Income Tax Appellate Tribunal - Mumbai
Godfrey Phillips India Ltd., Mumbai vs Assessee
1
IN THE INCOME TAX APPELLATE TRIBUNAL
"G" Bench, Mumbai
Before Shri R. V. Easwar, President and Shri Rajendra Singh(AM)
ITA No.1071/M/2007
Assessment Year 2003-04
ITA No.5569/M/2007
Assessment Year 2004-05
Godfrey Philips India Ltd. The ACIT 8(1), Aayakar Bhavan
Chakala, Andheri (E) M.K.Marg, Mumbai 400 020.
Mumbai 400 099
PAN : AABCG 4768 K
Appellant Respondent
CO 147/M/2007
Assessment year 2003-04
Godfrey Philips India Ltd. The DCIT 8(1), Mumbai
Appellant in appeal Respondent
ITA No.1301/M/2007
Assessment Year 2003-04
ITA No.5585/M/2007
Assessment Year 2004-05
The Dy.CIT Circle 8(1), Mumbai Godfrey Philips India Ltd.
Appellant Respondent
Assessee by : Shri Yogesh Thar
Revenue by : Shri Pawan Ved
ORDER
PER RAJENDRA SINGH (AM) These cross appeals and cross objection of the assessee are directed against different orders dated 27.11.2006 and 4.6.2007 of CIT(A) for the 2 assessment years 2003-04 and 2004-05 respectively. As grounds of appeal raised in the appeals are mostly identical, these are being disposed off by a single consolidated order for the sake of convenience.
2. Appeals of the assessee in ITA Nos.1071/M/2007 and ITA No.5569/M/2007 for assessment years 2003-04 and 2004-05. 2.1 The first dispute raised which is common in both the appeals is regarding disallowance of product development expenses. The AO during the assessment proceedings noted that the assessee had claimed expenditure of Rs.8,43,527/- for A.Y.2003-04 and Rs.18,03,831/- for A.Y.2004-05 on account of product development expenses. The expenses incurred were for printing cigarette packs through third parties which in turn had procured some specific printing cylinders/ dyes for the printing. The payments for procuring the cylinders/ dyes had been made by the assessee. The AO observed that even though the assets were lying with third parties, the assessee was having right to use the same and expenses were of capital in nature. He therefore disallowed the same. In appeal CIT(A) following the decision in A.Y.2002-03 confirmed the disallowance aggrieved by which the assessee is in appeal before the tribunal. 2.1.1 We have heard both the parties, perused the records and considered the matter carefully. We find that the same issue has already been considered by the tribunal in assessee's own case in A.Y.2002-03 in ITA No.2793/M/2006. The tribunal in the said year on perusal of invoice of M/s. Twenty-first Century Printers Ltd. relating to the purchases of cylinders/ dyes noted that these were consumable stores used in printing. The assessee had also issued specific certificate certifying that the items were charged to consumable stores. 3 Tribunal also observed that the life of such items used in printing job was short and therefore the expenditure incurred could not be of the nature of capital. The tribunal accordingly allowed the claim of the assessee as revenue expenditure. Facts this year are identical as distinguishing features have been brought to our notice by the Learned DR. We, therefore respectfully following the decision of the tribunal in A.Y.2002-03, set aside the order of CIT(A) and allow the claim of the assessee.
