to mention at the outset itself that in assessee's own case for AY 2000-01 in ITA Nos.459 and 498/Ahd/2008 order dated 19/03/2010 vide paragraph No.5 the disallowance was confirmed; reproduced below:-
"5. We have heard both the parties and gone through the facts of the case. We find that in the preceding year also disallowance of Rs.5 lakhs on sales commission to Nipun ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
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Finvest Pvt.Ltd. was made and on appeal, the ld. CIT(A) dismissed the appeal of the assessee. In the year under consideration, as pointed out by the AO, though terms and conditions of commission payment were fixed vide letter dated 19.5.1999, Rs.5,00,000 was paid to M/s.Nipun Finvest P Ltd. on 20.4.1999. Further all the commission payments were in round figures such as Rs.5 lacs, Rs.7 lacs, etc. whereas if it was worked out at percentage of sales it was not likely to be in round figures. The onus is on the assessee claiming deduction for payment of commission to establish that payments had been made for services rendered. There is nothing to suggest in the impugned orders that the aforesaid party had rendered any services to the assessee nor the ld. AR appearing on behalf of the assessee referred us to any such evidence. Mere existence of an agreement, without anything more, is not enough for allowance of deduction [Lachminarayan Madan Lal Vs. CIT, 86 ITR 439 (SC), Precision Instrument Mfg. Co. Vs. CIT, 137 ITR 5 (Del.). The burden of proving that the amount of commission was actually expended as commission for the purpose of business lies on the assessee as held in Goodlas Nerolac Paints Ltd. vs. CIT, 137 ITR 58 (Bom.). Since in the instant case not even an iota of evidence has been brought to our notice that the aforesaid party had indeed rendered services to the assessee nor genuineness of payment of commission has been established, we are not inclined to interfere with the findings of the ld. CIT(A). Accordingly, the disallowance of commission of Rs.17,63,500 is confirmed."
11. Since the issue of payment of commission to Nipun Finvest Pvt.Ltd. has already been disallowed in the past, therefore, on identical facts we have no reason for disagreement but to follow the aforecited decision. This ground of the assessee is, therefore, dismissed.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 17 -
12. Ground No.4 reads as under:
4. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming addition of notional interest of Rs.38,81,250/-
made by the Assessing Officer in respect of ICD placed with Nipun Investments Pvt.Ltd.
12.1 There was inter-corporate-deposit (ICD) with M/s.Nipun Investments Pvt.Ltd. It was noted by the AO that in the past for A.Ys. 1997-98 and 1998-99 the assessee had provided the interest on the said inter-corporate deposit. For the year under consideration, there was a balance of Rs.2,25,00,000/- recoverable from Nipun Investments Pvt.Ltd. It was noted by the AO that the assessee-company had not provided any interest on the said inter-corporate deposit. Since the assessee had maintained accounts on mercantile basis, therefore as per AO it ought to have provided interest income and as per AO by applying the rate of interest at 17.25% on the said deposit calculated accrued interest of Rs.38,81,250/- which was added in the total income of the assessee. The matter was carried before the first appellate authority.
12.2. The ld.CIT(A) has held that the assessee has unilaterally decided not to account for the interest on the ground that it was ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
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uncertain to recover the amount. As per ld.CIT(A) it was incorrect because out of the total inter-corporate of Rs.3 crores placed with Nipun Investments Pvt.Ltd., the assessee has recovered Rs.160 lacs in the past. Further, it was also noted by ld.CIT(A) that the assessee used to regularly credit sales commission to one of a sister- concern of Nipun Investments Pvt.Ltd. According to him, there was a contradiction in the stand of the assessee. After discussing and distinguishing few case laws viz. Sarabhai Chemicals 257 ITR 355(Guj.) and Shiv Prakash Janak Raj 222 ITR 583(SC) the action of the AO was affirmed.
12.3. The argument of ld.AR Mr. MG Patel was that the said company was neither repaying the ICD nor paying the interest on the deposit. Since no real income had actually accrued therefore not offered for tax.
