Income Tax Appellate Tribunal - Ahmedabad
The Dcit, Circle-1(1)(1), Ahmedabad vs M/S. Arvind Ltd.,, Ahmedabad on 30 September, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "B" BENCH
(Conducted Through Virtual Court)
Before: Shri Mahavir Prasad, Judicial Member
And Shri Amarjit Singh, Accountant Member
Sl. Appeal ITA/CO A.Y. Appellant (PAN if Respondent (PAN if
No. applicable) applicable)
1 ITA 2009-10 Arvind Ltd. A'bad DCIT, Circle-1, A'bad
1960/Ahd/2018 (AABCA2398D)
2 ITA 2009-10 DCIT, Circle-1(1)(1), Arvind Ltd. A'bad
2054/Ahd/2018 A'bad (AABCA2398D)
3 ITA 2010-11 DCIT, Circle-1(1)(1), Arvind Ltd. A'bad
249/Ahd/2016 A'bad (AABCA2398D)
4 CO 2010-11 Arvind Ltd. A'bad DCIT, Circle-1(1)(1),
43/Ahd/2016 (in (AABCA2398D) A'bad
ITA
249/Ahd/2016)
5 ITA 2011-12 Arvind Ltd. A'bad DCIT, Circle-1(1)(1),
1846/Ahd/2016 (AABCA2398D) A'bad
6 ITA 2011-12 DCIT, Circle-1(1)(1), Arvind Ltd. A'bad
2057/Ahd/2016 A'bad (AABCA2398D)
7 ITA 2013-14 DCIT, Circle-1(1)(1), Arvind Ltd. A'bad
273/Ahd/2018 A'bad (AABCA2398D)
8 CO 2013-14 Arvind Ltd. A'bad DCIT, Circle-1(1)(1),
42/Ahd/2019 (in (AABCA2398D) A'bad
ITA
273/Ahd/2018)
9 ITA 2015-16 DCIT, Circle-1(1)(1), Arvind Ltd. A'bad
2182/Ahd/2018 A'bad (AABCA2398D)
10 ITA 2015-16 Arvind Ltd. A'bad DCIT, Circle-1(1)(1),
1961/Ahd/2018 (AABCA2398D) A'bad
Revenue by: Shri Vinod Tanwani, CIT-D.R. &
Shri R.R. Makwana, Sr. D.R.
Assessee by: Shri Vartik Chokshi, A.R.
Date of hearing : 04-09-2021
Date of pronouncement : 30-09-2021
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 2
DCIT vs. M/s. Arvind Ltd.
आदे श/ORDER
PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
These eight appeals filed by assessee/revenue and two cross objections filed by assessee for different assessment years as mentioned in captioned page arise from the order of ld. CIT(A) in proceeding under Income Tax Act, 1961; in short "the Act". Since identical issues on similar facts are involved in these appeals, therefore, for the sake of convenience all these appeals are adjudicated together as follows:-
ITA No. 249/Ahd/2016 A.Y. 2010-11 filed by revenue & Cross AppealNo. 43/Ahd/2016 filed by assessee
3. The fact in brief is that the return of income declaring loss of Rs.
107,67,77,438/- was filed on 14th October, 2020. The case was subject to scrutiny assessment and notice u/s. 143(2) of the Act was issued on 25th August, 2011. Assessment u/s. 143(3) of the Act was finalized on 29th March, 2014.
Ground No. 1. (Disallowance of Rs. 11,41,72,708/- u/s. 14A r.w.r. 8D(2)(ii) of the Act) and ground no. 2 of cross objection filed by the assessee in sustaining disallowance u/s. 14A r.w.r. 8D(2)(ii) of Rs. 79,34,022/-
4. During the course of assessment, the Assessing Officer noticed that assessee has earned dividend income to the tune of Rs. 16,78,260/- claimed as exempt from tax. The assessee has suo moto disallowed expenses of Rs. 3,85,728/- u/s. 14A of the act. The Assessing Officer observed that the assessee had made large investment to the amount of Rs. 300.29 crores, I.T.A Nos. 249/Ahd/2016 & 9 others Page No 3 DCIT vs. M/s. Arvind Ltd.
therefore, assessee was asked to furnish the working of disallowance u/s. 14A r.w.r. 8D of the I.T. Rule, 1962. The detailed submission of the assessee in response to the aforesaid query raised by the Assessing Officer has been reproduced at the page no. 3 and 4 of the assessment order. In its submission, the assessee has briefly stated that it has received exempt dividend income of Rs. 16,78,260/- and assessee company has already made disallowance of Rs. 3,85,728/- u/s. 14A of the Act. The assessee reported that the working of disallowance has been made as per the method prescribed under rule 8D for the purpose of computation of disallowance u/s. 14A of the Act. The assessee explained that Rs. 3,85,728/- has rightly been disallowed u/s. 14A and no other expenditure has been incurred during the year under consideration which was attributable to earning of exempt income. The assessee has also stated that majority of the investment made by the assessee company was strategic investment in its subsidiary /group companies or general vendor, such investments were not made for the purpose of earning exempt income and these investments were made as part of the expansion of assessee's own business. The Assessing Officer has not accepted the explanation of the assessee and stated that assessee has not maintained separate accounts for the expenditure incurred for earning exempt income and opined that the manner of computation of such expenses has been prescribed under rule 8D of the I.T. Rule, 1962. Therefore, the Assessing Officer has computed expenditure incurred towards earning exempt income as per rule 8D of the I.T. Rule, 1962 u/s. 14A of the act to the amount of Rs. 12,37,95,730/- and added to the total income of the assessee.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 4DCIT vs. M/s. Arvind Ltd.
5. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has restricted the disallowance u/s. 14A to the amount of Rs. 79,34,022/-. The relevant part of the decision of the ld. CIT(A) is reproduced as under:-
"3.4.1 I observe that Appellant has made investment in shares from which exempt income is earned. Appellant has not established any nexus between utilization of 7terest-free funds and such investment hence argument of Appellant that it has sufficient interest-free funds available with it cannot be accepted in view of Rule 80 brought to Statute by Assessment Year 2008-09. The decisions relied upon by Appellant in support of this contention are prior to A.Y. 2008-09 i.e. in the year in which Rule 8D was not on Statute hence ratio of these decisions cannot be made applicable in current year.
However, it is observed that interest expenditure of Rs.186,53,14,250/~, considered by Assessing Officer for making disallowance of interest expenditure under Rule 8D(2)(ii) of the Act includes interest on term loan, buyer's credit, packing credit, overdue interest, transit period interest, discounting charges, interest paid to vendors, etc., and such funds cannot be attributable to investment activities. Once interest expenditure is paid for specific business purpose and not for making investment in shares, proportionate disallowance under Rule 8D(2)(ii) cannot be made. The Hon'ble Chennai ITAT, in case of ACIT V/s Best & Crompton Engineering Limited (ITA No 1603/Mds/2012) dated 16th July 2012 [36 taxman.com 555] has held as under:
"II. Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 ~ Expenditure incurred in relation to income not chargeable to tax [Bank interest] - Assessment year 2009-10 - Assessing Officer while computing disallowance under section 14A read with rule 8D, included bank interest and interest on term Loan - Commissioner (Appeals) excluded said interest from calculation of disallowance as assessee had utilized both loans for purpose of purchase of machineries and for expansion of projects and these loans were specifically sanctioned for these projects ~ Whether Commissioner (Appeals) had rightly excluded such interest from purview of computation of disallowance under rule 80(2) - Held, yes [Para 11] [In favour of assessee]"
Further, Kolkata I. T.A. T., in case of REI Agro Limited V/s DC/7 35 Taxman.com 404 has held as under:
"Rule 8D(2) has three sub-parts. The first sub-part i. e. (i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. That issue is not in dispute here. In second sub-pert i.e. (ii), it is a computation provided in respect of expenditure incurred by the assessee by way of interest during the previous year which is not directly attributable to any particular income or receipt. This clearly means that if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee's case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks or the Assessing Officer that the loan funds have been diverted for making the investment in shares or for non-business purposes. Thus for bringing any interest expenditure, claimed by the assesses, under the ambit of rule 8D(2)(ii) it wilt have to be shown by the Assessing Officer that the said interest is not directly attributable to any particular income or receipt."
It is pertinent to note that similar disallowance was made by Assessing Officer while passing the Assessment Order for A.Y. 2007-08 wherein Appellant has given similar explanation for interest expenditure and its purpose and Assessing Officer has accepted such explanation and made proportionate disallowance under Section 14A after considering interest paid on debentures and other interest only. It is observed that in A.Y.2007-08 Appellant has paid interest expenditure of Rs.14829.06 lacs and Assessing Officer has excluded specific interest of Rs.14696.75 lacs and made disallowance of interest expenditure after considering general interest of Rs.132.31 lacs.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 5DCIT vs. M/s. Arvind Ltd.
Even during the course of Assessment Proceedings Appellant has submitted the break-up of interest expenditure and purpose for which funds were borrowed and from the detailed break-up reproduced in Appellant's submission it is held that following expenditure are on general borrowing and Appellant has not proved direct nexus with business activity hence such interest expenditure is considered for making disallowance of interest as per Rule 8D(2)(ii).
Particulars Amount (Rs.)
Interest on inter-corporate deposit 2,46,28,881
Bank interest 16,39,20,525
Others 1,78,05,891
Interest on debentures 18,16,401
Total 20,81,71,698
Thus, disallowance of interest under Rule 8D(2)(ii) is required to be made after adopting interest expenditure of Rs. 20,81,71,698 and after considering observations made for net interest expenditure in subsequent Paras.
3.5 It is also observed that Appellant has earned interest income of Rs.35.54 crores which is higher than interest expenditure of Rs.20,81 crores worked out herein above and as both interest income and expenditure are taxed as part of income from business or profession, only net interest expenditure is required to be disallowed under Rule 8D(2)(ii). Hon'ble Ahmedabad I.T.A.T., in case of Safe/ Reality P. Ltd. V/s ACIT (OSD) (AY 2010-
11) in ITA No. 1842/Ahd/2013 vide its order dated 29/11/2013 has held as under
"5.3 Under the totality of the facts and circumstances of the case, we are of the considered opinion that when the interest income was more than the interest expenditure then the AO was not justified to invoke the provisions of Section 14A read with Rule 8D of IT Act. We hereby reverse the findings of the authorities below and direct to delete the disallowance."
Hon'ble Ahmedabad MAT., in case of /TO V/s. Adani Infrastructure Services Pvt. Ltd. (AY 2009-
10) in ITA No. 1943/Ahd/2012 vide its order dated 17/07/2015 has held as under:
"7. We find that in the case of Morgan Stanley India Securities Ltd Vs ACIT (ITA Nos 5072/Mum/2005 and 6774/Mum/2008; order dated 13th April 2011), a co-ordinate bench of this Tribunal has held that for the purpose of disallowance under section 14A what is to be taken into account is net amount debited in the profit and loss account and not the gross interest debited to the profit and loss account. Same was the view of another coordinate bench in the case of DC/TVs Trade investments Ltd (ITA No. 1277/Ko//2011; order dated 30th March 2012). Viewed thus, the action of the CIT(A) was fu//y justified in taking into account only the net figure which was nil in this case,"
Considering the facts discussed herein above, as Appellant has earned higher interest income in comparison with interest expenditure, no proportionate interest disallowance under Rule 8(2)(ii) is required to be made and addition made by Assessing Officer for Rs.11,41,72J08/-is deleted.