2.2 The second dispute is regarding allowability of enhanced depreciation on UPS. The AO noted from the depreciation chart filed during the assessment proceedings that the assessee had claimed depreciation @ 80% on items categorized as Energy Savings Equipment and Renewal Energy Devices. Such higher depreciation claimed was Rs.3,58,521/- in A.Y.2003-04 and Rs.3,85,152/- in A.Y.2004-05. The AO observed that the energy saving devices claimed by the assessee were nothing but Uninterrupted Power Supply (UPS) which according to the AO were not energy saving devices. AO also observed that in case of an energy saving device, a certificate from Ministry of Power is given to the manufacturer certifying that a particular item was an energy saving device which has not been done in this case. AO therefore rejected the claim of higher depreciation and allowed the normal depreciation @ 25%. In appeal CIT(A) following the decision in A.Y.2002-03 confirmed the order of AO aggrieved by which the assessee is in appeal before the tribunal. 2.2.1 After hearing both the parties, we find that this issue is also covered by the decision of the tribunal in assessee's own case in A.Y.2002-03 in ITA No.2792/M/2006. In that year also the same issue of allowability of depreciation at higher rate in case of UPS had been raised. The tribunal noted 4 that in the Appendix to the Income-tax Rules 1962 "Automatic voltage controller" had been listed under the heading "Energy Saving Devices" as an electrical instrument eligible for 100% depreciation. Therefore the issue was whether UPS could be considered as automatic voltage controller. The tribunal noted that UPS automatically corrected low and high voltage conditions and stepped up low voltage to safe output levels. The tribunal therefore held that UPS was doing the job of voltage controlling automatically. For the said proposition the tribunal placed reliance on the Jaipur bench of tribunal in case of DCIT Vs Service Finishing Equipment (2 SOT 232). The tribunal accordingly allowed the claim of the assessee. The facts in the years under consideration are identical except for some difference in rate of depreciation. We therefore respectfully following the decision of the tribunal in assessee's own case in A.Y.2002-03, set aside the order of CIT(A) and allow the claim of the assessee. 2.3 The third dispute is regarding disallowance of EDP charges. The AO noted that the assessee had claimed expenditure of Rs.37.80 lacs in A.Y.2003-04 and Rs.37.54 lacs in A.Y.2004-05 on account of EDP charges i.e for purchase of new computer software. The AO observed that in the depreciation table, computer software had been listed as a depreciable asset on which depreciation @ 60% was allowable. He also referred to the judgment of Hon'ble High Court of Rajasthan in case of CIT Vs Arawali Construction Pvt. Ltd. (259 ITR 30) in which computer software expenses were held to be of capital in nature. He therefore disallowed the claim of the assessee as revenue expenditure and allowed depreciation @ 60%. Aggrieved by the said decision the assessee in appeal before the tribunal.
52.3.1 We have heard both the parties, perused the records and considered the matter carefully. We find that the same issue had been considered by the tribunal in assessee's own case in A.Y.2002-03 in ITA No.2792/M/2006 in which the tribunal noted that allowability of expenditure on account of software expenses had been examined in detail by the Special Bench of the tribunal in case of Amway India Enterprises Vs DCIT (111 ITD 112) in which the special bench had laid down certain guidelines to ascertain the true nature of expenditure. The tribunal accordingly restored the matter to the file of AO for passing a fresh order after necessary observations in the light of decision of the special bench (supra) and after allowing opportunity of hearing to the assessee. Facts this year are identical. We therefore restore this issue to the file of AO for fresh order after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee. 2.4 The fourth dispute is regarding claim of depreciation in relation to software expenses disallowed earlier. The assessee had raised a ground before CIT(A) that in case software expenses were disallowed as capital expenditure depreciation should also be allowed in respect of such items disallowed in the earlier year. CIT(A) held that since the issue was pending before the tribunal no direction could be issued for allowing depreciation. Aggrieved by the said decision the assessee is in appeal before the tribunal.
2.4.1 We have heard both the parties perused the records and considered the matter carefully. The issue regarding allowability of the expenses on acquisition of computer software has already been restored by the tribunal in the earlier year to the file of AO for taking a fresh decision after necessary examination in the light of decision of the special bench in case of DCIT Vs Amway India 6 Enterprises (supra). In these years also we are restoring this issue to the file of AO. In case on fresh examination the AO finds that the software expenses are capital in nature, these expenses would have to be capitalized and the assessee will be entitled to depreciation as per rules even in respect of such expenses capitalized in earlier years. The AO is directed to act accordingly. 2.5 The fifth dispute is regarding addition on account of unutilized modvat credit. During the assessment proceedings, the AO noted that the assessee had unutilized modvat credit which had not been added to the closing stock as required under the provisions of section 145A which was applicable from A.Y.1999-2000. The assessee submitted that there would be no net effect on the profit of the assessee because of adjustment on account of unutilized modvat credit. AO however did not accept the contentions raised and made additions of Rs.88,42,780/- and Rs.1,08,60,116/- respectively for the two years. In appeal CIT(A) confirmed the orders of AO aggrieved by which the assessee is in appeal before the tribunal.