12.4. On hearing the submissions of both the sides, the issue of interest on ICD stood covered by decision of ITAT "B" Bench Ahmedabad in assessee's own case for AY 2000-01 bearing ITA No.459/Ahd/2008 dated 19/03/2010 wherein vide paragraph No.22, it was held as under:-
"22. We have heard both the parties and gone through the facts of the case. Undisputedly the assessee is consistently following mercantile system of accounting and as pointed out ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 19 -
by the ld. CIT(A) the assessee had shown interest on ICDs on accrual basis until the period relevant to the AY 1999-2000. However in the year under consideration, such interest has not been shown on the ground of uncertainty of its collection. In from 3CD [pg.123 of paper book] in col.11(a), the auditors have mentioned that interest income on doubtful ICDs is recognized on realization basis. Before the AO, the assessee did not place any material, suggesting that the principal or interest accrued thereon were not recoverable or doubtful. However, the ld. CIT(A) found that an amount of Rs.160 lacs had already been recovered until 31.3.2006. Before us, the assessee submitted that entire amount on account of ICDs has been recovered until 31.3.2007. Of this Rs.50 lacs was recovered in January,2004, Rs.1 crore in April,2004, Rs.60 lacs in July,2005 & remaining Rs.15 lacs in March,2007. However, the assessee is silent on recovery of interest. There is nothing to suggest that the financial condition of Nipun Investment P Ltd. was such that it was unable to pay its debts or that the said company was insolvent. Not an iota of evidence has been placed before us either for the view taken by the assessee that accrued interest was not recoverable nor the relevant terms and conditions of the ICDs were placed before us. It is well settled that taxability of income is attracted not only when income is actually received but also when it accrues. Income accrues when it falls due, that is to say when it becomes legally recoverable, irrespective of whether it is actually received or not and accrued income is that income which the assessee has a legal right to receive. Since the assessee had been consistently following mercantile system of accounting and accordingly, had shown interest accrued on ICDs as its income until the AY 1999-2000 while there was no material before the lower authorities nor even before us, suggesting that recovery of principal amount or interest accrues thereon was doubtful, we are of the opinion that income had accrued to the assessee and that the aforesaid amount was not a sticky debt, having already been ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 20 -
recovered. This view which we have taken finds support from the decision of the Hon'ble Delhi High Court in the case of Magnum Power generation Ltd. vs. Addl. CIT, 311 ITR 332 (Delhi). In these circumstances, especially when there is no material before us for taking a different view in the matter, we are not inclined to interfere. Therefore, ground no.6 in the appeal of the assessee is dismissed."
12.5. Respected Co-ordinate Bench has held that once the assessee had followed mercantile system of accounting consistently therefore should have shown interest on ICD and for this legal proposition followed a decision of Hon'ble Delhi High Court as cited supra. We respectfully follow the said decision and dismiss this ground.
13. Ground No.5 reads as under:
5. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by holding that replacement expenditure on Hand Sealing machine, Paper Shredding machine, imported Gas Burner along with custom duty totalling to Rs.9,87,462/- are of capital nature and accordingly has erred in confirming the disallowance made by the Assessing Officer.
13.1. A total expenditure of Rs.1,41,85,257/- under the head "Repairs to plant and machinery" was claimed as Revenue expenditure and debited to Profit & Loss account. The AO has reproduced a long list of repair expenses in respect of plant and machinery. As per AO, it was not a Revenue expenditure but ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 21 -
capital in nature due to enduring benefits enjoyed by the assessee. Out of the total claim, the AO has listed the nature of expenditure as capital in nature of Rs.30,43,605/- and disallowed the same.
13.2. When the matter was carried before the first appellate authority, ld.CIT(A) has referred a decision of the Ahmedabad Tribunal wherein it was held that replacement of reactors and steam driers was Revenue expenditure. A part relief was granted by the ld.CIT(A) as per the following paragraph:
"8.3. I have carefully considered the submissions of the appellant and also perused the details of various expenditure. Whether a particular expenditure falls in the realm of capital or revenue field, it is to be evaluated in terms of the nature of the individual item. It is also to be seen whether an item is capable of functioning independently and providing enduring benefit. In the decisions of the Ahmedabad Tribunal relied upon by the appellant for A.Y. 1992-93, 1993-94 and 1994-95 it was held that replacement of reactors and steam driers was revenue expenditure. Respectfully following the decision of ITAT the expenditure on reactor agitator system is therefore allowed as revenue expenditure. Further the hand sealing machine, paper shredding machine, imported gas burner (alongwith custom duty) are clearly capital items capable of independent existence and providing enduring benefits and were rightly treated as capital expenditure. The balance items appear to be in the nature of current repairs under the revenue stream as them facilitate the day to day manufacturing operations of the appellant company and are therefore directed to be allowed as revenue expenditure. The Assessing Officer may recomputed the allowability of ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 22 -
expenditure/depreciation in the light of above directions. Ground No.5 is partly allowed."