3.6 So far as disallowance of administrative expenditure under Rule 8D(2)(iii) is concerned, it is observed that same is made as per Rules prescribed for making such disallowance. It is a/so observed that Appellant has made new investments of Rs.200.23 crores which requires incurring of administrative and general expenditure. The Appellant has made very minor disallowance of expenditure of Rs. 2,88,512, which is not as per Rule 8D hence argument of Appellant regarding non-disallowance of any such expenditure is rejected. However, as observed in preceding Paras, investments in foreign subsidiaries and NSC cannot be subject matter of disallowance under Section 14A, investments required to be considered for making disallowance is reworked at Rs.266.51 crore as on 31st March, 2010 and Rs. 66.28 crores as on 31st March, 2009 and average works out to Rs.166.39 crores on which disallowance under Section 14A read with Rule I.T.A Nos. 249/Ahd/2016 & 9 others Page No 6 DCIT vs. M/s. Arvind Ltd.
8D(2)(iii) being 0.5 % of average investment works out to Rs.83,19,750/-3nd as Appellant has already made disallowance of Rs.3,85,728/-, disallowance under Section 14A is confined to Rs.79,34,022A. In the result, addition made by Assessing Officer for Rs.12,37,95,730/- is restricted to Rs.79,34,022/-."
6. Heard both the sides and perused the material on record. Without reiterating the facts as elaborated above during the course of assessment, the Assessing Officer has computed disallowance of expenditure incurred towards earning exempt income in accordance u/s. 14A r.w.r. 8D of I.T. Rule, 1962 to the amount of Rs. 12,37,95,730/-. However, the ld. CIT(A) has restricted the disallowance to the extent of Rs. 79,34,022/- after taking into consideration the submission of the assessee that it had sufficient interest free funds available with it and the nature of the expenditure incurred by the assessee was not related to investment made by it on which exempt income earned. It is undisputed fact that the total exempt income earned during the year under consideration was of Rs. 16,78,260/- only. In this regard, we observed that in a number of decisions the ITAT Ahmedabad had adjudicated that disallowance u/s. 14A cannot exceed the amount of exempt income earned by the assessee during the year under consideration i.e. in the case of Jivraj Tea Ltd. vs. DCIT ITA No. 886/Ahd/2012 dated 28th August, 2014 and decision of ITAT Delhi in the case of Sahara India Financial Corporation Ltd. 148 ITD 336. In the light of the facts that issue in the instant appeal is squarely covered by judicial findings as supra that disallowance u/s. 14A cannot exceed exempt income, therefore, we restrict the disallowance u/s. 14A of the act to the extent of exempt income of Rs. 16,78,260/- earned by the assessee during the year under consideration. Accordingly, the ground of appeal of revenue is dismissed and cross objection of the assessee is partly allowed.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 7DCIT vs. M/s. Arvind Ltd.
Ground No. 2 ( Deleting excess depreciation claim of Rs. 26,88,342/-) filed by revenue
7. During the course of assessment, the Assessing Officer noticed that assessee has purchased a car amounting to Rs. 76,80,973/- on which depreciation of Rs. 38,40,487/- @ 50% was claimed. The assessee submitted that it was entitled for depreciation @ 50% on purchase of new commercial vehicle on or after 1st January, 2009 but before 30th Sep, 2009 and put to use before 30th Sep, 2009. The assessee has further submitted that purchased motor car was of the category of new commercial vehicle on which it was entitled for depreciation @ 50% and the purchased car was used for the purpose of business of the assessee. The Assessing Officer has not agreed with the submission of the assessee. The Assessing Officer has stated that as per the provision of section 32 r.w. appendix one of income tax rule higher rate of depreciation is allowable on the new commercial vehicle. He was of the view that the requirement for registration for commercial vehicle was different from private vehicles and in the case of the assessee the vehicle on which higher deprecation claimed was not registered as commercial vehicle. Therefore, the claim of depreciation was restricted to the normal rate of depreciation at 15% and the excess claim of depreciation to the amount of Rs. 26,88,342/- was added to the total income of the assessee .
8. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has deleted the disallowance made by the Assessing Officer. The relevant part of the decision of ld. CIT(A) is reproduced as under:-
"5.3 I have carefully considered the Assessment Order and submission filed by appellant. The Assessing Officer has observed that the appellant has purchased car amounting to Rs. 76,80,973/- on which depreciation of Rs. 38,40,4877- at 50% has been claimed. From the provision of section I.T.A Nos. 249/Ahd/2016 & 9 others Page No 8 DCIT vs. M/s. Arvind Ltd.
32 of the Act read with the Appendix-1 of the Income Tax Rules it can be seen that the higher rate of depreciation is allowable on the ''New Commercial Vehicle". There is distinction between commercial vehicle and private vehicle. The vehicle on which higher rate of depreciation has been claimed is not registered as "Commercial Vehicle" with the RTO and hence the benefit of higher rate of depreciation cannot be allowed on such vehicle. On the other hand, Appellant relied on the notification No. 10/2009/F No. 142/01/09-TPL dated 19.01.2009 issued by CBDT, in which it is clearly mentioned that a new commercial vehicle purchased on or after 01.01.2009 but before 30.09.2009 and put to use before 30.09.2009, is eligible to be depreciated at the rate of 50% per annum. Further, vide Notification No. 37/2009 [F.No. 142/01/2009-TPL], dated 21-4-2009, date of purchase of such vehicle was extended upto 30/09/2009. The Appellant has referred to provisions of Section 32 of the Act and argued that it has satisfied the two pivotal conditions as under:
(i) The asset should be wholly and partly owned by the appellant. (ii) It should be used exclusively for the purpose of business and profession.
The Appellant has a/so referred to following conditions laid down in the Notification referred supra and contended that even such conditions are fulfilled by it:
(a) Depreciation at the rate of 50% can be claimed on new commercial vehicle.
b) It should be used for the purpose of business and profession.
c) It should be acquired on or after 01.01.2009 but before 01.10.2009 and should be put to use
before 01.10.2009
d) Vehicle acquired should be a commercial vehicle.
With reference to above claim, the appellant has relied on the following judicial pronouncements:
(i) ACIT vs. M/s Voltamp Transformers Ltd, Ahmedabad ITAT, ITA No.1676/Ahd/2012, vide order dated 22.03.2013
(ii) Sunilkumar Dhulichand HUF vs. ACIT (CPC), Bangalore, Ahmedabad ITAT, ITA No. 454/Ahd/2013 vide order dated 11.06.2013 On careful consideration of observation of Assessing Officer and contention of appellant, I observe that appellant company has acquired new vehicle before 30th September, 2009 and as per Notification No 37/2009 (F. No. 142/01/2009-TPL) dated 21/04/2009, depreciation @ 50% is allowed in respect of commercial vehicle purchased and put to use between Of/07/2009 to 30/09/2009 and on this basis, appellant has claimed depreciation@50% in year under consideration. I further observe that issue whether vehicle purchased by assesses is commercial vehicle or not as per Appendix of depreciation chart given in Income Tax Rules and whether assessee is entitled to higher depreciation or not is decided in favour of appellant by Hon'ble Ahmedabad ITAT in the case of M/s Voltamp Transformers Ltd ITA No.1676/Ahd/2012, vide order dated 22.03.2013 and held as under:
"10.1. The assessee has claimed excess depreciation of Rs.3,69,604/- on the new commercial vehicle purchased. The AO's objection was that those vehicles were not registered by the RTO "Commercial Vehicle", therefore the assessee was not entitled for additional depreciation claimed @ 50% on those vehicles acquired during the year. When the matter was carried before the first, appellate authority, Id.CIT(A) has examined the provisions of Motor Vehicle Act and allowed the claim as follows:-
"5.3. Decision: I have carefully perused the assessment order and the submissions given by the appellant. The A.O. has disallowed the claim of depreciation at higher rate as it has been held by him that the vehicle was not a commercial vehicle. The A.O. has taken the meaning of commercial vehicle in common parlance and has held that commercial vehicle is distinct and different from private vehicle and the vehicle used by the appellant is a private vehicle. The appellant has submitted that as per Note No. 6 to the Rules in Appendix-1, the word commercial vehicle has been defined to include Light Motor Vehicle as defined by Motor Vehicle Act, 1988. Further, section 2(21) of the Motor Vehicle Act define the word Light Motor Vehicle as- "Light Motor Vehicle means transport vehicle or amnibus. The gross vehicle weight of either of which or a Motor Car or a Tractor or road roller, the unladen weight of any of which does not exceed 7500 Kg."I.T.A Nos. 249/Ahd/2016 & 9 others Page No 9
DCIT vs. M/s. Arvind Ltd.
The appellant has further submitted that as per the RC Book, the vehicle is LMV and the weight of the car is 2074 Kg. and the unladen weight is 1454 Kg. which was less than 7500 Kg. Therefore, the appellant has claimed that the car purchased was a commercial vehicle and appellant was entitled to depreciation at higher rate. After considering the submission of the appellant and the facts, I am inclined to accept the submission made by the appellant. The Clause VI-A of the Appendix i.e. the table of rates of which depreciation is admissible prescribes the depreciation @ 50% for new commercial vehicle which is acquired on or after 01/01/2009 but before 01/04/2009 and is put to use before 01/04/2009 for the purpose of business or profession. Further Paragraph 6 of the note below the table defines commercial vehicles which includes Light Motor Vehicles as per the Motor Vehicle Acts, the specifications for which are produced in the preceding Paragraph, Therefore, it is clear that the appellant is entitled for depreciation @ 50% which was given as an incentive fora short period between 01/01/2009 to ;- '04/2009 but the period was later on extended upto 01/10/2009. The vehicle purchased by the appellant fulfills all the conditions prescribed in (he income Tax Act and the related Motor Vehicle Act and falls within the definition of Commercial Vehicle. The Act has nowhere prescribed that a commercial vehicle should be a vehicle which is used for the purpose of hire. It only prescribes that the vehicle should be used for the purpose of business or profession. The appellant is, therefore, entitled for the depreciation @50%. The ground of appeal is accordingly allowed."
11. On hearing both the sides, we are of the considered view that Id. CIT(A) has rightly interpreted the relevant provisions of Motor Vehicle Act, wherein the word "Commercial Vehicle"
has been defined. Once the relevant Act has given a specification in respect of a particular type of vehicle, then there is no scope left to interpret the commercial vehicle as per common parlance or common understanding. The finding in this regard of Id. CIT(A) is hereby confirmed. This ground of the Revenue is dismissed."
9. Heard both the sides and perused the material on record. The ld. CIT(A) has deleted the addition after following the decision of Co-ordinate Bench of the ITAT Ahmedabad on identical issue and similar facts in the case of Voltamp Transformers Ltd. ITA 1676/Ahd/2012 dated 22nd March 2013 and the decision of ITAT Ahmedabad in the case of Sunil Kumar Dhulichand HUF Vs. ACIT (CPC) Bangalore ITA 454/Ahd/2013 as elaborated in his findings supra in this order. Following the decision of Co-ordinate Bench, we do not find any infirmity in the decision of ld. CIT(A), therefore, this ground of appeal of the Revenue is dismissed.
Ground No. 3 (Deleting disallowance of excise duty of Rs. 6,51,16,385/-) filed by revenue
10. At the time of assessment, the Assessing Officer noticed that assessee has claimed excise duty claim adjusted against securities premium account I.T.A Nos. 249/Ahd/2016 & 9 others Page No 10 DCIT vs. M/s. Arvind Ltd.
amounting to Rs. 3,67,71,030/- and Rs. 2,83,45,355/- respectively. On query, the assessee explained that the same has not been charged to P & L account rather it has been set off against the share premium account as per the scheme of capital reduction sanction by High Court of Gujarat dated 15th Feb, 2013 being an item of section 43B of the Act. It has been claimed on payment basis. The detailed explanation of the assessee vide submission dated 27.01.2014 is reproduced as under:-
"8. Your good self has asked the assesses company to explain the allow/ability of excise duty claim of Rs. 3,67,71,030/- and Rs.2,83,45,355/-. In this regard, the. assessee company submits that the said liability has not been charged to P&L account; but it has been created by charging it against Share Premium Account as per the scheme of Capital Reduction sanctioned by High Court of Gujarat dated 15/12/2013. Being an item of Section 43B of the Act it has been claimed on payment basis. In this connection, it is submitted that the said liability crystallized during the year under consideration and has been settled in the same year itself. Accordingly, the same has been claimed on payment basis as per the provisions of section 438 of the Act.