2.5.1 We have heard both the parties, perused the records and considered the matter carefully. We find that the same issue has already been considered in the assessee's own case in A.Y.2002-03 in ITA No.2792/M/2006. The tribunal noted that in A.Y.2000-01 the same issue has been remitted back to the AO for fresh consideration in the light of decision of Hon'ble High Court of Delhi in case of CIT Vs Mahavir Aluminum Ltd. (297 ITR 277). The tribunal accordingly restored the issue to the file of AO. The facts are identical in these years. We therefore respectfully following the decision of tribunal in assessee's own case in A.Y.2002-03 set aside the order of CIT(A) and restore the issue to the file of 7 AO for fresh order after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee. 2.6 The sixth dispute is regarding disallowance of interest under section 36(1)(iii) of the Income-tax Act. The AO during the assessment proceedings noted that though the assessee was paying substantial interest on the borrowings made, it had advanced interest free loans of Rs.342.65 lacs to the subsidiary M/s. Kashyap Metals and Allied Industries. It was also noted by him that the assessee had also advanced loans at subsidized interest rate of 6.5% to the said subsidiary amounting to Rs.847.61 lacs in A.Y.2003-04 and 930.37 lacs in A.Y.2004-05. The AO further noted that the assessee was paying interest at the average rate of 7.45%. He therefore asked the assessee to explain as to why the interest proportionate to the loans given to the subsidiary should not be disallowed. The assessee explained that no interest had been charged on the advances of Rs.342.65 lacs as the said loan had been given prior to insertion of section 372A of the Companies Act. In respect of the balance amount the interest had been charged at RBI notified bank rate. The assessee also submitted, it had strong financial position to advance loans from internal generation of revenue and therefore no interest was required to be disallowed. AO however did not accept the contentions raised. It was observed by him that the assessee was not in the business of giving loans and therefore the transaction was not for the purpose of business. The assessee had diverted interest bearing funds from the business which was not for genuine business purposes. The AO therefore disallowed the proportionate interest after making allowance for recoveries made. The disallowance made was Rs.38.96 lacs in A.Y.2003-04 and Rs.42.61 lacs in A.Y.2004-05.
82.6.1 In appeal the assessee submitted that the interest free advances had been made out of internal accruals. It was also submitted that after 31.10.98 interest at the specified rate had been charged and it was the assessee's prerogative to decide the rate of interest in the interest of business. It was also submitted that the loans were mostly coming from the earlier years when there was no disallowance and therefore no disallowance could be made ion respect of the opening balances. The assessee placed reliance on the judgment of Hon'ble High Court of Karnataka in case of CIT Vs Sridev Enterprises (192 ITR
165) and some other judgments. CIT(A) however did not accept the contentions raised. It was observed by him that there was no dispute that the assessee had given interest free loans to the subsidiary for a certain period of time and thereafter at a subsidized rate. Further there was no evidence with the assessee to show that the loans given to the subsidiary were generated internally and not from the borrowed funds. There was also no evidence to show that loans given to the subsidiary had anything to do with the business of the assessee. CIT(A) referred to the judgment of Hon'ble High Court of Punjab & Haryana in case of CIT Vs Abhishek Industries Ltd. (286 ITR 1) in which it was held that once the assessee claimed deduction on account of interest the onus was on the assessee to show that whatever loans were taken, were used for business purposes and in case the assessee advanced funds to sister concerns or others without any interest, the onus was on the assessee to show that despite pending loans there was justification to advance loans to sister concerns for non business purposes. In the present case CIT(A) observed that there was no evidence to show that the loans taken were used by the assessee wholly and exclusively for the purpose of business or that interest free loans were given for the purpose of its business. CIT(A) accordingly confirmed the 9 disallowance made by the AO in both the years aggrieved by which the assessee is in appeal before the tribunal.
2.6.2 Before us the Learned AR for the assessee reiterated the submissions made before CIT(A) that interest free advances had been given to the subsidiary since F.Y.1992-93 and from F.Y.1998-99 interest at specified rate had been charged. In most of the years when the new advances were given, there were no borrowings and therefore the loans had been given from own funds. Annual profit of the assessee was also quite high running into crores to take care of all the advances. It was also submitted that the assessee had submitted fund flow statement before CIT(A) to demonstrate the above points, a copy of which has been placed at page 64 of the paper book. There were sufficient interest free funds and therefore loans were explained out of own funds. Reliance was placed on the judgment of Hon'ble High Court of Mumbai in case of Reliance Utilities and Power Ltd. (178 Taxman 135). It was also submitted that the entire interest free loans were coming from the earlier years and there were no new interest free loans in the years under consideration. Similarly the interest bearing loans were also mostly coming from the earlier years and there was addition of only Rs.1.48 crores in A.Y.2003-04 in which the assessee had profit of Rs.17.96 crores. It was pointed out that in the earlier years there had been no disallowance of interest and therefore no disallowance could be made in respect of opening balance of loans. Reliance was placed on the judgment of Hon'ble High Court of Karnataka in case of Sridev Enterprises (192 ITR 165). It was also argued that loans and advances had been given to the company which was a 100% subsidiary of the assessee and therefore there was commercial expediency involved and no disallowance could be made even if the loans and advances were from borrowed funds. Reliance was placed on 10 the judgment of Hon'ble Supreme Court in case of S.A.Builders (288 ITR 1). It was accordingly urged that addition made on account of disallowance of interest should be deleted. The Learned DR on the other hand supported the orders of authorities below and placed reliance on the findings given in the respective orders.