13.3. On hearing the submissions of both the sides, we have found that in assessee's own case for AY 2000-01 in ITA No.459/Ahd/2008(supra), the Respected Coordinate Bench has held that the expenditure was not Revenue in nature therefore not to be allowed u/s.37 of I.T. Act. Relevant findings contained in paragraph No.26; reproduced below:
"26. We have heard both the parties and gone through the facts of the case. At the outset, we find that reliance by the assessee on the decision of the ITAT in their own case for the AY 1998-99 is totally misplaced since in the AY 1998-99 expenditure was incurred on replacement of crates and steam injector system. The expenditure on ejector system was allowed, following the decision of the ITAT for the AY 1992- 93 & 1993-94 while the issue of expenditure on crates had been restored to the file of the AO. In the instant case, the boiler in The processing plant was hitherto being run on oil fuel. In the year under consideration, the assessee incurred expenditure on imported Thermax Gas Burner assembly, Gas Burner-Gas Train, Control Panel, other accessories for Heat Resistance etc in order to replace oil based fuel system with the gas based fuel system . We find from the impugned orders that nowhere the assessee claimed that the said expenditure amounted to 'current repairs' under s. 31 of the Act. Rather, the claim is that expenditure is revenue in nature. The issue before us is as to whether the replacement of oil based fuel system with the gas based fuel system, amount to repair of ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 23 -
plant and machinery, as contended on behalf of the assessee. In Ballimal Naval Kishore & Another vs. CIT, 224 ITR 414(SC), Hpn'ble Apex Court held 'current repairs' under the Act means expenditure on machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and that does not bring a new asset into existence or does not give to the assessee a new or different advantage. Again in CIT vs. Saravana Spinning Mills (P) Ltd.,293 ITR 201 (SC), Hon'ble Apex Court laid down 'that in order to determine whether a particular expenditure amounts to 'current repairs' the test is "whether the expenditure is incurred to 'preserve and maintain' an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For 'current repairs' determination, whether expenditure is revenue or capital is not the proper test. In a recent decision in the case of CIT Vs. Sri Mangayarkarasi Mills Pvt Ltd.,315 ITR 114(SC), Hon'ble Apex Court observed that replacement of an old machine with a new one would constitute the bringing into existence of a new asset in place of the old one and not repair of the old and existing machine. While referring to observations in Saravana Spinning Mills (P) Ltd. case that if replacement was held to be 'current repair' in such cases, s. 31 (i) will be completely redundant and absurdity will creep in because repair implies existence of a part of the machine which has malfunctioned, which is impossible in the case of such replacement, Hon'ble Apex Court held that replacement expenditure cannot be said to be 'current repairs'., In the instant case, as the facts on record reveal, the assessee got a new and different advantage while replacing old oil based fuel system with imported gas based fuel system. As held by the Hon'ble Apex Court in the case of Travancore Cochin Chemicals Ltd. vs. CIT 1977 CTR (SC) 148 : (1997)(sic-1977) 2 SCC 20, expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 24 -
the business. Further, in Lakshmiji Sugar Mills (P) Co. vs. CIT AIR 1972 SC 159 it has been held that bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. Since the aforesaid replacement in the instant case amounts to bringing into existence a new asset & advantage, and thereby an enduring benefit for. the assessee, it is clear then that expenditure of the assessee here is not of revenue nature and thus, cannot be claimed as a deduction even under s.37 of the Act. In view thereof, especially when there is no material before us for taking a different view in the matter, we have no alternative but to uphold the findings of the Id. CIT(A). Therefore, ground no. 7 in the appeal of the assessee is dismissed."
13.4. Once a view has already been taken the expenditure was capital in nature therefore we have no reason to take any other view but to follow the same, hence this ground is dismissed.
14. Ground No.6 reads as under:
6. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.2,48,078/- out of total sales promotional expenditure of Rs.12,40,390/- made by the Assessing Officer after holding the same as for non-business purposes.
14.1. The assessee had incurred sales promotion expenses of Rs.12,40,390/- stated to be towards purchase of dry-fruits, sweets, etc. for distribution to customers. The AO has allowed 80% and ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 25 -
disallowed the balance. The first appellate authority has confirmed the action of the AO.
