Income Tax Appellate Tribunal - Pune
Aquapharma Chemicals Pvt. Ltd.,, Pune vs Additional Commissioner Of ... on 17 April, 2017
आयकर अपील
य अ धकरण "बी" यायपीठ पण
ु े म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, PUNE
ी आर. के. पांडा, लेखा सद य, एवं ी #वकास अव थी, या%यक सद य के सम& ।
BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No. 2099/PUN/2014
%नधा(रण वष( / Assessment Year : 2009-10
Dy. Commissioner of Income Tax,
Circle - 8, Pune
.......अपीलाथ / Appellant
बनाम/Vs.
M/s. Aquapharm Chemicals Pvt. Ltd.,
S-122, 2, MIDC, Bhosari,
Pune - 411026
PAN : AAECA7014R
......
यथ / Respondent
आयकर अपील सं. / ITA No. 240/PUN/2015
%नधा(रण वष( / Assessment Year : 2009-10
M/s. Aquapharm Chemicals Pvt. Ltd.,
Khandelwal Jain & Associates,
Alankar Cinema Building, 1st Floor,
Above United Bank, Pune - 411001
PAN : AAECA7014R
.......अपीलाथ / Appellant
बनाम/Vs.
Addl. Commissioner of Income Tax,
Range - 8, Pune
......
यथ / Respondent
Assessee by : Shri R.G. Nahar
Revenue by : Shri Mukesh Jha
सन
ु वाई क तार ख / Date of Hearing : 17-03-2017
घोषणा क तार ख / Date of Pronouncement : 17-04-2017
2
ITA Nos. 2099/PUN/2014 & 240/PUN/2015,
A.Y. 2009-10
आदे श / ORDER
PER VIKAS AWASTHY, JM :
ITA No. 2099/PUN/2014 has been filed by the Department
against the order of Commissioner of Income Tax (Appeals)-V, Pune dated 07-08-2014 for the assessment year 2009-10 assailing the deleting of additions made by Assessing Officer during the course of assessment.
The Assessing Officer vide order dated 29-12-2011 had inter alia made additions on account of under valuation of inventory `1,77,88,184/-, contribution towards unapproved gratuity fund `7,59,685/- and legal and professional charges paid to SRG Consultant `41,74,500/-. In first appellate proceedings the Commissioner of Income Tax (Appeals) vide impugned order deleted the additions in respect of contribution towards unapproved gratuity fund and payment of legal and professional charges in toto and granted part relief in respect of valuation of inventory. Subsequently, the Commissioner of Income Tax (Appeals) vide order dated 09-01-2015 passed u/s. 154 upheld the findings of Assessing Officer in respect of disallowance of contribution towards unapproved gratuity fund. Against the order of Commissioner of Income Tax (Appeals) passed u/s. 154 of the Act, the assessee has filed appeal before the Tribunal in ITA No. 240/PUN/2015.
2. The facts of the case as emanating from records are: The assessee is engaged in manufacturing and processing of chemicals. The assessee filed its return of income for the impugned assessment year on 3 ITA Nos. 2099/PUN/2014 & 240/PUN/2015, A.Y. 2009-10 22-09-2009 declaring total income as `5,65,65,793/-. The case of the assessee was selected for scrutiny. Statutory notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") was issued to the assessee on 19-08-2010. During the course of assessment proceedings the Assessing Officer made certain additions / disallowances in the income returned by the assessee.
Aggrieved by the assessment order dated 29-12-2011, the assessee filed appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) granted part relief to the assessee by restricting the addition in respect of under valuation of inventory to `3,64,990/-, allowing entire amount of `41,74,500/- paid as legal and professional charges to SRG Consultant by the assessee and by deleting some other minor additions made by Assessing Officer during the course of scrutiny assessment. The Commissioner of Income Tax (Appeals) initially deleting the addition made in respect of assessee's contribution to group gratuity scheme. However, in subsequent rectification order passed u/s. 154 rejected the claim of assessee. Against the findings of Commissioner of Income Tax (Appeals), now, both the Department and the assessee are in appeal before the Tribunal.