2.6.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of interest paid by the assessee on account of advances given to the subsidiary of the assessee company. The assessee had advanced interest free loan of Rs.342.65 lacs. It had also advanced further loans at concessional rate. The assessee had also made borrowings on which substantial interest was being paid. The authorities below have disallowed part of the interest proportionate to interest free advances and advances given on concessional rate on the ground that there was no material to show that the loans taken by the assessee were used wholly and exclusively for the purpose of business or that these loans and advances were given out of own funds. The case of the assessee is that the interest free advances had been given since financial year 1992-93 and loans on concessional rate had been given from financial year 1998-99. These had been given out of own funds as the assessee had sufficient interest free funds and profit earned during the relevant years Reliance has been placed on the judgment of Hon'ble High Court of Mumbai in case of Reliance Utilities and Power (supra). It has also been argued that most of the loans/ advances were coming from the earlier years in which there were no disallowances and therefore no disallowance could be made in respect of opening balances. The assessee has also raised plea of commercial expediency on the ground that loans and advances had been given to the concern which was a 100% susbsidiary of the 11 assessee company and therefore the same had to be treated for the purposes of business of the assessee.
2.6.4 We have carefully considered the various aspects of the matter. We find substance in the submission of the assessee that no disallowance could be made in respect of the opening balances of loans and advances which were coming from earlier years and in which there were no disallowance. The plea of the assessee is supported by the judgment of Hon'ble High Court of Karnataka in case of Sridev Enterprises (supra) in which it was held that in case loans and advances were being carried forward from earlier years in which there was no disallowance, no disallowance could be made in respect of the opening balance in the current year as the nature and status of the advances on the first day of the current year remained the same as the nature and status of the advances on the last day of preceding year. In the earlier year there were no disallowances which meant that the revenue was satisfied that loans and advances were give from own funds. Therefore respectfully following the judgment of Hon'ble High Court of Karnataka in case of Sridev Enterprises (supra) we hold that no disallowance of interest will be made in respect of the opening balances as on the first day of assessment year involved. As regards the loans/ advances given in the current year, the assessee is required to show that on the date of giving loans/ advances the assessee had sufficient own funds available which has not been shown in this case. The assessee has also placed reliance on the judgment of Hon'ble Supreme Court in case of S.A.Builders (supra). In the said case, Hon'ble Supreme Court held that interest on money borrowed cannot be allowed on commercial expediency in all cases of loans and advances given to the sister concern. It was also observed by the Hon'ble Supreme Court that in case the holding company advanced 12 borrowed funds to the subsidiary in which it had deep interest, it would ordinarily be entitled for deduction and that it will depend upon facts and circumstances of each case. We find that in the present these aspects have not been examined and it is not clear how the interest free loans and advances to the sister concerns would have promoted the interest of the assessee. We also note that the assessee had filed the fund flow statement available on page 64 of the paper book but the same was filed only before CIT(A) and was not available before the AO. Therefore the aspects as to whether and how much loans and advances were coming from earlier years is required to be verified by the AO. The assessee has also filed copy of the Board resolution dated 10.8.92 available at page 61 of the paper book as per which some loans had been given to the subsidiary company for development of the property with understanding that the assessee would acquire part of the property for the purpose of business. There was thus commercial expediency involved. This resolution was however not available before the AO. In our view matter requires fresh consideration after examination of the additional evidences filed before CIT(A) as mentioned above and after considering the judicial pronouncements discussed earlier. We therefore set aside the order of CIT(A) and restore the matter to the file of AO for passing a fresh order after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee.
2.7 The seventh dispute is regarding disallowance of expenditure under section 14A of the Income-tax Act. At the time of hearing of the appeal the Learned AR for the assessee did not press the ground due to its smallness of amount involved. The grounds raised by the assessee in both the years are dismissed as not pressed.