14.2. On hearing the submissions of both the sides, it was found that for AY 2000-01 in ITA No.459/Ahd/2008(supra) it was held that in assessee's own case for AY 1999-2000 bearing ITA No.1438/Ahd/2007 order dated 12/03/2010 it was held that an adhoc addition was not permissible. Relevant paragraph Nos.29 & 30 are reproduced below:-
"29. The assessee is now in appeal before us against the aforesaid findings of the Id. CIT(A). Both the parties agreed that issue may be adjudicated in the light of decision of the ITAT for the AY 1999- 2000. We have in our order dated 12.3.2010 in ITA no. 1438/Ahd./2007 in the assessee's own case for the AY 1999-2000 held on this issue as under:
"9. After hearing rival submissions, we are of the view that addition is clearly unjustified. The Assessing Officer made part of the addition by presuming that the entire stock would not have been adjusted upto March 1999. The Assessing Officer on the presumption without pointing out any inadmissible item, made the ad-hoc addition which is not permissible in law. The Assessing Officer has not disputed the genuineness of the expenditure laid out wholly and exclusively for the purpose of business by the assessee. The Learned Commissioner of Income Tax (Appeals) confirmed the presumption of the Assessing Officer on making the part addition by holding it to be a valid presumption of the Assessing Officer in disallowing part addition. It therefore, appears that the authorities below have made the addition on this issue on mere presumption without bringing any adverse material against the assessee. We accordingly set aside the orders of authorities below and delete ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 26 -
the entire addition. This ground of appeal of assessee is allowed."
30. In the light of our aforesaid decision in the appeal for the AY 1999-2000 and undisputedly facts in the year under consideration being similar, we set aside the order of the ld. CIT(A) on this issue and accordingly, allow ground no.8 in the appeal of the assessee."
14.3. Following the past history of the case for the year under consideration as well, we hereby direct to allow the claim. This ground is, therefore, allowed.
15. Ground No.7 reads as under:
7. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in confirming disallowance of Rs.1,64,666/-
out of total expenditure of Rs.32,93,318/- incurred under the head of Canteen expenses. Miscellaneous expenses and other expenses.
15.1 The observation of the AO was that under the head "miscellaneous expenses" and "staff welfare expenses" the assess has incurred a sum of Rs.1.88 crores and 1.05 crores respectively. As per AO most of the expenditure was in cash hence, there was no check over the expenses. For want of check an amount of Rs.4,11,085/- was disallowed. When the matter was carried before the first appellate authority the disallowance was restricted to Rs.1,64,666/-.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 27 -
16. A short submission of the ld.AR before us is that there was no such disallowance uptill AY 2000-01 and the AO has abruptly disallowed for the year under consideration. Further, ld.AR has also informed that as per the comparative chart for AY 1999-2000 there was no substantial increase in the expenditure under the head "miscellaneous expenses" and "canteen expenses".
17. On hearing the submissions of both the sides, we are of the view that the reason for disallowance, as per AO, was that the expenditure was incurred in cash and it could not be verified. Ld.CIT(A) has partly allowed the same following the decisions of his predecessors, therefore, restricted 5% of the total disallowance. We therefore, deem it proper that the disallowance being nominal in nature which was partly upheld by ld.CIT(A) for want of verification being incurred in cash, therefore under the circumstances, no disturbance is required. With the result, this ground of the assessee is hereby dismissed.
18. Ground No.8 reads as under:
8. The Learned Commissioner of Income tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming reduction of 90% of notional interest income of Rs.38,81,250/- made by the Assessing Officer for working out claim u/s.80HHC.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 28 -
18.1. As per the calculation of deduction of section 80HHC, annexed as Annexure-A of assessment order, it was noticed that there was a disallowance of 90% of the interest from Nipun Investments Pvt.Ltd. of Rs.38,81,250/-. When the matter was carried before the first appellate authority, the calculation of the AO was confirmed. Ld.AR has submitted before us that this ground is consequential in nature because the issue of notional interest from Nipun Investments Pvt.Ltd. has been taken up in Ground No.4 of this appeal. We have already taken a view that interest on ICD placed with Nipun Investments Pvt.Ltd. had accrued to the assessee for the year under consideration. Now the question is that once the assessee has not offered the interest from the said ICD, whether the AO was justified in taking into account the impugned notional interest while computing the deduction of section 80HHC. According to us, this calculation deserves to be revised in the light of our decision on Ground No.4 as also the observations made hereinabove so as to recalculate as per law. We order accordingly and this ground may be treated as allowed for statistical purposes.