Since it has not been charged to Profit & Loss account for the year under consideration, it has been claimed separately in the Return of Income on payment basis. The assessee had already submitted the details of the said Excise Duty claim vide submission dated 19/12/2013. However, it resubmits the same vide Annexure-8. Since the payment has already made during the year, the said amount does not form part of outstanding liabilities at the end of the year, as reported in Enclosure-8 of Tax Audit Report."
Further, the assessee was submitted vide submission dated 29/01/2U14 submitted as under:-
Your good self has asked the assessee company to furnish the proof of payment of excise duty claim of Rs.6,51,16,385/-. [Shown in the computation of income as Rs.3,67,71,030/- and Rs.2,83,45,355/-]. The claim has been made as per the provisions of section 43B as the liability has been settled before the due date of filing the return of income for the year under consideration. The details are as under:-
Particular Amount (Rs.)
The issue under consideration was in relation to re-credit of s.2,48,59,319/- 1,72,21,030/-
in violation of Cenvat Credit Rules, 2002. The assesses company had freezed the said amount from the Cenvat Credit Account towards the final liability arising in the said matter on We outcome of the final decision. The copy of letter, dated 13/11/2009, addressed to The Commissioner of Central Excise, Ahmedabad-II; informing about the said amount so freezed under protest is attached herewith vide Annexure-2. The copy of Cenvat Credit Register for the period from 01/11/2009 to 13/11/2009 showing the debit entry of Rs. 2,48:59,319/- is attached herewith vide Annexure-2A.
The final order of The Commissioner of Central Excise, Ahmedabad-II was issued on 04/05/2010, wherein the final liability arrived at Rs. 1, 72, 21, 030/-- The copy of the said order is attached herewith vide Annexure-2B. Pursuant to the order so received, the assessee adjusted the said liability against the liability frozen (Rs.2,48,59,319/-). The copy of letter, dated 25/05/2010, informing the Commissioner of Central Excise, Ahmedabad- II about the adjustment of liability and payment of interest thereon is attached I.T.A Nos. 249/Ahd/2016 & 9 others Page No 11 DCIT vs. M/s. Arvind Ltd.
herewith vide Annexure-2C. It was a/so intimated that the balance of Rs. 76, 38, 289/- will be utilized in due course. In this context, the copy of Cenvat Credit Register for the period from 01/05/2010 to 30/05/2010 showing the credit entry of Rs. 76,38, 289/- is attached herewith vide Annexure-2D. Pursuant to order received by the assessee, as mentioned above, wherein the 18,42,068/- final liability of Excise was arrived at Rs. 1, 72, 2 1, 030/-, the assessee was liable to pay the interest thereon amounting to Rs.18,42,068/-. The copy of challan, dated 25/02/2010 reflecting the said payment is attached herewith the Annexure-3 Pursuant to the Order no. V.52/15-66/Off/OA2004-05 of The 4,16,41,543/- Commissioner of Central Excise, the Excise duty to the tune of Rs.4,16,41,543/- and Interest of Rs. 44, 11, 7447- .was reversed/paid. The copy of the said order is attached herewith vide Annexure-4 Further, the copy of letter, dated 13/05/2010, informing the Assistant 44,11,744 Commissioner of Central Excise regarding the reversal of duty and interest is attached herewith vide Annexure-4A. Further, the copy of challans reflecting the payment of Excise duty and Interest is attached herewith Annexure-48 Total Claim of Excise duty 6,51,16,385 In response to the submission of the assessee, the Assessing Officer was of the view that assessee got credit of CENVAT credit but actually it has not made any payment during the year, therefore, assessee was asked to explain why the same should not be disallowed. In this regard, the assessee has made submission vide letter dated 22nd March, 2014, the same is reproduced as under:-
"7. Explanation regarding claim for Excise duty Your good self has asked the assessee company to explain as to why the claim of Excise duty amounting to Rs.6,51,16,385/- should not be disallowed since the same is not actually paid during the year under consideration. It is also stated by your goodselves that the same is not even reported in the Tax Audit Report.
7.1 In this connection, it is submitted that the assessee has explained the accounting treatment of Excise duty and the necessary justifications for allowability of the claim of Excise duty, explaining the background of the transaction vide submission dated 27/01/2014. The same is not repeated here for the sake of brevity. However, it is reiterated that Cenvat Credit has been written off is a business loss occurred during the course of business and hence allowable as deduction while computing the business income for the year under consideration. 7.2 With regards to the query as to no payment has been made in respect of the Excise duty claimed while computing the business income, the assessee would like to bring to your reference the fact that the payment of Excise duty can be made //, following two ways.
a) By debiting the PLA account. - In this case, PLA account in maintained with - the Excise Department; wherein the debit balance is maintained by making payment through cash or bank.
Payment of Excise duty can be made through such account I.T.A Nos. 249/Ahd/2016 & 9 others Page No 12 DCIT vs. M/s. Arvind Ltd.
b) By utilizing the Cenvat credit - In this case, Excise duty payable on sales is adjusted against the Cenvat Credit receivable which has been availed on purchases. The records of such Cenvat credit is maintained in RG 23 register as per the Excise law.
73 In the instant case, Cenvat Credit in respect of the excess electricity cleared outside the factory at the contractual rates was in dispute and the same was settled against the assessee; wherein it was held that cenvat credit attributable to inputs used for the generation of electricity passed on / sold out by the assessee to Ahoka Spintex and Arvind Polycot Limited is required to be reversed/paid. The copies of the orders, wherein the said matter was settled have already been submitted vide submission dated 29/01/2014.
In view of the orders so received, the assessee has reversed/paid cenvat credit attributable to the generation of electricity sold out by it. Further, the interest thereon has also been paid and the proofs regarding the same have already been submitted vide submission dated 29/01/2014, 7.4 In the instant case, the payment has been made by way of utilizing Cenvat credit balance and therefore the same is deemed to be paid. Had the assessee was not having balance in cenvat credit receivable^ it^ would have made the payment respect of such liability settled, by PLA account However, the assesse was having enough Cenvat credit Receivable and therefore the payment has been made by adjusting against the Cenvat Credit.
7.5 In addition, it is to be noted that the assessee is following an exclusive method of accounting wherein the purchase and sales are shown at net of Excise duties. It shall be noted that had the Cenvat Credit attributable to the generation of electricity sold out by the assessee was not availed in the relevant year; then the same would have formed part of fuel expense, debited to profit and loss account, in the relevant year and thereby allowed to the assessee while computing the business income.
7.6 In addition to above, the assessee company submits that the said liability has not been charged to P&L account; but it has been created by charging it against Share Premium Account as per the scheme of Capital Reduction sanctioned by High Court of Gujarat dated 15/12/2013. Since it has not been charged to Profit & Loss account for the year under consideration, it has been claimed separately in the Return of Income on payment basis.
Further, with regards to the observation as to why the same has not been reported in the Tax Audit Report, it is submitted that the said liability crystallized during the year under consideration and has been settled in the same year itself. Accordingly, the same does not form part of outstanding liabilities at the end of the year, as reported in Enclosure-8 of Tax Audit Report 7.7 Moreover, it shall be noted that clause 22(a) of the Tax Audit Report is in respect of amount of Modvat/Cenvat credit availed of or utilized during the previous year and its treatment in the profit and loss account and treatement of the outstanding Modvat/Cenvat credit in the accounts. The details thereof have been reported in Enclosure-9 to the Tax Audit Report. It has been clearly mentioned that the excise duty paid on raw materials is debited to the Modvat credit receivable account and the Excise duty payable is adjusted against the modvat credit receivable account- In view of the above, it is submitted that the reversal of cenvat credit is deemed to be payment and therefore the same cannot be disallowed."
However, the Assessing Officer has not accepted the submission of the assessee stating that the assessee has reversed the CENVAT credit on the order of excise department and the same was not certified by the auditor in his report in form 3CD. The Assessing Officer was of the view that assessee has not paid excise duty actually, therefore, the same was not allowable u/s. 43B of the Act. Therefore, the claim of excise duty adjusted against I.T.A Nos. 249/Ahd/2016 & 9 others Page No 13 DCIT vs. M/s. Arvind Ltd.
securities premium account amounting Rs. 6,51,16,385/- (Rs. 3,67,71,030 + Rs. 2,83,45,355/-) was disallowed and added to total income of the assessee.
11. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of the decision of ld. CIT(A) is reproduced as under:-
"7.3 I have carefully considered the Assessment Order and submission filed by Appellant. The brief facts pertaining to above addition made by Assessing Officer are that the appellant had been using Naphtha as fuel in gas turbine for the generation of Electricity. A part of the electricity so generated was for captive consumption in the manufacture of final product and part of electricity so generated was wheeled (sold) out to Ashoka Spintex and Arvind Polycot Limited. The CENVAT credit on fuel used in the generation of electricity is admissible for electricity used within the factory for production i.e. Inputs used for generation of electricity cleared outside the factory is not entitled for CENVAT Credit. The appellant had accordingly reversed CENVAT Credit of duty availed on input Naptha attributable to the electricity passed on to other entities. However, from March 2004, the appellant stopped reversing credit and also suo motu took re-credit of CENVAT credit reversed by them earlier for certain period. However, issue pertaining to matter of re-credit of excise duty was in dispute and it was ultimately held that CENVAT credit attributable to inputs used for generation of electricity sold to Ashoka Spintex and Arvind Polycot is required to be reversed/paid and amount of Rs. 6,51,16,385/- was paid to Excise Authority by adjusting CENVAT receivable account. The appellant has claimed above referred adjustment of excise balance against securities premium A/c amounting to Rs. 3,67,71,030/- and Rs. 2,83,45,355/- in balance sheet and same was claimed as loss in return of income. This claim of Appellant was not accepted by Assessing Officer on the ground that it has not paid excise duty. The appellant has reversed the Cenvat credit on the order of Excise Department. The same was not certified by the Auditor in his report in Form No. 3CD Report. The appellant has followed mercantile system and not paid excise duty actually. The deduction u/s 436 of the Act is available in respect of any sum payable by way of tax or duty under any law for the time being in force or any sum payable by the assesses only if the same is actually paid by the assessee. Thus, the claim of excise duty adjusted against securities premium A/c is added to the total income of the appellant as the same is not actually paid by the appellant On the other hand, Appellant has argued that is following an exclusive method of accounting the purchase and sales in the profit and loss account are reflected at net of Excise duties. It was further submitted that manner in which payment of excise duty can be made is either by debiting the PLA account or by utilizing the CENVAT credit. The Assessing Officer has disallowed the CENVAT Credit so reversed on the ground that actual payment has not been made which is a pre-requisite for admissibility for the expenses covered u/s 438 of the Act. It was also submitted that credit means a subsequent claim of set-off for something paid earlier. When CENVAT credit receivable is adjusted against CENVAT Payable/excise duty, it is deemed to be a payment. The main reason for insertion of CENVAT (erstwhile MODVAT) was to ensure that cascading effect of tax does not take place and tax on tax is not levied in the chain of goods produced by a manufacturer being passed through various hands and ultimately reaching the end or final consumer. When the CENVAT credit initially receivable was subsequently reversed, the nature of such reversal would be Excise Duty Payable hence it could be set-off against CENVAT receivable. Adjustment of CENVAT credit deemed to be one of the modes of payment of excise duty under Excise rules and such adjustment made by Appellant is not disputed by Excise Authorities. The appellant relies on the following decisions:
i) Hawkins Cookers Ltd. vs ITO, 14 DTR 206 (Mumbai ITAT)
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 14
DCIT vs. M/s. Arvind Ltd.
ii) ACIT vs Kaiser Industries ltd. (Delhi ITAT) [2011] 10 taxmann.com 133 ITA No. 555/Del/2010 dated 18.02.2011
iii) CIT vs Shakti Spring Industries Pvt. Ltd. (Jharkhand high Court) [2013] 39 taxmann.com 19 So far as argument of Assessing Officer that the appellant has reversed the CENVAT credit on the order of excise department but the same is not certified by the Auditor in his report in Form No. 3CD Report, Appellant has drawn attention to clause 22fa) of the Tax Audit Report which is in respect of amount of MODVAT/CENVAT credit availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of the outstanding MODVAT/CENVAT credit in the accounts. It has been clearly mentioned that the excise duty paid on raw materials is debited to the MODVAT credit receivable account and the Excise duty payable is adjusted against the MODVAT credit receivable account.