3. The Department has raised following grounds of appeal :
1. "Whether on the facts and in the circumstances of the case, the ld.CIT(A) was justified in restricting the addition to Rs.3,64,990/- being 10% of the difference of valuation of closing stock as on 31.03.2009 and opening stock as on 1.4.2008 when CIT(A) has principally rejected the method followed by the assessee in valuation of stock and ignored the fact that the assessee has treated the stock as non movable item in the inventory and not obsolete items while valuing its stock as per the Auditor's report.4 ITA Nos. 2099/PUN/2014 & 240/PUN/2015,
A.Y. 2009-10
2. Whether on the facts and in the circumstances of the case, the ld.CIT(A) was justified in deleting the addition of Rs.7,59,685/- on account of contribution to Provident Fund and other funds when the funds are not duly approved and ignored the provisions contained u/s 36(1)(v) r.w.s. 40A(7) and also the decision of Supreme Court in the case of Shri Sajjan Mills Ltd. vs CIT - 49 CTR 193 (SC).
3. Whether on the facts and in the circumstances of the case, the ld.CIT(A) has failed to examine the issue in its proper perspective that the contribution to Provident Fund and other funds are allowable only to the funds approved u/s. 36(1)(v) and 40A(7). The ld. CIT(A) also failed in appreciating the fact that the payment does not relate to the gratuity payment of an employee but relates to Contribution to gratuity scheme which is not for an approved fund therefore not allowable in law.
4. Whether on the facts and in the circumstances of the case, the ld.CIT(A) was justified in deleting the disallowance of Rs.41,74,500/- out of legal and professional Charges by ignoring his own finding that one of the objectives of the study was to explore acquisition of phosphorous producer and development of toll manufacturing arrangement for existing produces which will bring into existence of new assets which is capital in nature and the decision of Hon'ble Delhi High Court in the case of CIT vs OCL India Ltd.
5. The appellant craves leave to add, amend or alter any of the above grounds of appeal."
Since, the relief granted in respect of contribution towards unapproved provident fund `7,59,685/- was withdrawn by the Commissioner of Income Tax (Appeals) in a subsequent order passed u/s. 154 of the Act, ground Nos. 2 and 3 raised in the appeal by the Department assailing the relief granted on this issue have become infructuous. Therefore, the effective grounds to be decided in the appeal by the Department are Ground Nos. 1 and 4.
5ITA Nos. 2099/PUN/2014 & 240/PUN/2015,
A.Y. 2009-10
4. The assessee in its appeal has raised solitary ground and the same reads as under :
1. "On facts and circumstances prevailing in the case and as per provisions & scheme of the Act it be held that, the disallowance of Rs.7,59,685/- on account of premium paid to LIC under Group gratuity scheme u/s.
40A(7)/36(1)(V) is not in accordance with the provisions of the Act. The additions so made be deleted. Just a proper relief be granted to the appellant on this score.
2. The appellant prays to e allowed to add, amend, modify, rectify, delete, & raise any grounds of appeal at the time of hearing."
5. Shri R.G. Nahar appearing on behalf of the assessee submitted that the assessee had made application to the concerned Commissioner of Income Tax for approval of group gratuity scheme with LIC on 15-02-2000. The ld. AR pointed that the copy of letter vide which the application was made for approval of gratuity scheme is at pages59 to 61 of the paper book. The assessee has been regularly depositing premium in group gratuity scheme. However, the Commissioner of Income Tax (Appeals) neither rejected the aforesaid application of the assessee nor granted approval to the scheme. The assessee in its return of income has been regularly claiming the benefit of contribution towards the said group gratuity scheme and the Assessing Officer in scrutiny assessment proceedings has been granting the benefit of same in all the earlier assessment years. This is the first year when the revenue has raised dispute in respect to the contributions made by the assessee under group gratuity scheme. It is not the case of Department that the assessee has not contributed towards the group gratuity fund. Thus, there is no doubt about the assessee's contribution towards the scheme. The only issue is with regard to assessee eligibility to claim 6 ITA Nos. 2099/PUN/2014 & 240/PUN/2015, A.Y. 2009-10 deduction in respect of such contributions under the provisions of section 36(1)(v) r.w.s. 40A(7) of the Act. The ld. AR submitted that the assessee had sent reminder to the Commissioner of Income Tax-V, Akurdi, Pune on 26-10-2016 for approving the scheme. However, no communication was ever received from the office of Commissioner of Income Tax in this regard. The ld. AR submitted that the assessee is eligible to claim benefit of contribution towards group gratuity fund as the assessee has fulfilled all the conditions laid down for approval of fund with Life Insurance Corporation of India. The assessee has done its part in getting the fund approved. Inaction at the end of Commissioner of Income Tax should not put the assessee in disadvantageous position. The delay in approving the scheme for such a long period cannot be attributed to the assessee. In support of his submissions, the ld. AR placed reliance on the decision of Hon'ble Rajasthan High Court in the case of Commissioner of Income Tax Vs. Jaipur Thar Gramin Bank reported as 388 ITR 228.