19. Ground No.9 reads as under:
9. The learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming the action of the Assessing Officer in reducing the other income from the eligible profit for the purpose of computing deduction u/s.80IA of the I.T.Act, 1961.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 29 -
19.1 The observation of the AO was that the assessee had claimed deduction u/s.80IA of the Act in respect of Unit-V and Unit-VI. It has also been observed that the assessee had shown total sales of Rs.139.20 crores against the taxable profit of Rs.1.12 crores. As per AO, the assessee had tried to manipulate the profit of Industrial Unit by apportioning cost of production. However, the claim of the assessee was that all the Units are integrated to each other so cannot be differentiated. In addition to the above observation, it was also observed by the AO that certain income were not related to manufacturing activity, such as, interest on investment, interest on deposit, miscellaneous income, profit on sale of fixed assets and interest from Nipun Finvest Pvt.Ltd. As per Annexure-B of the assessment order, the AO has calculated the deduction u/s.80IA of the Act and allowed the claim at Rs.8,29,912/- against the claim of the assessee of Rs.73,29,231/-. When the matter was carried before the ld.CIT(A), the claim of the assessee was partly allowed and the AO was directed to recomputed the deduction.
20. In the AY 1998-99 in assessee's own case bearing ITA Nos.1522 and 1594/Ahd/2005 vide an order dated 20/11/2009 in paragraph No.17, it was observed that in the past each unit had been considered as a separate Unit and accordingly the income for the purpose of claiming deduction u/s.80IA of the Act to be worked ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 30 -
out separately. Because of that reason the Bench had observed that no justification was given by the Income Tax Authorities for making a departure from the past practice. In respect of the eligibility of "other income" the Respected Bench has made a discussion in paragraph No.16 and given certain directions to AO to examine afresh the nature of interest as directed therein and to recompute the deduction accordingly.
20.1. Again, in the AY 1999-2000 in ITA No.1438/Ahd/2007 in assessee's own case vide order dated March-2010 the issue was the computation of deduction u/s.80IA of the Act, wherein the AO has excluded proportionate income from other sources in respect of Unit Nos.V and VI. The matter was restored back to AO following the earlier decision of the Tribunal for AY 1998-99.
20.2. Thereafter again, for AY 2000-01 in assessee's own case in ITA No.459/Ahd/2008(supra), the issue was the exclusion of income of " other sources" from the profits eligible for deduction u/s.80IA of the Act, wherein it was finally concluded vide paragraph No.34.8 as under:-
"34.8. In view of the foregoing, especially when neither the AO nor the ld. CIT(A) analysed as to whether or not the aforesaid items of receipts (other than dividend, profit on sale of fixed assets & sale of raw material) comprised in other ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 31 -
income were derived by the industrial undertakings in unit-V & VI from any business carried on in these undertakings, we have no alternative but to vacate the findings of the ld.CIT(A) in respect of aforesaid items of receipts (other than dividend, profit on sale of fixed assets & sale of raw material) and restore the matter to the file of the AO with the directions to analyse each of the said items as to whether or not these were derived by the industrial undertakings unit-V & VI from any business carried on in these undertakings and thereafter, adjudicate the issue in accordance with law the light of our aforesaid observations and various judicial pronouncements, including those referred to above and after allowing sufficient opportunity to the assessee."
20.3. In the past, this issue had been discussed at length by the Respected Coordinate Benches and the law emerges that for the purpose of claiming deduction u/s.80IA, the assessee is required to establish that the eligible business profit are from Industrial Undertaking and, most importantly, the assessee has to establish that the said profit is derived from "the business activity of the Industrial Undertaking". In other words, the assessee has to establish a direct nexus between the "eligible profit" and "Industrial Undertaking". As far as the eligibility of income under the head "other sources"
and under the head "interest income", the observation was that the assessee has to first establish the correct nature of the income. For example, interest paid by the customers for late payment of sale proceeds may form part of the eligible income subject to the affirmation of correct facts. It has also been defined that the ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 32 -
charging of interest represents a converse situation to offering of cash discount and so the transaction must be viewed as if the purchaser pays a higher price on the late payment. Still the question was that if the assessee is not in the business of finance or to lend funds, then it is necessary to draw a distinction. An another situation has also been dealt with the Hon'ble Courts where interest income is earned on account of deposits with the Bank which was stated to be a business necessity. The question was that though the immediate source of interest was deposit itself but then the source of interest income was the said deposit and not the business. Hence it was held that the "Industrial Undertaking" is not the immediate source of the said interest income. In other words, an income may be incidental, but the observation of the Court is that only such income is eligible which is derived from the actual conduct of the business of the "Industrial Undertaking". We have to follow the mandate of the law as settled by the Hon'ble Courts, which was also thoroughly discussed in the above referred judgements of the Tribunal, therefore, we hereby direct the AO to recompute the eligibility in the light of the cited decisions, hence, this ground is referred for readjudication and, therefore, allowed for statistical purposes.