7.5 On careful consideration of entire facts it is observed that Appellant was required to pay excise duty of Rs. 6,51,16,385/- on the ground that in earlier Assessment Years it has wrongly taken CENVAT credit pertaining to inputs used for generation of electricity which is sold to outside parties. It is observed that Appellant has been consistently following exclusive method of accounting hence at the time of taking credit of CENVAT Appellant has already claimed expenditure net of such CENVAT credit hence when it is held that Appellant is not entitled to such CENVAT Credit in view of subsequent orders of Excise Authorities, Joss is business loss for Appellant. The only dispute raised by Assessing Officer is that as Appellant has not made payment of such Excise Duty through cheque or utilizing PLA but utilized CENVAT credit receivable account, it is not entitled to claim it as expenditure in year under consideration. This observation of Assessing Officer cannot be accepted as Excise Act itself provides payment mechanism of excise duty either through PLA or utilization of CENVAT credit. When Appellant is utilizing CENVAT credit balance available with it as per mechanism provided in Excise Act, it is in fact reducing CENVAT credit available with it and to that extent payment is already made to Excise Authorities. Whether utilization of such CENVAT credit is eligible for deduction under Section 438 or not is already held in favour of Appellant by Hon'ble Mumbai ITAT in the case of Hawkins Cookers Limited v/s ITO 14DTR 206 wherein it is held as under:
"In case of where there is no actual payment but adjustable against MODVAT Account, whether the assessee is entitled to claim deduction under section 43B. For this purpose, we would like to refer to the decision of ITAT Special Bench, Chandigarh in the case of Dy. C/T V Glaxo Smithkline Consumer Healthcare Limited 107 ITD 343 (CHD)(SB) wherein it was held that the MODVAT balance as such does not amount to payment. The balance becomes equivalent to payment only at the point of time the assessee exercises his option to set off the balance against the Central Excise liability and not before. It is to note that the issue pertaining to simple adjustment of balance in MODVAT account was before the ITAT Special Bench, Chandigarh. While giving effect of section 145A, the adjustment of balance in MODVAT account was not before the ITAT Special Bench, Chandigarh. In cases where there are statutory compellation under section 145A to give adjustment in closing stock, in such cases it has to presume that the assesses has exercised his option to set off against MODVAT Account. On the basis of the ratio laid down by the ITAT Special Bench Chandigarh in the case of Dy. CIT V Glaxo Smithkline Consumer Healthcare Limited 107 ITD 343(CHD)(SB) it is to be presumed that the assesses exercises his option to set off MODVAT account against excise liability, which amounts to payment of excise duty and accordingly the assessee is entitled to deduction under section 43B."
The similar observation is also made in decision of Delhi ITAT in the case of ACIT vs Kaiser Industries Limited referred in Appellant's submission. Even Hon'ble Supreme Court while dealing with issue under Excise Act in the case of Eicher Motors Limited vs Union of India (supra) has held that if unexpired MODVAT credit is set off against excise duty payable, the liability is extinguished and it is held that such set off is as good as excise duty paid. It is a/so observed that even Tax Auditor has given aggregate utilization of CENVAT credit in year Under consideration in Tax Audit Report which includes reversal of CENVAT credit and payment thereof against I.T.A Nos. 249/Ahd/2016 & 9 others Page No 15 DCIT vs. M/s. Arvind Ltd.
available CENVAT credit balance hence argument of Assessing Officer that such treatment is not certified by Auditor is incorrect.
So far as decision of Hon'ble Supreme Court in the case of CIT vs Maruti Udyog Limited 186 Taxmann 49 relied upon by Assessing Officer it is appropriate to reproduce the decision rendered by Court as under:
1, Though the High Court has admitted the appeal and though it has framed questions of law, it is the grievance of the Department that the following questions have also arisen for determination by the High Court and they have not been formulated for decision under section 260A of the Income- tax Act, 1961. The said questions are as follows :
"(i)Whether the Tribunal was right in law in holding that unutilized MODVAT credit of earlier years adjusted in the assessment year in question should be treated as actual payment of excise duty under section 43B of the Income-tax Act, 1961.
(ii)Whether the Tribunal was right in law in holding that customs duty paid and allowed as a deduction under section 43B cannot be added to the value of the closing stock." 2. To this extent, the Department succeeds and accordingly we direct the High Court to decide the above questions under section 260A in the Income-tax Appeal pending before it (ITA 1683 of 2006)."
Thus, it is very clear that Hon'ble Supreme Court has directed Delhi High Court to insider and decide the question of law pending before it along with above question of law and not held that adjustment of unutilized MODVAT Credit of earlier year is not actual payment of excise authorities as observed by Assessing Officer. It is observed that even reference was made to Supreme Court for the case where Assessee has claimed advance payment of excise duty as deduction under Section 43B whereas in the Appellant's case, it has utilized available CENVAT credit balance for making payment of excise duty which actually represents payment of excise duty. It is further observed that above liability of excise is raised in year under consideration was settled by utilizing CENVAT credit during the year under consideration itself and if the contention of the Assessing Officer is accepted, entire utilization of CENVAT credit balance for making payment of excise duty arising out of sale made during the year would be allowed as deduction as there is no 'payment as alleged by Assessing Officer and this is not the intention of providing CENVAT mechanism under the Excise Act. In the present case it is observed that appellant was having CENVAT balance with excise authorities which is nothing but excise payment at the time of purchase of goods/materials and it had utilized such balance for making payment of CENVAT referred supra and after such utilization, its available balance with excise authorities have got reduced and the same is nothing but payment of excise to concerned authorities. Thus, for the reasons stated herein above, disallowance of Rs. 6,57,76,385/- is deleted. This ground of appeal is allowed."
12. During the course of appellate proceedings before us, ld. Departmental Representative has submitted that Assessing Officer has rightly relied upon the decision of Hon'ble Supreme Court in the case of CIT vs. Maruti Udhyog Ltd. 186 taxman 49. The ld. Departmental Representative has also quoted Civil Application No. 1923 of 2018 of Hon'ble Supreme Court 114 taxman.com 129 SC dated 7th Feb, 2020. The ld. Departmental Representative has referred para 16 of the order and contended that unrealized credit under MODVAT is not qualified for deduction u/s. 43B of I.T.A Nos. 249/Ahd/2016 & 9 others Page No 16 DCIT vs. M/s. Arvind Ltd.
the Act. On the other hand, the ld. counsel has referred page no. 60 of the order of ld. CIT(A) and submitted that assessee has utilized entire balance of CENVAT credit for making payment and facts in the case of assessee are entirely different from the decision of Hon'ble Supreme Court in the case of Maruti Udhyog Ltd. In this regard, the Hon'ble Supreme Court held that as the liability to pay excise duty under the excise act arises on manufacture/removal of finished goods from the factory, amount outstanding under MODVAT account was not eligible for deduction u/s. 43B. It was merely the expenditure of excise duty that has shifted from the manufacture to the purchaser and not the liability to the same. Therefore, it was concluded that the unutilized credit under MODVAT scheme did not qualify for deduction u/s. 43B whereas in the case of assessee the facts are entirely different, the assessee had been using Naptha as fuel in gas turbine for the generation of electricity. A part of electricity generated was for captive consumption in the manufacture of final product and part of electricity so generated was sold out to Ashoka Spintex and Arvind Polycot Ltd. The CENVAT credit on the fuel used for the generational of electricity was admissible for electricity use within the factory, for production for example input use for generation of electricity cleared outside the factory is not entitled for credit. Therefore, the assessee had accordingly reversed CENVAT credit of duty availed on input Naptha attributable to the electricity passed on to other entities. However, from March, 2014 the assessee stopped reversing credit and also suo motto took re-credit of CENVAT credit reversed by them earlier for certain period. However, the matter was in dispute and ultimately it was held that CENVAT credit attributable to input used for generation of electricity sold to Ashoka Spintex I.T.A Nos. 249/Ahd/2016 & 9 others Page No 17 DCIT vs. M/s. Arvind Ltd.
and Arvind Polycot Ltd. is required to be reversed/paid, therefore, an amount of Rs. 6,51,16,385/- was reversed/paid to excise authority by adjusting CENVAT receivable account. The ld. counsel has further submitted that decision of Hon'ble Supreme Court in the case of Maruti Udhyog Lt, relied upon by the Assessing Officer was not related to the issue pertained to the case of the assessee. The ld. counsel has relied upon the decision of ld. CIT(A).
13. Heard both the sides and perused the material on record. The assessee has been using Naptha as fuel gas turbine for the generation of electricity. A part of the electricity so generated was for captive consumption for the manufacture of final product and part of the electricity so generated was sold out to one of sister concerns of the assessee. The CENVAT credit of fuel used for the generation of electricity is admissible for electricity used within the factory for production i.e. input used for generation of electricity cleared outside the factory is not entitled for CENVAT credit. Therefore, the assessee has reversed CENVAT credit of duty availed on input Naptha attributable to the electricity passed on to other entities. However, from March, 2004 the assessee stopped reversing credit of CENVAT which was earlier reversed by it for certain period. The matter was in dispute and it has been held by the excise authority that the CENVAT attributable to input used for generation of electricity which was sold to other entities was required to be reversed. There would be no CENVAT credit on input (Napth) used for generating electricity sold to other entities. The Assessing Officer was of the view that assessee has not made any payment of excise duty through cheque or utilizing P & L Account therefore the assessee was I.T.A Nos. 249/Ahd/2016 & 9 others Page No 18 DCIT vs. M/s. Arvind Ltd.
not entitled to claim of excise duty expenditure during the year under consideration. The issue has been discussed in detail in the finding of ld. CIT(A) as elaborated in this order, that assessee was required to pay excise duty of Rs. 6,51,16,385/- on the ground that in earlier assessment year it had wrongly taken CENVAT credit pertaining to input used for generation of electricity which was sold to outside parties. The same was settled by utilizing CENVAT credit during the year under consideration. The assessee has followed exclusive method of accounting as purchases and sales in the P & L A/c are reflected at net of excise duties. The CENVAT credit receivable is shown in the Balance Sheet under the head loan and advances. Since the excise authority held that CENVAT credit on fuel used for generation of electricity supplied to the outside entities is not available therefore the assessee has adjusted CENVAT credit receivable against CENVAT payable/excise duty. The assessee has exercised his option to set off CENVET credit against excise liability, which amounts to payment of excise duty, therefore, assessee is entitled to deduction u/s. 43B of the Act. As referred in para 12 of this order, the facts in the case of the issue are distinguishable from the facts of the case law cited by the Ld. DR in the case of CIT vs. Maruti Vdygo Ltd. 86 taxman as in that case the assessee has claimed advance payment of excise duty as deduction under section 43B whereas in the case of the assessee as elaborated above the assessee has used the CENVAT credit balance for making payment of excise duty. The records of CENVAT credit is maintained in RG 23 register as per excise law and adjustment of CENVAT credit is one of the mode of payment of excise duty under Excise Rule. Considering the above facts and findings, we do not find I.T.A Nos. 249/Ahd/2016 & 9 others Page No 19 DCIT vs. M/s. Arvind Ltd.
any infirmity in the decision of ld. CIT(A). Accordingly, this ground of appeal of revenue is dismissed.