6. On the other hand Shri Mukesh Jha representing the Department vehemently supported the findings of Commissioner of Income Tax (Appeals) in rejecting the claim of the assessee with respect to contribution towards unapproved group gratuity scheme with LIC. In support of his submissions the ld. DR placed reliance on the decision of Hon'ble Bombay High Court in the case of Commissioner of Income Tax Vs. Petroleum and Minerals P. Ltd. reported as 187 ITR
560. 7 ITA Nos. 2099/PUN/2014 & 240/PUN/2015, A.Y. 2009-10 6.1 In respect of grounds raised in the appeal by the Department, the ld. DR submitted that in ground No. 1 the Department has assailed the findings of Commissioner of Income Tax (Appeals) in restricting the addition in valuation of closing stock to `3,64,990/-. The assessee in its books has not included the value of non-moving items in closing stock. In the Auditor's report some of the items have been mentioned as non-movable in the inventory and not obsolete items while valuing the stock. Whether the items are slow moving or fast moving, their value has to be taken while determining closing stock. The Commissioner of Income Tax (Appeals) in his impugned order has in principle rejected the method followed by the assessee for valuation of stock. However, by applying the ratio of judgment rendered by the Hon'ble Bombay High Court in the case of Alfa Laval India Ltd. Vs. Deputy Commissioner of Income Tax reported as 186 CTR 390 has granted relief to the assessee. The ratio of said judgment does not apply in the case of assessee. The ld. DR submitted that the Commissioner of Income Tax (Appeals) has granted relief to the assessee without examining the details of stock. The ld. DR prayed for restoring the matter back to the file of Assessing Officer for detailed examination of the stock.
6.2 With respect to ground No. 4 raised in the appeal, the ld. DR submitted that from perusal of the agreement under which the payments have been made to M/s. SRG Consultant Pvt. Ltd., it is clearly evident that the payments are made in relation to acquisition of new phosphonate production facility, construction of new facility from grass root level, 'toll' manufacturing arrangement etc. The said payments are capital in nature as the expenditure has been incurred to 8 ITA Nos. 2099/PUN/2014 & 240/PUN/2015, A.Y. 2009-10 bring into existence new asset. The Commissioner of Income Tax (Appeals) has ignored the fact that one of the objective of the study conducted by M/s. SRG Consultant is to explore acquisition of phosphorous producer and development of toll manufacturing arrangement for existing producers. The expenditure has been incurred for establishing new line of business. Even if the expenditure is for existing business it is for enduring benefit. The ld. DR prayed for reversing the findings of Commissioner of Income Tax (Appeals) on the issue and upholding the order of Assessing Officer.
7. The ld. AR vehemently supporting the findings of Commissioner of Income Tax (Appeals) in respect of valuation of closing stock and deleting the addition in respect of legal and professional charges, reiterated the submissions made before the First Appellate Authority. The ld. AR submitted that the assessee company is engaged in manufacturing of special water treatment chemicals which is used by various industries. The products manufactured by the assessee are not sold to general customers i.e. the products are not shelf products. The products are chemical products used as raw material in specialized industry. The main raw material is yellow phosphorous which is highly inflammable. Considering the specific nature of the product, it is necessary to maintain quality control. Any product lying in inventory for more than 6 months is normally rendered unusable. 7.1 The ld. AR submitted that for the last several years the assessee is consistently following the same method of valuation of closing stock i.e. excluding the stock of raw material from valuation which is more than 6 months old. This practice is followed as part of commercial 9 ITA Nos. 2099/PUN/2014 & 240/PUN/2015, A.Y. 2009-10 prudence, as well as accounting standards. The ld. AR pointed that the Assessing Officer while passing assessment orders u/s. 143(3) for the assessment years 2006-07, 2007-08 and 2008-09 i.e. in the last three preceding assessment years and in the succeeding assessment years i.e. assessment years 2010-11 and 2011-12 has accepted the method of valuation of stock consistently followed by the assessee. The ld. AR submitted that the Commissioner of Income Tax (Appeals) has rightly followed the law laid down by the Hon'ble Bombay High Court in the case of Alfa Laval India Ltd. Vs. Deputy Commissioner of Income Tax (supra) while granting relief to the assessee.