21. Before we part with this ground, it is worth to mention, that on page No.50 of the paper-book, there is a detailed chart of several ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 33 -
sources of income and in the next column the assessee has mentioned the fate of the said source as held in the past by the Tribunal. This chart, therefore, shall serve the purpose to redetermine the deduction u/s.80IA of the Act. We order accordingly.
22. Rest of the grounds are either repetition of the grounds already raised or general in nature need no readjudication.
23. In the result, the appeal of the Assessee for Assessment Year 2001-02 is partly allowed protanto.
(B) Revenue's Appeal, i.e. ITA No. 499/Ahd/2008 - A.Y. 2001-02
24. Ground Nos.1 & 3 read as under:
1. The Learned CIT(A) has erred on facts and in law in directly to rework out the interest disallowance after allowing for 4 months credit period in respect of each transaction with the holding company.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that interest of Rs.1,28,86,599/- was for huge debit balance which the assessee was not regularly and timely recovering.
Regular and timely recovery of the debit balances had direct bearing on the assessee's profitability.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 34 -
24.1. A view has already been taken in favour of the assessee while deciding Ground No.1 in Assessee's appeal hereinabove. Accordingly, these grounds of the Revenue are, therefore, dismissed.
25. Ground Nos.2 & 4 read as under:
2. The Learned CIT(A) has erred on facts and in law in directing re-computation of deduction u/s.80IA.
4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the fact that the assessee was sympathetically manipulating the profits of separate units to maximize deduction u/s.80IA. The Ld.CIT(A) therefore also erred in directing the AO to exclude the profit from the trading activity while working out the eligible profit for deduction u/s.80IA.
25.1. These grounds have already been restored back with certain directions to re-compute the deduction u/s.80IA of the Act.
Revenue is aggrieved by the restoration of the computation of the said deduction, but we have also adopted the same recourse, resultantly, in the like manner, these grounds may be treated as allowed for statistical purposes.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 35 -
26. In the result, appeal of the Revenue (A.Y. 2001-02) may be treated as partly allowed but only for statistical purpose.
(C) Assessee's appeal, i.e. ITA No.461/Ahd/2008 - A.Y. 2002-03
27. Ground No.1 reads as under:
1. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by holding that the Appellant has transferred borrowed funds to holding company as the Appellant has not collected sale amount form the said company in time and has allowed undue credit and accordingly has erred in directing the Assessing Officer to rework disallowance of interest after allowing four months credit period for each transaction with the holding company.
27.1. The issue of disallowance of interest has already been dealt with while deciding Assessee's appeal for AY 2001-02 and directed to allow the same. We have noted hereinabove that there was no justification to rework out the disallowance of interest after granting credit of four months period for each transaction as directed by the ld.CIT(A). In the result, in the like manner for this year as well, this ground of the assessee is allowed.
28. Ground No.2 reads as under:
2. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 36 -
confirming disallowance of Rs.2,45,92,286/- made by the Assessing Officer in respect of reimbursement of marketing expenses to Gharda Chemicals Ltd. after invoking provisions of Section 40A(2)(b) of the Income Tax Act, 1961and holding that the expenditure in question is unreasonable and excessive.
28.1. The observation of the AO was that the assessee had paid marketing expenses to the holding company GCL and disallowed the claim. While deciding Ground No.2 for AY 2001-02 we have followed the past history of the case and quoted few decisions of the Tribunal in assessee's own case for AYs 1999-2000 and 2000-01 and thereafter affirmed the action of the Revenue Department. Following the said view, for this year as well, this ground of the assessee is dismissed.
29. Ground No.3 reads as under:
3. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.45,69,565/- made by the Assessing Officer in respect of commission.