132.8 The dispute raised in the ground No.8 is regarding disallowance of leave encashment expenses. The AO noted that the assessee had been claiming expenses on account of leave encashment on the basis of actuarial valuation report but from A.Y.2003-04 the assessee started claiming deduction on the actual payment basis. The AO observed when the assessee had made claim on the basis of actuarial valuation in the earlier year, the claim now being made on the basis of actual payment could lead to double deduction. As per the AO the assessee was not able to furnish the details of double deduction. He therefore proceeded to make disallowance on estimate basis. It was observed by him that an employee on average worked in private sector for 20 - 25 years. Since the assessee had been making claim on the basis of actuarial valuation for the last 7 years he estimated that 1/3rd of actual payment may have been claimed on the basis of actuarial valuation. Accordingly disallowances to the extent of 1/3rd amounting to Rs.20 lacs and Rs.12.33 lacs respectively for the two years. In appeal CIT(A) confirmed the orders of AO aggrieved by which the assessee is in appeal before the tribunal.
2.8.1 We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding disallowance of part of the claim relating to leave encashment. The assessee had been making the claim earlier on the basis of actuarial valuation but consequent to the amendment of section 43B the claim was being made on payment basis from A.Y.2003-04. The AO has made estimated disallowance out of the claim made on payment basis on the ground that part of the payments made may relate to earlier year when these were allowed on actuarial basis. The AO has made disallowance on estimate which cannot be sustained. Only the payment which had actually been 14 allowed earlier can be disallowed. In our view matters require fresh examination and disallowance has to be restricted to the amounts allowed in the earlier year. We therefore set aside the order of CIT(A) and restore the issue to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. 2.9 The dispute raised in ground No.9 is regarding claim of deduction under section 80HHC in respect of DEPB income. The AO noted that the assessee had received DEPB income of Rs.2,88,41,387/- and Rs.5,01,03,898/- for A.Yrs. 2003-04 and 2004-05 respectively. The assessee had claimed deduction under section 80HHC in respect of DEPB income also. The AO however observed that the assessee had not satisfied the conditions mentioned in third proviso to section 80HHC(3) as the assessee could not show that the duty drawback rate on the date of export was higher than the DEPB rate. The AO therefore disallowed the claim of deduction in relation to DEPB income. In appeal CIT(A) observed that DEPB income was not covered by any of the clauses i.e. (iiia), (iiib) (iiic) of section 28 and therefore the same was not eligible for deduction under section 80HHC. It was also observed by him that profit on sale of DEPB would also not be eligible for deduction. Accordingly he confirmed the order of AO rejecting the claim of the assessee. Aggrieved by the said decision the assessee is in appeal before the tribunal.
2.9.1 Before us the Learned AR for the assessee submitted that in view of the judgment of Hon'ble High Court of Mumbai in case of CIT Vs Kalpataru Colours & Chemicals (328 ITR 451) the entire DEPB income have to be taken as covered under section 28(iiid) and therefore the turnover of the assessee being more than Rs.10 crores the benefit of deduction under section 80HHC could be 15 given to the assessee if the following two conditions mentioned in the third proviso to section 80HHC (3) were fulfilled.
(a) He had an option to chose either the duty drawback or the duty entitlement pass book scheme being duty remission claimed and
(b) The rate of drawback credit attributable to the custom duty was higher than the rate of credit allowable under the duty entitlement pass book scheme being the duty remission scheme.
2.9.2 The Learned AR pointed out that the authorities below have disallowed the claim on the ground that the above two conditions were not fulfilled in case of the assessee. It was argued that in the case of the assessee duty drawback scheme was not applicable at all and therefore it was eligible only for the credit under the DEPB scheme. It was submitted that when no option was available, question of providing necessary and sufficient evidence did not arise. Therefore the said conditions cannot be made applicable in case of the assessee and the assessee should be entitled to deduction under section 80HHC in respect of DEPB credit. He placed reliance on the decision of the tribunal in case of M/s. Western Drugs Pvt. Ltd. Vs ACIT in ITA no.2079/A/2007. The Learned DR on the other hand placed reliance on the judgment of Hon'ble High Court of Mumbai in case of Kalpataru Colours & Chemicals Ltd. (supra). 2.9.3 We have perused the records and considered the matter carefully. The dispute is regarding allowability of deduction under section 80HHC in respect of DEPB income. There is no dispute that the entire DEPB income including the face value as well as the profit on sale is required to be considered as profit of business under section 28(iiid) in view of the judgment of Hon'ble High Court of 16 Mumbai in case of CIT Vs Kalpataru Colour and Chemicals (supra). Once the entire income is considered under section 28(iiid) the deduction under section 80HHC could be allowed only if the two conditions mentioned in the 3rd proviso to section 80HHC(3) are fulfilled as the turnover in respect of the assessee exceeded Rs.10 crores. The two conditions referred to above have been reproduced in para 2.9.1 in this order earlier. The case of the assessee is that in case of the assessee, the duty draw back scheme was not applicable at all and therefore there was no way, the conditions could be fulfilled and therefore the said conditions could not be made applicable in case of the assessee and deduction could be allowed without fulfilling those conditions. Reliance has been placed on the decision of the tribunal in case of M/s. Western Drugs Pvt. Ltd. Vs ACIT (supra) in support of the above proposition. In the said decision, the tribunal held that in case the conditions are not applicable in case of the assessee, the same have to be ignored while computing deduction in respect of DEPB income. However, we find that the same issue had also been considered by the Hon'ble jurisdictional High Court in case of CIT Vs Kalpataru Color and Chemical (supra) in which it was held that in case the turnover exceed Rs.10 crores and the two conditions were not satisfied, the deduction under section 80HHC in respect of DEPB income could not be allowed. The said judgment was not available at the time of passing the order by the tribunal. We therefore respectfully following the said judgment hold that the assessee will not be entitled to deduction under section 80HHC in respect of DEPB income as the two conditions mentioned in the 3rd proviso to section 80HHHC(3) are not satisfied.