7.2 In respect of ground No. 4 raised in appeal by the Department, the ld. AR submitted that assessee had engaged the services of M/s. SRG Consultant Pvt. Ltd. to conduct study to improve profitability, knowledge of the market/competitors for the growth of business of the assessee. The agreement was entered into by the assessee with M/s. SRG Consultant Pvt. Ltd. for expanding the market in existing line of the business including growth of business, exploring acquisition of phosphorous producer and development of toll manufacturing arrangement for existing producers. 94% of the total output of the assessee is exported out of India. The expenditure was not incurred to establish new line of business, therefore, the said expenditure is not capital in nature.
8. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. In ground No. 1 of the appeal, the Department has assailed the findings of Commissioner of Income Tax (Appeals) in restricting the addition of 10 ITA Nos. 2099/PUN/2014 & 240/PUN/2015, A.Y. 2009-10 valuation of closing stock to `3,64,990/- as against the addition of `1,77,88,184/- made by the Assessing Officer. The Assessing Officer made said addition for the reason that the assessee has not included the value of non-moving items in the stock. The assessee is dealing in chemicals, especially yellow phosphorous which is highly inflammable. The said chemicals are supplied by the assessee to specified customers. It has been contended that the stock of phosphorous which is more than 6 months old become unusable. Hence, while determining the value of closing stock, phosphorous which is more than 6 months old is excluded from the value of closing stock. This method of valuation of closing stock is followed by the assessee for the past several years. The assessee has filed copy of the assessment orders for the assessment years 2006-07, 2007-08, 2008-09, 2010-11 and 2011-12 at pages 16 to 30 of the paper book to show that the Assessing Officer during the course of scrutiny assessment proceedings has accepted this method of accounting of closing stock. A perusal of the assessment orders placed on record shows that in the preceding assessment years and in the succeeding assessment years the Assessing Officer has not raised any objection in excluding the value of raw material which is more than 6 months old. Although, the assessee has been consistently following the same method of valuation of closing stock i.e. excluding the value of raw material which is more than 6 months old while determining the value of closing stock, the Commissioner of Income Tax (Appeals) has restricted the addition to `3,64,990/- by following the ratio laid down by the Hon'ble Bombay High Court in the case of Alfa Laval India Ltd. Vs. Deputy Commissioner of Income Tax (supra). In the said case, the Hon'ble High Court approved the method of valuation of closing stock of obsolete item at 10% of the cost.
11ITA Nos. 2099/PUN/2014 & 240/PUN/2015,
A.Y. 2009-10 We do not find any infirmity in the method and reasoning given by the Commissioner of Income Tax (Appeals) in restricting the addition to `3,64,990/-. The ld. DR has not been able to controvert the findings of Commissioner of Income Tax (Appeals) on the issue. The ld. DR has prayed for remitting the matter back to the file of Assessing Officer for examination the details of stock. We do not find merit in the submissions of the ld. DR. No useful purpose would be served by remitting the issue back to the file of Assessing Officer. The Assessing Officer has accepted the method of valuation of closing stock during scrutiny assessment proceedings in the preceding and the succeeding assessment years. The Assessing Officer should have been consistent in determining the value of closing stock. No material has been placed on record to show any change in facts and circumstances to take a different view in the impugned assessment year. Lacking merit in the submissions of the ld. DR on the issue, we dismiss ground No. 1 raised in appeal by the Department.
9. Ground Nos. 2 and 3 in appeal by the Department relates to disallowance of amount contributed by the assessee towards unapproved gratuity fund. The Commissioner of Income Tax (Appeals) had initially deleted the said addition. Subsequently, vide rectification order dated 09-11-2015 passed u/s. 154 of the Act, the Commissioner of Income Tax (Appeals) rejected the claim of the assessee with respect to contribution towards unapproved gratuity fund. Thus, in view of the subsequent order passed u/s. 154 of the Act, ground Nos. 2 and 3 of the appeal have become infructuous.