29.1. It was noticed by the AO that the assessee has paid commission to Nipun Finvest Pvt.Ltd. That issue was dealt with while deciding Ground No.3 hereinabove in assessee's appeal for AY 2001-02 and following a decision of the Tribunal in assessee's own case for AY 2000-01 affirmed the action of the AO.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 37 -
Accordingly, for this year as well, this ground of the assessee is dismissed.
39. Ground No.4 reads as under:
4. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.3,38,400/- out of total sales promotion expenditure of Rs.16,92,000/- made by the Assessing Officer after holding that the same is for non-
business purposes.
39.1. The issue of sales promotion expenses was raised by the AO on the ground that the assessee has claimed payment for purchase of dry-fruits, sweets, posters, calendars, etc. While deciding ground No.6 for AY 2001-02 hereinabove in assessee's appeal we have followed an earlier decision of this Tribunal for AY 2000-01 and directed to allow the claim. Therefore, this ground of the assessee is allowed.
40. Ground No.5 reads as under:
5. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming addition of notional interest of Rs.31,50,000/-
made by the Assessing Officer in respect of ICD placed with Nipun Investments Pvt.Ltd.
40.1. The issue of notional interest on ICD has been dealt with while deciding Ground No.4 for AY 2001-02, wherein we have ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 38 -
followed a decision for AY 2000-01 and dismissed this ground. Accordingly this ground is hereby dismissed.
41. Ground No.6 reads as under:-
6. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.3,29,525/- made by the Assessing Officer holding that replacement of items to the plant and machinery is in nature of capital.
41.1. The assessee has claimed "repairs to plant and machinery"
expenditure as Revenue in nature, however, the AO was of the view that the said repair expenses were capital in nature having enduring benefit. An allegation has also been made by the AO that the supporting evidence have not been filed. Out of the total claim of Rs.3,35,80,827/- it was noted by the AO that an expenditure of Rs.3,76,600/- was capital in nature. The matter was carried before the first appellate authority. However, the ld.CIT(A) has opined that on evaluating the expenditure of each individual item it had come in the realm of capital field. He has specifically mentioned that the disallowance was in respect of weighing scales and weighing systems which were independent items capable of providing long- term benefit, therefore, concluded that it was rightly treated as capital expenditure.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 39 -
42. While deciding ground No.5 for AY 2001-02 hereinabove we have followed an earlier order of the Tribunal in assessee's own case for AY 2000-01 (ITA No.459 & 498/Ahd/2008)[supra] and held that the expenditure being in the nature of replacement, therefore bringing into existence a new asset providing an enduring benefit, hence, not of Revenue nature. Since a view has already been taken, therefore, following the same for this year as well, this ground of the assessee is hereby dismissed.
43. Ground No.7 reads as under:-
7. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in confirming disallowance of Rs.1,86,600/-
out of total expenditure of Rs.37,32,000/- incurred under the head of Canteen expenses. Miscellaneous expenses and other expenses.
43.1. It was noted by the AO that under the head "staff welfare expenses", the assessee has debited a sum of Rs.1.16 crores. It was noted that the expenditure was incurred in cash. An adhoc disallowance of Rs.4,19,300/- i.e. 5% of the total expenditure was disallowed. The matter was carried before the first appellate authority and the same was restricted to Rs.1,86,600/-. Herein above in this order this issue was discussed in AY 2001-02 while deciding ground No.7 (vide paragraph No.17 of this order) and affirmed the part relief granted by first appellate authority. Respectfully following the same, we are not inclined to disturb the finding of ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 40 -
CIT(A) hence in the like manner as already held, this ground of the assessee is dismissed.
44. Ground No.8 reads as under:
8. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming reduction of 90% of notional interest income of Rs.31,50,000/- made by the Assessing Officer for working out claim u/s.80HHC while computing the income.
44.1. While computing the deduction u/s.80HHC of the Act, the AO has reduced 90% of the notional interest of Rs.31,50,000/-.
The first appellate authority has mentioned that as per Annexure-A of the assessment order the said amount was excluded from the eligible profit of business. Assessee's contention was that the said income was not the real income, hence, ought not to be reduced from the eligible profit.
44.2. On hearing the submissions of both the sides, we have found that while deciding ground No.8 for AY 2001-02(supra), we have held that calculation deserves to be revised in the light of our decision on Ground No.4 (in assessee's appeal for A.Y.2001-02) and the observations made hereinabove. Therefore, in the like manner for this year as well this ground be treated as allowed for statistical purposes.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 41 -
45. Ground No.9 reads as under:-
9. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming the action of the Assessing Officer in reducing the other income from the eligible profit while allowing deduction u/s.80IB.