2.10 The next dispute which is relevant only for assessment year 2004-05 is regarding levy of interest under section 234D. The Learned AR for the assessee 17 submitted that the issue was only consequential. The AO is therefore directed to re-compute the interest at the time of giving effect to this order. 2.11 The ground No.11 is an additional ground raised by the assessee only for the assessment year 2003-04. The assessee had made a claim of deduction on account of legal and professional fees to M/s. Dua Associates in A.Y.2002-03 which was disallowed on the ground that the bill dated 19.4.2002 related to A.Y.2003-04. The disallowance in A.Y.2002-03 was confirmed by the tribunal in ITA no.2792/M/2006. The assessee has therefore raised the additional ground and being a legal ground and the facts already been being on record, the same was admitted by the tribunal for adjudication.
2.11.1 We have heard both the parties perused the records and considered the matter carefully. The assessee has made a claim of deduction of Rs.2,06,815/- on account of legal and professional fees due to M/s. Dua Associates in A.Y.2002-03. The claim was disallowed and the disallowance was confirmed by the tribunal in ITA No.2792/M/2006. The tribunal noted that the bill from M/s. Dua Associates of Rs.2,06,815/- was dated 19.4.2002 and therefore the liability had crystallized only during the assessment year 2003-
04. In view of the finding of the tribunal in A.Y.2002-03 that bill was dated 19.4.2002 which related to A.Y.2003-04 the claim of the assessee has to be allowed in A.Y.2003-04. We accordingly allow the claim of the assessee this year.
3. Appeals of the revenue in ITA No.1301/M/2007 (Assessment Year 2003-04) and ITA No.5585/M/2007 (Assessment Year 2004-05). In these 18 appeals of the revenue, disputes have been raised on six different grounds which are mostly common.
3.1 The first dispute is regarding disallowance of contribution to labour welfare fund. This dispute is relevant only for A.Y.2003-04. The AO noted that the assessee had deposited an amount of Rs.360/- towards company's contribution to Labour Welfare Fund but the same had not been realized within 15 days as pointed out by the auditors. The assessee explained that the amount had been deposited within the due date but the same was not realized within 15 days for no fault of the assessee. AO however did not accept the contentions raised. It was observed by him that the deduction could be allowed under section 43B only if the payments were made within the time permitted. Since the amount had not been realized within the due date, AO disallowed the sum of Rs.360/-. In appeal CIT(A) following the decision in earlier year allowed the claim of the assessee aggrieved by which the revenue is in appeal. 3.1.1 Before us the Learned AR for the assessee at the very outset pointed out that the issue was covered in favour of the assessee by the decision of the tribunal in assessee's own case in A.Y.2002-03 in ITA No.2792/M/2006. The Learned DR fairly conceded that the issue was covered.
3.1.2 We find that the same issue had been considered by the tribunal in assessment year 2002-03 in which it was held that in case the cheque was deposited within due date, the payment would relate back to the date of deposit even if the cheque was dishonoured and cleared later. The tribunal placed reliance on the judgment of Hon'ble Supreme Court in case of CIT Vs Ogale Glass Works Ltd. (25 ITR 429). The claim was accordingly allowed. This 19 year also the assessee has claimed that the deposit had been made within the due date and this claim has not been controverted before us. Therefore respectfully following the decision of the tribunal in assessee's own case in A.Y.2002-03 we confirm the order of CIT(A) allowing the claim. 3.2 The second dispute which is relevant to both the years is regarding claim of depreciation on motor care at a higher rate. The AO noted that the assessee had claimed depreciation at higher rate in respect of certain cars. Depreciation had been claimed at 40% in some cases and in respect of cars acquired after 1.4.2001 depreciation had been claimed at 50%. The assessee had claimed higher depreciation as specified in Appendix I of the Income-tax Rules treating the same as commercial vehicle. The AO observed that the commercial vehicles are used in the business of hiring. Since the assessee was not in the business of hiring of cars, the AO did not treat the cars as commercial vehicles and rejected the claim of higher depreciation. He allowed depreciation only @ 20% being the normal depreciation. In appeal CIT(A) following the decision in the earlier year, allowed the claim of the assessee aggrieved by which the revenue is in appeal.