Ground No. 3 (adding quantum of disallowance u/s. 14A for computing book profit u/s. 115JB of the Act) of Cross Objection filed by assessee
14. At the outset, the ld. counsel submitted that this issue is covered in favour of the assessee as per the decision of Special Bench of ITAT in the case of the ACIT Vs. Vinit Investment Pvt. Ltd. (2017) 82 taxman.com 415 wherein it is held that expenses incurred to earn exempt income not to be added for computing book profit u/s. 115JB of the Act. The ld. Departmental Representative is fair enough not to controvert these undisputed fact that issue is squarely covered by the decision of Special Bench. Following the decision of Special Bench as above, we consider that disallowance made u/s. 14A is not required to be added for computing book profit u/s. 115JB of the Act. Therefore, this ground of cross objection of the assessee is allowed.
Ground No. 4 (Disallowance of Rs. 61,19,869/- on account of employee's contribution ) of cross objection filed by assessee
15. During the course of assessment, the Assessing Officer observed that assessee has failed to deposit employee's contribution to provident fund and ESIC before due date prescribed under relevant provisions of the said acts. Therefore, in accordance with the provision of section 36(1)(va) r.w.s. 2(24)(x), the Assessing Officer made disallowance of Rs. 61,19,869/-. The ld. CIT(A) has sustained the disallowance made by the Assessing Officer.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 20 DCIT vs. M/s. Arvind Ltd.
16. Heard both the sides and perused the material on record. It is observed that the issue is covered by the decision of Hon'ble Gujarat High Court in the case of Gujarat State Road Transport 366 ITR 170 wherein it is held that where an employer has not credited sum received by it as employee's contribution to employees account in relevant fund on or before due date as prescribed in explanation to section 36(1)(va), the assessee is not entitled to deduction of such amount, therefore, we do not find any infirmity in the decision of ld. CIT(A). Accordingly, this ground of cross objection is dismissed.
17. Ground No. 5:- This ground of appeal pertains to initiation of penalty is premature at this stage and the same stands dismissed.
ITA No. 2057/Ahd/2016 filed by revenue & ITA No. 1846/Ahd/2016 filedby assessee Ground No. 1 (Deleting the addition of Rs. 4,41,77,801/- on account disallowance u/s. 14A) filed by revenue Ground No. 1.1 to 2 (Sustaining part of the disallowance of interest expenditure of Rs. 3,97,291/- u/s. 14A r.w.r. 8D of the Act) filed by assessee
18. As the facts and issue involved in ground no. 1 of appeal vide ITA No. 249/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 2057/Ahd/2016 Assessment Year 2011-12, therefore, after applying the decision adjudicated vide ITA No. 249/Ahd/2016 as supra in this order, the disallowance is restricted to I.T.A Nos. 249/Ahd/2016 & 9 others Page No 21 DCIT vs. M/s. Arvind Ltd.
exempt income earned by the assessee to the amount of Rs. 52,37,680/-. Therefore, the appeal filed by the revenue on this issue is dismissed and the appeal of the assessee on this issue is partly allowed.
Ground No. 2 (Deleting addition u/s. 14A for computing book profit u/s. 115JB) filed by revenue
19. As the facts and issue involved in ground no. 3 of appeal vide C.O. No. 43/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 2057/Ahd/2016 Assessment Year 2011-12, therefore, after applying the decision adjudicated vide C.O. No. 43/Ahd/2016 as supra in this order, this ground of appeal of the revenue is dismissed.
Ground No. 3 (Deleting the addition of Rs. 14,06,339/- made u/s. 41(1) of the act) filed by assessee
20. During assessment, the Assessing Officer noticed that assessee has shown sundry creditors of Rs. 506.16 crores. On perusal of the detail filed, the Assessing Officer noticed that assessee has shown sundry creditors in respect of six parties as on 31st March, 2009, 31st March, 2010, 31st March, 2011, 28th Feb, 2015 to the amount of Rs. 14,06,339/-. The Assessing Officer asked the assessee that why this liability should not be presumed to be ceased in view of the fact that till date the amount due to such parties has not been paid. The assessee explained that this liability is still existed and the same has not to be ceased. The Assessing Officer has not agreed with the submission of the assessee and disallowed the amount of Rs. 14,06,339/-
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 22 DCIT vs. M/s. Arvind Ltd.
as deemed income of the assessee as per provision of section 41(1) of the Act.
21. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has deleted the disallowance made by the assessee.
22. Heard both the sides and perused the material on record. It is undisputed fact that assessee has not written back the aforesaid liability and it is still shown in the books of account as payable. Therefore, considering the decision of Hon'ble Jurisdictional High Court of Gujarat in the case of CIT vs. Bogilal Kamjibhai Atara (2014) 43 taxman.com 55, we do not find any infirmity in the decision of ld. CIT(A) ld. CIT(A) since there was noting on record to indicate that there was cessation of liability during the year under consideration. Therefore, this ground of appeal of the revenue is dismissed.
Ground No. 4 (Deleting addition of Rs. 14,40,165/- made on account of depreciation of motorcar vehicle @15%) filed by revenue
23. As the facts and issue involved in ground no. 2 of appeal vide ITA No. 249/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 2057/Ahd/2016 Assessment Year 2011-12, therefore, after applying the decision adjudicated vide ITA No. 2057/Ahd/2016 as supra in this order, this appeal of the revenue is dismissed.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 23 DCIT vs. M/s. Arvind Ltd.
Ground No. 5 (Deleting the addition of Rs. 80,37,739/- made on account of treating expenditure on repairs on plant and machinery as capital expenditure) filed by revenue
24. During assessment, the Assessing Officer noticed that assessee has debited an amount of Rs. 76.21 crores on account of machinery repair to P & L. On perusal of the detail filed, the Assessing Officer was of the view that expenses to the amount of Rs. 86,89,448/- paid to Mouvo Pignone on account of spare parts was not on account of current repairs but was on account of assets which was having enduring benefit. The assessee explained that these expenditure was of the nature of repair to maintain a already existing asset. However, the Assessing Officer was of the view that purchasing of spare parts to the amount of Rs. 86,89,448/- was of the nature of enduring benefit, therefore, the Assessing Officer has capitalized the same after providing depreciation @ 15% to the assessee. The ld. CIT(A) has allowed the appeal of the assessee after placing reliance on the decision of ITAT Ahmedabad in the case of Banco Product Ltd. ( ITA No. 1105/Ahd/2020 dated 25th October, 2010)
25. Heard both the sides and perused the material on record. Without reiterating the facts as above, the Assessing Officer has disallowed the expenditure claimed by the assessee as incurred on repair/maintenance on plant and machinery. It is clear from the facts as elaborated above in the finding of ld. CIT(A) that the assessee has incurred the expenditure for repairing of existing spare parts as evident from the invoices and detail of contract note mentioned in the finding of ld. CIT(A). The Revenue has not controverted the facts reported in the finding of the ld. CIT(A), therefore, I.T.A Nos. 249/Ahd/2016 & 9 others Page No 24 DCIT vs. M/s. Arvind Ltd.
following the decision of Co-ordinate Bench of the ITAT as referred by the ld. CIT(A), we do not find any infirmity in the decision of ld. CIT(A). Therefore, this ground of appeal of the revenue stands dismissed.
Ground No. 6 (Deleting the addition of Rs. 59,27,640/- made on account of disallowance of commission expenditure)
26. During the course of assessment, the Assessing Officer observed that assessee has incurred commission and brokerage expenditure of Rs. 29.16 crores and claimed commission expenditure pertaining to assessment year 2010 of Rs. 59,29,640/- in the current year without establishing that such expenditure was crystalised in the current year. The assessee explained that it has been consistently making provision for commission expenditure on mercantile basis on year to year basis at the end of financial year on the basis of sale made in that financial year. At the beginning of next accounting year such provision is reversed and when party raised bill for commission, expenditure is debited in commission account hence above commission is settled against provision made in earlier year and expenditure is not a prior period expenditure. The Assessing Officer has not accepted the submission of the assessee and stated that such expenditure pertained to the earlier year.
27. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of the decision of the ld. CIT(A) is reproduced as under:-
"7.3 I have carefully considered the Assessment Order and the submission filed by the Appellant The Assessing Officer has observed that Appellant has incurred commission and brokerage expenditure of Rs.2016 crones and on the basis of details submitted by Appellant, it was found that I.T.A Nos. 249/Ahd/2016 & 9 others Page No 25 DCIT vs. M/s. Arvind Ltd.
Appellant has claimed commission expenditure pertaining to A.Y.2010 for Rs.59,27,640/- in current year without establishing that such expenditure was crystallized in current year. On the other hand, Appellant has relied upon submission dated 25th March, 2015 filed before Assessing Officer wherein it was explained that Appellant is consistently making provisions for commission expenditure on mercantile basis on year to year basis at the end of financial year on the basis of sales made in that financial year. At the beginning next accounting year, said provision is reversed and when party raises bill for commission, expenditure is debited in commission account hence above commission is settled against provision made in earlier year and expenditure is not a prior period expenditure. It is also argued that even if it is held that expenditure pertains to preceding Assessment Year, same need to be allowed in current year as effective tax rate for both Assessment Years remained the same.
On careful consideration of entire facts, it is observed that Appellant provides for 'commission payable on sales at year end and expenditure is debited in the year to which it relates. On the basis of such accounting policy it has provided for aggregate provision of Rs. 1.44 crores in A.Y. 2010-11. The provisions made in A.Y. 2010-11 is reversed in A.Y. 2011-12 on 1st April, 2010 which means that ledger account of commission expenditure is credited by reversal of provision made in earlier year. Against above provision Appellant has received bill of commission agent in current year and such expenditure is debited as commission expenditure in current year and TDS is also deducted. As expenditure of Rs. 59,27,640/- is lower than provision made in earlier year, in fact, Appellant has not claimed such expenditure in current year but same were claimed in earlier year to which it relates. Considering this fact, it is observed that Assessing Officer is incorrect in observing that Appellant has claimed prior period expenditure in current Assessment Year. It is also observed that Assessing Officer has not doubted the genuineness of such expenditure and if such expenditure pertains to earlier year, it can be allowed as expenditure in said Assessment Year and even this exercise is tax neutral as held by Hon'ble Delhi High Court in the case of Vishnu Industrial Glasses and Shriram Piston & Rings Ltd. It is also observed that Hon'ble Ahmedabad ITAT in the case of Adani Enterprises Limited (ITA No. 1859/Ahd/2011, dated 1st January, 2016) has held as under:
"5. We have heard rival contentions. Page 13to 16 of the paper book comprise all details of assessee's prior period expenditure amounting to Rs. 67,88,591/- falling under major heads of C & F, misc. expenditure, outward freight and travelling etc. Its ledger accounts reveals that the same have been recognized on various dates from 01-04-2005 to 31-03-2006. There is hardly any dispute on genuineness aspect of the above stated expenditure heads. This is not the Revenue's case that the same is capital expenditure otherwise not allowable u/s. 37 of the Act. Both the lower authorities nowhere rebut assessee's case that it has been following past practice or the issue stands decided in its favour in earlier assessment years. Case law (1958) 33 ITR 681 (Bom) CIT vs. Nagri Mills Co, Ltd holds that when an assesses company is assessed at uniform rate, year of raising an expenditure claim is of no consequence, more particularly, when the same is allowable. Next judgment (2010) 194 TAXMANN 158 (Del) CIT vs. Jagatjit Industries accepts consistent accounting practice claiming identical expenditure in mercantile system of accounting wherein the necessary expenditure vouchers have been received after 31st March of the relevant accounting period. Case law (2014) 221 TAXMANN 80 (Bom) CIT vs. Mahanagar Gas Ltd supports assessee's case that prior period expenditure crystallize during the year on receipt of bills is allowable. This is followed by (2010) 328 ITR 17 (Del) CIT vs. Exxon Mobil Lubricants Pvt. Ltd upholding CIT(A)'s and tribunal's view that if the assesses admits prior period income which was not excluded while working out relevant previous year income, it is unreasonable to allow one part of prior period adjustment i.e. prior period expenditure.