45.1. In respect of Unit-VI, the assessee has claimed a deduction u/s.80IB of the Act. On verification, it was found that the taxable profit was declared at Rs.4,49,86,956/-, however, as per AO the assessee had manipulated the impugned profit of the said industrial unit. Accordingly, certain adjustments were made and claim was revised. When the matter carried before the first appellate authority, it was directed to recomputed the deduction u/s.80IB in respect of Unit-VI, after excluding the income from other sources, trading profit, etc. 45.2. This issue has also been decided while deciding ground No.9 for AY 2001-02(supra), wherein we have followed the mandate of the law as settled by the Hon'ble Courts , therefore, we hereby direct the AO to recompute the eligibility in the light of the cited decisions, resultantly this ground is referred for re-adjudication and allowed for statistical purposes.
In this manner, the appeal of the assessee for AY 2002-03 is partly allowed.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 42 -
(D) Revenue's appeal, i.e. ITA No.500/Ahd/2008 - A.Y. 2002-03
46. Ground Nos.1 & 3 read as under:
1. The Learned CIT(A) has erred on facts and in law in directly to rework out the interest disallowance after allowing for 4 months credit period in respect of each transaction with the holding company.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that interest of Rs.1,43,40,500/- was for huge debit balance which the assessee was not regularly and timely recovering. Regular and timely recovery of the debit balances had direct bearing on the assessee's profitability.
47. A view has already been taken in favour of the assessee while deciding the Assessee's appeal in Ground No.1 (for Assessment Year 2001-02) hereinabove, as also, ante this ground of the Revenue has already been dismissed. Accordingly, these grounds of the Revenue are hereby dismissed.
48. Ground Nos.2 & 4 read as under:
2. The Learned CIT(A) has erred on facts and in law in directing re-computation of deduction u/s.80IA.
ITA Nos.460 & 461/Ahd/2008 (By Assessee) & ITA Nos.499 & 500/Ahd/2008 (By Revenue) M/s.Gujarat Insecticides Ltd. vs. Dy.CIT Asst.Years - 2001-02 & 2002-03
- 43 -
4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the fact that the assessee was sympathetically manipulating the profits of separate units to maximize deduction u/s.80IA. The Ld.CIT(A) therefore also erred in directing the AO to exclude the profit from the trading activity while working out the eligible profit for deduction u/s.80IA.
49. These grounds have already been restored back with certain directions to re-compute the deduction u/s.80IA of the Act. Resultantly, in the like manner, these grounds may be treated as allowed for statistical purposes.
50. In the result, appeals of the Assessee (A.Ys. 2001-02 & 2002-03) as well as appeals of the Revenue (A.Ys. 2001-02 & 2002-03) are partly allowed.
Order signed, dated and pronounced in the Court on 31/ 05 /2011.
Sd/- Sd/-
( D.C. AGRAWAL) ( MUKUL Kr. SHRAWAT )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 31/ 05 /2011
T.C. NAIR, Sr. PS
ITA Nos.460 & 461/Ahd/2008 (By Assessee)
& ITA Nos.499 & 500/Ahd/2008 (By Revenue)
M/s.Gujarat Insecticides Ltd. vs. Dy.CIT
Asst.Years - 2001-02 & 2002-03
- 44 -
Copy of the Order forwarded to :
1. The Assessee.
2. The Department.
3. The CIT Concerned
4. The ld. CIT(Appeals)-VI, Baroda
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER,
स×याǒपत ूित //True Copy//
(Dy./Asstt.Registrar), ITAT, Ahmedabad4444
1. Date of dictation.......................24.5.2011
2. Date on which the typed draft is placed before the Dictating Member 25.5.2011.................. Other Member.....................
3. Date on which the approved draft comes to the Sr.P.S./P.S.................
4. Date on which the fair order is placed before the Dictating Member for pronouncement......
5. Date on which the fair order comes back to the Sr.P.S./P.S.........31.5.2011
6. Date on which the file goes to the Bench Clerk..................... 31.5.2011
7. Date on which the file goes to the Head Clerk..................................
8. The date on which the file goes to the Assistant Registrar for signature on the order..........................
9. Date of Despatch of the Order..................