3.2.1 We have heard both the parties, perused the records and considered the matter carefully. We find that the same issue had been considered by the tribunal in assessee's own case in A.Y.2002-03 in which case also the assessee had claimed depreciation at higher rate treating the cars as commercial vehicle. The tribunal noted that there was no dispute that the cars were used in the business of the assessee though the business was not of plying of vehicles on hire. The tribunal also noted that Note IIIA under the Appendix I defined commercial vehicles which also included a light motor vehicle. Further light 20 motor vehicle had been defined in section 2 of Motor Vehicles Act which in addition to other vehicles also included a motor car with unladen weight not exceeding 7500 kg. Thus the motor cars with unladen weight not exceeding 7500 kgs will be covered by the definition of commercial vehicles. The tribunal therefore held that the assessee was entitled higher rate of depreciation. Facts this year are identical as no distinctive features have been brought to our notice by the Learned DR. We therefore see no infirmity in the order of CIT(A) allowing the rate of higher depreciation and the same is therefore upheld. 3.3 The third dispute which is also relevant for both the years is regarding depreciation on building. The AO noted that the building on which depreciation has been claimed by the assessee was yet to be registered in the name of the assessee. The letter from the Corporation obtained by the assessee also made it clear that the property was mutated in the name of the assessee for limited purpose of payment of property tax. The assessee was having only a power of attorney given by the owner of the property. AO therefore held that the assessee was not the owner of the property and accordingly disallowed the claim of depreciation. In appeal CIT(A) following the decision in A.Y.2002-03 allowed the claim of the assessee aggrieved by which the revenue is in appeal before the tribunal.
3.3.1 We have heard both the parties, perused the records and considered the matter carefully. We find that the issue is covered by the decision of the tribunal in assessee's own case in A.Y.2002-03 in ITA No.2792/M/2006. In that year also the depreciation had been claimed in respect of the same building. The tribunal noted that though the conveyance had not been executed in the name of the assessee, the assessee had paid the full consideration in A.Y.1996- 21 97 and was in full possession of the property which was being used as a corporate office. The tribunal referred to the judgment of Hon'ble Supreme Court in case of Mysore Mineralas Vs CIT (239 ITR 725) in which it was held that the term "owned" occurring in section 32(1) had to be assigned a wider meaning and anybody exercising dominion over a property as would enable others being excluded there-from and who occupies it in its own right would be an owner. As the assessee was exercising the right of ownership in the property which was in its possession and use and entire consideration had been paid, the tribunal allowed the claim of depreciation. The facts this year are identical. We therefore respectfully following the decision of the tribunal in A.y.2002-03 (supra) confirm the order of CIT(A).
3.4 The fourth dispute is regarding disallowance of cigarette sampling expenses. AO noted that the assessee had claimed expenses of Rs.8,63,814/- in A.Y.2003-04 and Rs.8,73,088/- in A.Y.2004-05 on account of cigarette samples. When asked to explain the justification for such claim, the assessee submitted that cigarette samples were given to potential visitors and some were sent for test in the laboratories. These expenses had been incurred to create awareness about the company's brands and to help create market for the company. AO however observed that the assessee had failed to substantiate the business necessity. He therefore disallowed the claim. CIT(A) following the decision in A.Y.2002-03 allowed the claim of the assessee aggrieved by which the revenue is in appeal before the tribunal. 3.4.1 Before us the Learned AR for the assessee submitted that the issue was covered in favour of the assessee by the decision of the tribunal in assessee's own case in A.Y.2002-03 in ITA No.2792/M/2006 and in A.Y.2005-06 in 22 6692/M/2008 in which similar sample expenses have been allowed by the tribunal. The Learned DR fairly conceded that the issue was covered. 3.4.2 We have perused the said orders of tribunal. The tribunal in A.Y.2002- 03 noted that the sample distribution expenses were miniscule considering the turnover of over Rs.600 crores. The assessee had produced all necessary details and vouchers. The claim was therefore allowed. This year also the facts are identical. There is no case made out by the department that details and vouchers were not available. The disallowance has been made on the ground that the assessee failed to substantiate the business necessity. Sample distribution expenses are the normal business expenses of any company dealing with fast moving consumer products. The claim has already been allowed by the tribunal in the earlier year. We therefore see no justification for disallowing the claim in these years. Orders of CIT(A) allowing the claim are therefore upheld.