We come to Revenue's case law now. The first one is (2013) 33 taxmann.com 92 (Bang) Bearing Point Business Solutions vs. DCIT and (2013) 35 taxmann.com (Hyd) now Bharat Ventures Ltd vs. CIT deciding the issue in Revenue's favour. We find that these tribunal's decisions do not confirm to different views of various Hon'ble high courts hereinabove. Next case law (2013) 42 taxmann.com 142 (Guj) CIT vs. Gujarat Mineral Development Corporation is an admission order after framing substantial question of law wherein the main case is still pending for final disposal. We observe that this latter order does not settle a ratio. We take into account above stated I.T.A Nos. 249/Ahd/2016 & 9 others Page No 26 DCIT vs. M/s. Arvind Ltd.
discussions, relevant facts and case law to conclude that both the lower authorities have wrongly disallowed assessee's claim or prior period expenditure. The same stands deleted. This first substantive ground is treated as allowed."
Considering the facts discussed herein above, addition of Rs.59.27640/- is deleted. This around of appeal is allowed."
28. Heard both the sides and perused the material on record. In view of the decision of Hon'ble Co-ordinate Bench of the ITAT in the case of Adani Enterprises as elaborated in the finding of ld. CIT(A) as above, we do not find any infirmity in the decision of ld. CIT(A). Therefore, this ground of appeal of the revenue stands dismissed.
Ground No. 4 ( Addition of Rs. 65,80,813/- on account of employee's contribution to Provident Fund and ESI) filed by assessee
29. As the facts and issue involved in ground no. 4 of appeal vide C.O. No. 43/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 1846/Ahd/2016 Assessment Year 2011-12, therefore, after applying the decision adjudicated vide C.O. No. 43/Ahd/2016 as supra in this order, this ground of cross objection of the assessee is dismissed.
Ground No. 5 (Addition of Rs. 1,84,89,600/- on account of written off stock) filed by assessee
30. During the course of assessment, Assessing Officer noticed that assessee company has claimed an amount of Rs. 20,24,99,600/- under the head stock written off against security payment. On perusal of the detail filed, the Assessing Officer stated that assessee has not provided any detail regarding the claim of stock written off to the amount of Rs. 18,18,600/-
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 27DCIT vs. M/s. Arvind Ltd.
being fabric garment, therefore, he held that claim of deduction is not tenable for want of documentary evidences.
31. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee. The relevant part of the decision of ld. CIT(A) is as under:-
"8.2. I have carefully considered the Assessment Order and the submission filed by the Appellant. The Assessing Officer has observed that Appellant has not provided details regarding stock written off for Rs.1,84,89,600/- being fabric garments hence such loss was disallowed while computing total income. On the other hand Appellant has argued that it has submitted complete details of stock written off against security premium hence Assessing Officer is not justified in disallowing the above claim.
On careful, consideration of entire facts, it is observed that Appellant has submitted details regarding stock written off for Rs.20.24 crores against security premium. The Appellant's reply dated 25"1 March, 2015 is reproduced at page 35 to 36 of Assessment Order wherein it is apparent Appellant has submitted such details vide Annexure-2. The Assessing Officer has accepted the details tor /?s. 18.39- crores pertaining to stock written off against security premium for other division but, confirmed the disallowance on the ground that details regarding fabric division is not submitted. The Appellant has submitted such details before undersigned. However, the Appellant is unable to prove its contention that such details are already on record of Assessing Officer and part of submission dated 2 5 March, 2015. Secondly, from the details submitted, it is difficult to verify the stock written off for Rs. 1,84,89,600/~ being fabric garments. Considering these facts, disallowance made by Assessing Officer for Rs. 1,84,89,600/-is confirmed. This ground of appeal is dismissed."
32. During the course of appellate proceedings before us, the ld. counsel referred its submission reproduced at page no. 53 of the ld. CIT(A)'s order. The ld. counsel has also referred page no. 154 to 157 of the paper book which was submitted during the course of assessment and appellate proceedings before the lower authorities containing complete details and accounts of stock written off . The ld. counsel submitted that ld. CIT(A) has wrongly sustained the erroneous addition made by the Assessing Officer. On other hand, the ld. Departmental Representative supported the order of lower authorities.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 28 DCIT vs. M/s. Arvind Ltd.
33. During the course of assessment, the Assessing Officer disallowed the claim of stock written off of Rs. 1,84,89,600/- on the ground that assessee has not furnished relevant supporting detail pertaining to the stock written off. In this regard, we have gone through the copies of document placed at page no. 154 to 157 of the paper book i.e. the complete detail of the fabric stock including quantity, original rate value adopted and other relevant particulars. The Assessing Officer has not made any discussion on the aforesaid details furnished by assessee in the assessment order, therefore, we consider it appropriate to restore this issue to the file of the Assessing Officer for deciding afresh after examination and verification of the detail submitted by the assessee. Therefore, this ground of appeal of the assessee is allowed for statistical purposes.
34. Ground No. 6 of the assessee pertaining to levy of interest u/s. 234A, B, C and D stands dismissed since levying of interest is mandatory according to specific provisions of the Act.
35. Ground No. 7:- Since this ground of appeal against initiation of penalty is immature at this stage, therefore, this ground of appeal of the assessee stands dismissed.
ITA No. 273/Ahd/2018 A.Y. 2013-14 (assessee) & Cross Objection42/Ahd/2019 (revenue) Ground No. 1 (Restricted addition to Rs. 24,72,982/- u/s. 14A of the Act) filed by revenue and Ground No. 1 (confirming disallowance to the extent of Rs. 24,72,982/-) of Cross Objection filed by assessee I.T.A Nos. 249/Ahd/2016 & 9 others Page No 29 DCIT vs. M/s. Arvind Ltd.
36. As the facts and issue involved in ground no. 1 of appeal vide ITA No. 249/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 273/Ahd/2018 Assessment Year 2013-14 & CO 42/Ahd/2019 A.Y. 2013-14, therefore, after applying the decision adjudicated vide ITA No. 249/Ahd/2016 as supra in this order, the ld. CIT(A) has already restricted the disallowance to the extent of Rs. 24,72,982/- and after reducing the suo moto disallowance of Rs. 10,49,653/-, further disallowance of Rs. 2,47,294/- were made by the ld. CIT(A). Keeping in view the finding of ld. CIT(A) has rightly restricted the disallowance to the exempt income therefore we do not find any infirmity in the decision of ld. CIT(A). Accordingly, the appeal of the revenue and cross objection of the assessee both are dismissed.
Ground No. 2 (Addition of Rs. 8,86,45,931/- is not to be made while computing the book profit u/s. 115JB of the Act) filed by revenue
37. At the outset, the ld. counsel submitted that this issue is covered in favour of the assessee as per the decision of Special Bench of ITAT in the case of the ACIT Vs. Vinit Investment Pvt. Ltd. (2017) 82 taxman.com 415 wherein it is held that expenses incurred to earn exempt income not to be added for computing book profit u/s. 115JB of the Act. The ld. Departmental Representative is fair enough not to controvert these undisputed fact that issue is squarely covered by the decision of Special Bench. Following the decision of Hon'ble Delhi Special Bench in the case of Vinit Investment Pvt. Ltd. 82 taxman.com 415, we do not find any infirmity in the decision of ld. CIT(A) after applying the finding as per above, the appeal of the Revenue stands dismissed.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 30 DCIT vs. M/s. Arvind Ltd.
Ground No. 3 (Deleting the disallowance of Rs. 2,19,738/- on account of depreciation on motor vehicles which are not commercial vehicles) filed by revenue
38. As the facts and issue involved in ground no. 2 of appeal vide ITA. No. 249/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 273/Ahd/2018 Assessment Year 2013-14 therefore after applying the decision adjudicated vide I.T.A. No. 249/Ahd/2016 as supra in this order, this ground of appeal of the revenue is dismissed.
Ground No. 4 (Deleting the addition of Rs. 9,87,664/- made on account of cessation of liability u/s. 41(1) of the I.T. Act) filed by revenue
39. As the facts and issue involved in ground no. 3 of appeal vide ITA. No. 249/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 273/Ahd/2018 Assessment Year 2013-14 therefore after applying the decision adjudicated vide I.T.A. No. 249/Ahd/2016 as supra in this order, this ground of appeal of the revenue is dismissed.
Ground No. 2 (Confirming disallowance of Rs. 4,41,513/- being employee's contribution to Provident Fund and ESI) filed by assessee (CO)
40. As the facts and issue involved in ground no. 4 of appeal vide C.O. No. 43/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 273/Ahd/2018 Assessment Year 2013-14 therefore after applying the decision adjudicated vide C.O. No. 43/Ahd/2016 as I.T.A Nos. 249/Ahd/2016 & 9 others Page No 31 DCIT vs. M/s. Arvind Ltd.
supra in this order, this ground of the cross objection is
dismissed.
ITA No. 2054/Ahd/2018 A.Y. 2009-10 filed by revenue & ITA No.
1960/Ahd/2018 A.Y. 2009-10 filed by assessee
Ground No. 1 (Deleting Addition of Rs. 9,54,12,435/- made on account of disallowance of claim of bad debt)
41. During the course of assessment , the Assessing Officer noticed that assessee has reduced an amount of Rs. 9,54,12,435/- as provision against bad debt and doubtful debt. The Assessing Officer was of the view that the said bad debt were not actually written off in the books of account of the assessee in the previous year. On query, the assessee explained that bad debt written off to the tune of Rs. 0.08 crores was related to the debt which have been written off during the year under consideration by debiting to P & L account. The assessee has furnished the relevant detail and submitted that the corresponding income was offered to tax in the earlier years when the sale was made. In respect of claim of Rs. 9.54 crores, the assessee explained that it referred to bad debt written off during the year under consideration against provision for doubtful debt credited in earlier year. The assessee explained that it has rightly claimed deduction in respect of bad debt written off against the provision for bad debt as per the provisions of section 36(1)(vii) of the Act. The Assessing Officer has not accepted the submission of the assessee stating that since 2000-01, the assessee has consistently reduced doubtful debt from total debtor by making a provision and the figure reduced from debtor does not match the provisions made by the assessee in the profit and loss account. Therefore, assessee's claim of I.T.A Nos. 249/Ahd/2016 & 9 others Page No 32 DCIT vs. M/s. Arvind Ltd.
Rs. 9,54,12,435/- was disallowed and added to the total income of the assessee.
42. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of decision of ld. CIT(A) is as under:-
"5.3. I have carefully considered the Assessment Order and submission filed by the Appellant. The Appellant has claimed deduction of bad debt of Rs.9,54,12,435/- in return of income. The AO has observed that such amount is not debited in profit & loss account but reduced against provision for bad and doubtful debts in Balance Sheet- The Appellant has submitted its explanation which is reproduced at page No.3 to 5 of Assessment Order which includes details regarding provision for doubtful debts created in earlier Assessment Years, copy of return of income for such Assessment Years, etc. In such submission Appellant has also contended that provisions were created in the hands of Arvind Clothing Limited which was merged into Arvind Brands Limited and Arvind Brands Limited (Garment Division) was merged with Appellant subsequently and bad debt claimed pertains to such units and incomes were already offered to fax in earlier Assessment Years. However, the claim of Appellant was rejected by AO on the ground that though provision considered doubtful were reduced from debtor, no such provision was made in profit & loss account. The AO has also made a tabular chart showing year-wise amount pertaining to total debtors, provision reduced from debtor, provision for bad and doubtful debts in profit & loss account and actual bad debts claimed in profit & loss account. On the basis of such tabular chart, AO concluded that provision for bad and doubtful debt in profit & loss account is not matching with provision reduced from debtors, which means that Appellant has not properly disclosed the accounting treatment of bad and doubtful debts in financial statements.
During the course of Appellate Proceedings the ARs of the Appellant have relied upon the written submission filed before Assessing Officer and contended that in earlier years, there were three companies existing individually i.e. Appellant Company, Arvind Brand Limited (ABL) and Arvind Clothing Limited (ACL). Thereafter, pursuant to order of Hon'ble Gujarat High court, ACL was merged with ABL with effect from 1sl April, 2003 and thereafter, garment division of ABL (which includes ACL) was merged with Appellant from 1st April. 2006. In this background Appellant has contended that in earlier Assessment Year ACL and ABL have created provision for bad and doubtful debts from profit & loss account and such amount was not claimed as deduction in computation of total income. The Appellant has also submitted tabular chart adopting the figure compared by AO and contended that AO has wrongly compared the figure of provision for bad and doubtful debt debited in profit & loss account of two companies being ABL and ACL with provision reduced from debtors pertaining to Appellant Company. As ABL and ACL were not merged with Appellant in A. Y.2004- 05 to 2006-07, provision reduced from debtors in annual accounts of Appellant does not include figure of provision pertaining to above two companies. So far as mismatch of A. Y. 2008-09 and 2009-10 is concerned, ARs of the Appellant have contended that AO has taken the figure of provision for bad and doubtful debt in profit & loss account from annual accounts of appellant company and same were compared with consolidated Balance Sheet of appellant company which includes figures of all the subsidiaries and associate companies and due to such wrong comparison he has arrived at conclusion that there is mismatch in both the figures. The Appellant has submitted following reconciliation statement as to how figure of Rs.9,45,12,435/- arrived by it and claimed as bad debt which was a/so submitted before Assessing Officer:I.T.A Nos. 249/Ahd/2016 & 9 others Page No 33
DCIT vs. M/s. Arvind Ltd.
STATEMENT OF BAD DEBTS WRITTEN OF AGAINST PROVISION FOR BAD & DOUBTFUL DEBTS Fin. Year Provision as per Return Remark Claimed Net debt debt ABL ACL Total Debt Debt 1815530 Prior to FY 2000 not 0 identifiable 2000-01 123340 864321 13198361 Disallowed in return 0 40 2001-02 125461 3701992 16248144 Disallowed in return 0 52 2002-03 273994 1846985 4586932 Disallowed in return 700000 7 2003-04 110680 2891054 13959054 Disallowed in return 0 00 2004-05 711524 1439903 8555143 Disallowed in return 0 0 2005-06 211952 0 21195262 Disallowed in return 38589541 62 2006-07 265021 0 26502117 Disallowed in return 0 17 2006-07 246113 0 24611313 Created from Share 0 13 Premium A/c.
2007-08 446784 0 4467845 Disallowed in return 437725 5 2008-09 Total:- 1 10744255 135139701 39727266 95412 225799 435 1G
On the basis of above reconciliation Appellant has reiterated its contention that whenever provision for doubtful debt was created in profit & loss account, same was disallowed in return of income and corresponding income is already offered to tax. The Appellant has also submitted that during the course of Assessment Proceedings, it has submitted copy of ledger account of parties whose balances are written off in current year and contended that AO has not objected to the fact that bad debt was reduced from ledger balances of the such parties. It was also contended by Appellant that instead of crediting profit & loss account by reversal of provision for doubtful debts and claiming similar amount as bad debt in profit & loss account, Appellant has directly reduced I.T.A Nos. 249/Ahd/2016 & 9 others Page No 34 DCIT vs. M/s. Arvind Ltd.
such amount from provision created in earlier years. The above method of accounting and claiming bad debt as deduction is accepted by Ahmedabad IT AT In the case of Gujarat State Co-operative Bank Limited (supra), which was later on confirmed by Hon'ble Gujarat High Court. The Appellant has also relied upon decision of Hon'ble Supreme Court in the case of TRF Limited (supra) and contended that said decision merely states that for claiming bad debt, amount should be written off as irrecoverable in accounts ofAssessee and such condition is duly fulfilled by Appellant. On this basis Appellant has contended that disallowance made by AO should be deleted.
5.4. On careful consideration of entire facts, it is observed that during the course of Assessment Proceedings, Appellant has given ledger account of parties whose balances were written off in para - 1.1 of its written submission. The Appellant has also submitted statement showing party- wise bad debts along with the year in which corresponding income was booked and explained that all the parties were part of outstanding debtors in respect of sales made in earlier years and such amounts were written off as bad debt in current year. The AO has not disputed these facts which clearly prove that Appellant has written off debt in respective were already offered to tax in earlier year. The provisions of Section 36(1)(vii) of the Act as elaborately discussed in the decision of Hon'ble Supreme Court in the case of TRF 391 states that for claiming bad debt, amount would be written off as irrecoverable in Assessee's account and this condition is already fulfilled by Appellant. The only dispute raised by AO was that Appellant has not debited profit & loss account of current year by amount of bad debt but this contention of AO cannot be accepted as Appellant has debited the profit & loss account in the year in which provision for bad and doubtful debts were created and such amounts wore already disallowed in return of income. The Appellant has also submitted copies of return of income of all the previous Assessment Years to prove that bad debt which is claimed in current year is out of provision for bad and doubtful debts created in earlier Assessment Years and same was not claimed as deduction in respect Assessment Years. These facts are also not disputed by AO. The Appellant has adopted method of account by which it has reduced provision for bad and doubtful debts appearing in Balance Sheet instead of adopting method of account by which crediting profit & loss account by provision for bad and doubtful debts written back and correspondingly claiming bad debt in profit & loss account. By adopting both the methods of accounting the net result remains the same and parties' accounts are already reduced by bad debt. This issue is elaborately discussed by Hon'ble Ahmedabad ITAT in the case of Gujarat State Cooperative Bank Limited V/s DCIT (referred supra) and allowed the claim of Appellant for bad debt not debited in profit & loss account. This decision is further upheld by Hon'ble Gujarat High Court in 85 taxmann. com 259 wherein it is held as under:
"Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts (Writing off of debt) - Assesses was a co-operative bank - It claimed deduction on account of bad debts written off which comprised of debt shown in statement of income and outside statement - Assessing Officer noted that assessed had not written off bad debts in books of account and a mere mention in audit report would not satisfy such requirement - He, accordingly, disallowed claim of bad debt - Tribunal held that debt had been written off in sense that account of debtor was squared up by crediting debtor and debiting bad debt reserve account and, that, said accounting treatment did amount to actual write off of debt- Whether Tribunal was justified in its decision-Held. yes] [In favour of assessee] In view of binding decision of Hon'ble Gujarat High Court referred supra and decision of Mumbai I TAT in the case of Arrow Coated Products Limited referred in Appellant's submission reproduced herein above, claim of bad debt made by Appellant for Rs.9,54,12,435/- cannot be denied on the ground that Appellant has not shown corresponding amount in profit & loss account.
5.5. So far as the observation of the AO that provision for doubtful debts appearing in annual accounts are not matching with the figure of provision forbad and doubtful debts in profit & loss account, It is observed that during the course of Assessment Proceedings Appellant has clearly stated that bad debt claimed in return of income pertain to companies being ABL and ACL which were subsequently merged with Appellant from A.Y.2007-08 and these figures were compared by AO either with the stand alone annual accounts of Appellant Company for A. Y.2004-05 to 2006- I.T.A Nos. 249/Ahd/2016 & 9 others Page No 35 DCIT vs. M/s. Arvind Ltd.
07 wherein above referred two companies wore not merged with Appellant and for subsequent year, such figures were compared with consolidated financial statements of Appellant Company which includes accounts of all the subsidiaries and joint ventures. Had AO compared such figures for A.Y.2004-05 to A,Y.2006-07 with the stand alone Balance Sheet of ABL and ACL and from A.Y.2007-08 with stand alone Balance Sheet of Appellant, such figures would have been matched and there would not have been any variation as stated by AO. This claim of Appellant is also apparent from published annual account of Appellant Company and annual accounts of ABL and ACL already filed with the Department along with return of income. The Appellant has also explained the above discrepancy in tabular chart reproduced in its submission. On careful consideration of such reconciliation it is found that there is no discrepancy as alleged by AO and discrepancy has arisen only on account of incorrect comparison made by Assessing Officer which cannot be basis for making addition of Rs.9,54,12,435/-. In view of detailed discussion made herein above and relying upon the decision referred supra, disallowance of Rs.9,54,12.435/- made by AO is deleted. This ground of appeal is allowed."
43. Heard both the sides and perused the material on record. Without reiterated the facts as above, it is noticed that the assessee has claimed deduction of bad debt of Rs. 9,54,12,435/-. The Assessing Officer has rejected the claim mainly on the ground that the bad debt has not been debited in the P & L account reduced against the provision for bad and doubtful debt in the Balance Sheet. The assessee explained that provisions were created in the hands of Arvind Brand Ltd. (Garment Division) which was merged with the assessee company. Subsequently, bad debt claimed was pertained to such units and related income were already offered to tax in the earlier years. In this regard, it is noticed that in pursuance of the order of Hon'ble Gujarat High Court, Arvind Clothing Ltd. was merged with Arvind Brand Ltd. w.e.f. 01-04-2013 and thereafter garment division of Arvind Brand Ltd. which also include Arvind Clothing Ltd. was merged with the assessee company from 1st April, 2006. In the assessment year merged company Arvind Clothing Ltd and Arvind Brand Ltd. have created provision for bad and doubtful debt from P & L account and such amount was not claimed as deduction in computation of total income. The relevant supporting detail and information was filed before the Assessing Officer and ld. CIT(A) during the course of assessment and appellate proceedings.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 36 DCIT vs. M/s. Arvind Ltd.
Because of merging of the aforesaid two companies with the assessee company, there was mismatch in the figures which has been reconciled by the assessee before the Assessing Officer and ld. CIT(A) and explained that whenever provision for doubtful debt was created in the P & L account, the same was disallowed in return of income and corresponding income was already offered to tax. Keeping in view the aforesaid facts, the ld. CIT(A) after placing reliance on the decision of Hon'ble Gujarat High Court in the case of Arrow Coated Product Ltd. held that there was no discrepancy as alleged by the Assessing Officer and the discrepancy was arised on account of incorrect comparison made by the Assessing Officer. The revenue could not bring any other material to controvert the facts and findings of the ld. CIT(A), therefore, we do not find any infirmity in the decision of ld. CIT(A). Accordingly, this ground of appeal of the revenue is dismissed.