12ITA Nos. 2099/PUN/2014 & 240/PUN/2015,
A.Y. 2009-10
10. The ground No. 4 in appeal by the Department relates to disallowance of legal and professional charges `41,74,500/- paid to M/s. SRG Consultant Pvt. Ltd. The assessee has claimed the said amount as revenue expenditure. The Assessing Officer disallowed the claim of assessee on premise that the expenditure has been incurred for setting up of new line of business and thus is capital in nature. The assessee has placed on record copy of the agreement with M/s. SRG Consultant Pvt. Ltd. at pages 66 to 70 of the paper book. During the First Appellate proceedings the Commissioner of Income Tax (Appeals) after considering the objects and terms and conditions of the agreement accepted the claim of assessee. The objects and the scope of agreement have been reproduced by the Commissioner of Income Tax (Appeals) in the impugned order. A perusal of the objects shows that the assessee had hired the services of M/s. SRG Consultant Pvt. Ltd. to improve profitability and growth of its existing business. The study was directed to explore new markets for its existing products and exploring acquisition of phosphorous producer current in operation. We are of the considered view that the expenditure has been incurred by the assessee for the efficient conduct of its present business with more awareness of the competitors, new markets and the source of procurement of product in which the assessee is already dealing. The expenditure was not incurred for opening any new line of business hence, the expenditure incurred is not capital in nature. We concur with the findings of Commissioner of Income Tax (Appeals) on this issue hence, ground No. 4 raised in the appeal by the Department is dismissed. In the result, the appeal of the Department is dismissed. 13 ITA Nos. 2099/PUN/2014 & 240/PUN/2015,
A.Y. 2009-10
11. Now, we proceed to decide the appeal of the assessee. The solitary issue in appeal is with respect to disallowance of contribution `7,59,685/- made towards payments of premium of group gratuity fund with Life Insurance Corporation of India. It is an undisputed fact that the assessee has created gratuity trust and the assessee has been regularly contributing towards the fund for the welfare of its staff. The assessee had made an application to the concerned Commissioner of Income Tax for approval of the fund way back on 15-02-2000. The Commissioner of Income Tax neither rejected the application of the assessee nor issued any letter communicating approval of the fund. In the meantime the assessee started contributing towards the said group gratuity fund with LIC. The Assessing Officer granted the benefit of contribution towards the said fund in the assessments made u/s. 143(3) of the Act in the earlier assessment years. It was only in the assessment year under appeal that the contribution made by the assessee towards the said ground gratuity fund was disallowed by the Assessing Officer. The ld. DR informed the Bench that the Commissioner of Income Tax (Appeals) has now approved the group gratuity scheme floated by the assessee.
12. The Hon'ble Rajasthan High Court in the case of Commissioner of Income Tax Vs. Jaipur Thar Gramin Bank (supra) has held that once the assessee fulfills the condition laid down for approval after having created a trust with Life Insurance of India and the assessee has been regularly contributing towards the said fund, the claim of the assessee cannot be rejected on the ground that the Commissioner of Income Tax (Appeals) has not approved the fund. The assessee should not suffer for inaction of the revenue authorities. Thus, in view of the facts of the 14 ITA Nos. 2099/PUN/2014 & 240/PUN/2015, A.Y. 2009-10 case and the decision rendered by the Hon'ble Rajasthan High Court coupled with the fact that now the Commissioner of Income Tax has approved the fund, the contribution made by the assessee towards group gratuity fund is allowable u/s. 36(1)(v) of the Act. The appeal of the assessee is allowed, accordingly.
13. In the result, the appeal of the Department is dismissed and the appeal of the assessee is allowed.
Order pronounced on Monday, the 17th day of April, 2017.
Sd/- Sd/-
(आर. के. पांडा / R.K. Panda) (!वकास अव"थी / Vikas Awasthy)
लेखा सद"य / ACCOUNTANT MEMBER $या%यक सद"य / JUDICIAL MEMBER
पुणे / Pune; &दनांक / Dated : 17th April, 2017
RK
आदे श क+ ,%त.ल#प अ/े#षत / Copy of the Order forwarded to :
1. अपीलाथ / The Appellant.
2. यथ / The Respondent.
3. आयकर आयु'त (अपील) / The CIT(A)-V, Pune
4. आयकर आयु'त / The CIT-V, Pune
5. !वभागीय %त%न,ध, आयकर अपील य अ,धकरण, "बी" ब/च, पुणे / DR, ITAT, "B" Bench, Pune.
6. गाड1 फ़ाइल / Guard File.
//स या!पत %त // True Copy// आदे शानुसार / BY ORDER, सहायक पंजीकार / Assistant Registrar, आयकर अपील य अ,धकरण, पण ु े / ITAT, Pune