3.5 The fifth dispute is regarding nature of income earned by the assessee from interest and rent. The AO noted that the assessee had shown income from rent and hire charges as well as interest on loans, bank deposits and income tax refund aggregating Rs.3,64,16,000/- in A.Y.2003-04. Similar income of Rs.493.62 lacs had been shown for A.Y.2004-05. The assessee had declared the entire income as business income. The assessee explained that it had received rent from subletting of the property and hire charges from hiring of furniture, machinery and equipments as well as interest income which was of the nature of business. The AO however did not accept the claim as business and treated the entire income as income from other sources. In appeal CIT(A) 23 following the decision in A.Y.2002-03 allowed the claim of the assessee aggrieved by which the revenue is in appeal before the tribunal. 3.5.1 We have heard both the parties in the matter. The Learned AR for the assessee submitted that the issue was partly covered by the decision of the tribunal in A.Y.2002-03 in ITA No.2792-2632/M/2006 in which rent and hire charges had been held assessable as business income. The Learned DR placed reliance on the order of AO.
3.5.2 We have perused the records and considered the matter carefully. The dispute is regarding the nature of rental income received from subletting of the office space, hire of furniture, machinery and equipments etc and income from interest on loan, deposits and income-tax refund. We find that the issue regarding the nature of income from subletting of the premises or hiring of the machinery/equipments etc had been considered by the tribunal in assessee's own case in A.Y.2002-03. The tribunal in that year noted that sublet, lease rentals had been received from ITC. Both the companies were in the same business and there were mutual agreements for using their spare capacities subject to availability without involving any handing over of possession. The rental income was therefore from exploitation of commercial assets. The tribunal, therefore hold that such lease rental income was of the nature of business. The tribunal also held that while computing deduction under section 80HHC such income had to be treated as other income covered by the Explanation (baa) and 90% of the same was required to be deducted from the profit of business. Respectfully following the said decision of the tribunal, we hold that rental income from subletting of spare office space as well as plant and machinery and equipments will be of the nature of business income and 24 will be considered as per Explanation (baa) while computing deduction under section 80HHC. As regards the interest income from loans, deposits and income-tax refund there is no material produced before us to show that the loans and deposits had any nexus with the business of the assessee. Therefore we agree with the finding of the AO that interest income from loans deposits and income-tax refund has to be treated as income from other sources. We accordingly set aside the order of CIT(A) on this point and uphold the order of AO.
3.6 The sixth dispute is regarding exclusion of excise duty from total turnover. The AO had added excise duty to the total turnover while computing deduction under section 80HHC. In appeal CIT(A) excluded the same from the total turnover. Aggrieved by the said decision the revenue is in appeal. 3.6.1 After hearing both the parties, we find that the issue is covered by the judgment of Hon'ble Supreme Court in case of CIT Vs Laxmi Machine Works (290 ITR 667) in which it has been held that excise duty does not contain an element of turnover and therefore has to be excluded from the total turnover while computing deduction under section 80HHC. Respectfully following the said judgment of Hon'ble Supreme Court we confirm the order of CIT(A) and dismiss the ground raised by the revenue.
4. The cross objection of the assessee in CO No.147/M/2007 for A.Y.2003-04. The only dispute raised by the assessee in the cross objection is regarding levy of interest under section 234B and 234C. The Learned AR for the assessee at the time of the hearing submitted that levy of interest was only consequential. He did not dispute the liability on account of levy of interest. We 25 therefore dismiss the cross objections raised by the assessee. The AO, however, will recompute the interest at the time of giving effect to this order.
5. In the result the cross appeals for both the years are partly allowed whereas the cross objection of the assessee is dismissed.
6. Order was pronounced in the open court 20.04.2011.
Sd/- Sd/-
( R. V. EASWAR ) (RAJENDRA SINGH)
PRESIDENT ACCOUNTANT MEMBER
Date : 20.04.2011
At :Mumbai
Copy to :
1. The Appellant
2. The Respondent
3. The CIT(A), Mumbai concerned
4. The CIT, Mumbai City concerned
5. The DR "G" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
Alk