Ground No. 2 (Deleting the addition of Rs. 16,08,17,279/- made on account of foreign exchange derivative loss)
44. At the time of assessment, the Assessing Officer noticed that assessee has claimed market to market loss on account of foreign exchange derivatives. On query, the assessee explained that in respect of claim of deduction of loss of Rs. 89.22 crores in respect of derivative/forward contract of foreign exchange that it is in business of manufacturing and trading of textile, readymade garments and tele-communication. In view of its overseas operation on purchase and sale, the assessee company is exposed to risk on account of foreign exchange fluctuation and to protect itself from adverse fluctuation on exchange rates of foreign currency, the assessee company has entered into derivative/forward contracts for the I.T.A Nos. 249/Ahd/2016 & 9 others Page No 37 DCIT vs. M/s. Arvind Ltd.
purpose of its business. The assessee company submitted that Rs.16,08,17,279/- is pertained to loss arising on account of market to market valuation of such forward/derivative contracts which were outstanding pending for settlement till 31st March, 2009. The assessee explained that such loss was not speculation loss as the assessee entered into foreign exchange contract, covered the losses in exchange variation, therefore, transaction is not speculation transaction. It is also submitted that such hedging transaction is not a speculation transaction as provided in section 43(5) rather the same is a normal business transaction. The assessee has also placed reliance a number of judicial pronouncements reported at the page no. 11 of the assessment order of the Assessing Officer. However, the Assessing Officer was not agreed with the submission of the assessee and he was of the view that market to market loss is not allowable and same was of contingent in nature arising out of past contract and cannot be really estimated until the occurrence of future uncertainty event. Therefore, foreign exchange derivative losses amounting to Rs. 16081729/- was disallowed by the Assessing Officer and added to the total income of the assessee company.
45. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of decision of ld. CIT(A) is reproduced as under:-
"6.4. I have carefully considered the Assessment Order and submission filed by the Appellant. The brief facts of the case are that Appellant has claimed foreign exchange loss of Rs.89,21,53,274/- in return of income and stated that it is as per AS-30 issued by ICIAI. The Appellant has also debited such expenditure in profit & loss account as "transitional provision on adoption of AS-30 and AS- 11". During the course of Assessment Proceedings, Appellant has claimed that it has chosen for early adoption of AS-30 by which all the financial assets, liabilities and derivatives are re- measured af their fair value and Marked-to-Market Loss pertaining to outstanding contracts as on 1E' July, 2008 were provided and debited as "transitional provision on adoption of AS-30 and AS-I.T.A Nos. 249/Ahd/2016 & 9 others Page No 38
DCIT vs. M/s. Arvind Ltd.
11" in profit & loss account. The Appellant has explained that above referred loss of Rs.89.22 crores represented loss arising on re-measurement of forward contracts as on 1st July, 2008 and such loss is arrived at after compiling foreign exchange rate as on 1st April, 2008/rate on the date of contract entered into from 1st April, 2008 and 1sl July, 2008 and foreign exchange rate as on 1s! July, 2008. Tho Appellant has further explained that out of such loss, loss of Rs.73.13 crores were representing actual realized loss on settlement of derivative contracts which was allowed by AO in Assessment Order. The remaining amount of Rs.16.08 crores represents loss on account of Marked-to-Market valuation for forward derivative contracts outstanding as on 31st March, 2009. This loss has been disallowed by AO on the ground that such loss is contingent loss and he referred to Instruction No. 3 of 2010, dated 23'" March, 2010 issued by CBDT and contended that Marked-to-Market Loss for derivative transactions cannot be allowed as actual loss.
During the course of Appellate Proceedings Appellant has claimed that it has taken forward derivative contracts for hedging of its USD exports by taking USD-INK forward contract and in such transactions, il has incurred losses due to devaluation of Indian currency. The Appellant has further claimed that due to adoption ofAS-30, it has claimed Marked-to-Market Loss pertaining to such derivative contracts executed upto 1si July, 2008 as business loss in return of income and Marked-to-Market Loss pertaining to contracts executed after such date were debited to hedge reserve account in Balance Sheet. So far as contention of AO that such foss is notional loss is concerned, Appellant has contended that transactions were carried for purely hedging purpose and such hedging was against its USD export which is not denied by AO. The ARs of the Appellant hove relied upon decision of Hon'b/e Supreme Court in case of Woodward Governor (India) Limited (supra) and ONGC in support of Appellant's claim that such loss is allowable business loss. With regard to reliance placed by AO that such loss is not allowable business loss as per Instruction No.3/2010, Appellant has argued that said Instruction was issued by CBDT on 23l(t March, 2010, which is subsequent to filing of return for current Assessment Year hence same is not applicable in current Assessment Year. Apart from above, Appellant has referred to various decision of Ahmedabad ITAT, Bangalore ITAT and Delhi High Court wherein it is held that CBDT Instruction cannot override decision of Hon'bie Apex Court. The Appellant has also contended that above provision of Marked-to-Market Loss was reversed in immediately succeeding year hence the entire exercise for providing for Marked-to-Market Loss is tax neutral. 6.5. So far as Marked-to-Market Loss pertaining to forward contracts executed 1s' July, 2009 and outstanding as on 31s1 March, 2009 are concerned, it is observed that such loss has been effectively routed through profit & loss account. It is also observed that such loss is hedging loss and against export sale made by Appellant which is not denied by AO. The only dispute of the Assessing Officer is that such loss is notional loss or contingent loss, but claim made by Appellant is supported by binding decision of Hon'ble Supreme Court in case of CIT V/s Woodward Governor (India) Pvt. Limited 31 2 ITR 254 wherein it is held as under:
"I Section 37(11 read with section 145, of the Income-tax Act, 1961 - Business expenditure - Allowably of - Assessment year 1998-99 - Whether expression 'expenditure' as used in section 37 may, in circumstances of a particular case, cover an amount which is really a 'toss1, evon though said amount has not gone out from pocket of assessee - Held, yes - Whether loss suffered by assesses on account of foreign exchange difference as on date of balance sheet is an item of expenditure under section 37(1) - Held, yes - Whether accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits - Held, yes - Whether an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period ~ Held, yes" -
it is observed that Hon'ble Ahmedabad ITAT in the case of Ac/an/ Enterprises Limited 55 taxmann.com 375 (2015), group case of Appellant has held that 'Where Assessee Company has entered into currency swap contracts for working capital loans which was prerequisite for its I.T.A Nos. 249/Ahd/2016 & 9 others Page No 39 DCIT vs. M/s. Arvind Ltd.
business of export and import of commodities, loss incurred in the said contract being in respect of circulating/working capital is allowable business, it is observed that on this very issue, Hon'ble Ahmedabad ITAT In the case of Heavy Metal and Tubes Limited in ITA No.1951/Ahd/2011, dated 30/06/2014 decided the issue in favour of Assessee. In the case of Heavy Metal and Tubes Limited, facts are that Assessee has claimed loss on account of foreign exchange derivative amounting to' Rs.5,89, 29,8127-. It was Assessee's submission that it had availed foreign currency loan for importing raw materials and it had shifted its loan liability in Dollar to Swiss Franc and the loss resulted due to fall in the value of Swiss Franc vis-a-vis dollar on the Balance Sheet date was undertaken to minimize the risk of foreign exchange fluctuation. The AO disallowed such loss in Assessment Order on the ground that "Assessee Company has claimed loss on account of re- statement of loans/credit liability existing as on the date of Balance Sheet by swapping the loan from Dollar to Swiss Franc to reduce its Forex Exposure risk and therefore the loss claimed by the Assessee 'Was riot of Revenue in nature but was an unascertained and notional loss. He was of the view that the loss claimed by the Assessee was speculative in nature". In above case, CIT (Appeals) has held as under:
"8. I have carefully considered the observations and findings of the A.O. as well as submissions of the appellant. The appellant company is engaged in the manufacturing of Tubes & Pipes. It purchases the requited raw materials mainly from import source. During the previous year relevant to assessment year under consideration, approx. 90% of the value of materials consumed is from import purchase. There are export sales a/so. Thus, it appears that the appellant company requires dealing in foreign exchange in normal course of business and to safeguard the future losses against foreign exchange rate fluctuation it enters in to hedging transaction. It has availed the fund based and non fund based financial facilities from its bankers in the form of Letter of Credit, Buyer's Credit, Cash Credit Limits in foreign currency for purchase of raw materials & payment to overseas suppliers, against stock of raw materials & collection of book debts. It is submitted that since the appellant company uses the fund and non fund based facilities in foreign currency, the bankers have advised the company to cover up the foreign exchange payment liabilities against the risk of fluctuation in rate of foreign exchange. There is always an inherent risk of fluctuation in the rates of foreign exchange, i.e. the rates of foreign exchange changes between the time of purchase of raw materials and actual payment to suppliers or bank, which depends on the demand and supply position of the foreign exchange in the international market.
8.1 During the previous year, the appellant company has swap its working capital bank liability against purchase of raw-mater/a/s in Dollar Currency to Swiss Frank currency by entering into derivative contracts with hank. The stated logic for such swap from Dollar to Swiss Franc currency was that the Swiss Franc is considered as one of the most stable currency as compared to Dollar and accordingly, the loss, if any on account of foreign exchange fluctuation can be minimized. However, there was fall in the value of Swiss Frank vis-a-vis Dollar and on the balance sheet date i.e. 31-03-2008, the appellant company booked the loss of Rs.5,Q9,29,812/-. This facts have not been disputed by the A.O.
8. 2 It is further submitted by the authorized representative of the appellant company that as per the consistent prudent practice and requirements of Accounting Standards issued by the ICAI, it follows accounting of transactions for purchase & Sales in foreign currency at the prevailing foreign exchange rate at the time of executing transactions and difference if any between the amount of purchase/sales and amount at which the transactions is actually settled by the payment to/from suppliers/debtors is accounted as "Loss/Gain on foreign exchange fluctuation". In the Trading & Profit & Loss Account, the Purchase and sales are disclosed after set off on account of the Loss or Gain due to fluctuation in rates of foreign exchange on account of transactions of import purchase and export sales in foreign exchange. Such gain or loss in foreign exchange transactions settled during the year is part of the cost of import purchase or value of export sates. It is further submitted that at times, it happens that the forward contract to buy/sell foreign I.T.A Nos. 249/Ahd/2016 & 9 others Page No 40 DCIT vs. M/s. Arvind Ltd.
exchange remains outstanding at the last date of Balance Sheet. As per the prudent accounting policy of mercantile/accrual system of accounting and Accounting Standards issued by the ICAI, the unsettled outstanding foreign exchange forward contracts have to be evaluated at an exchange rate prevailing on the date of Balance Sheet and loss, if any, on evaluation of such unsettled forward contracts have to be accounted in the books. As such there is no different between the loss on account of evaluation of unsettled outstanding foreign exchange forward contracts and loss on account of settled foreign exchange forward contracts during the year, Loss, under both the situation, i.e. settled and unsettled forward contracts in foreign exchange, is revenue loss incurred in the normal course of business to hedge the risks of fluctuation in foreign exchange rates. Further, it is also submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAI and RBI's guidelines, the companies are required to revalue un-matured contracts as per rates of exchange notified by Foreign Exchange Dealers' Association of India (FEDAI).
8.3 During the previous year relevant to assessment year under consideration, there were 2 unsettled forward contracts aggregating to US $ 76.00 lacs as on the last date of Balance Sheet i.e. 31-03- 2008 to sell the foreign currency at an agreed price at a future date failing beyond the last date of accounting period. The loss is incurred by the appellant company on account of evaluation of these unsettled outstanding forward foreign exchange contracts on the last date of the accounting period i.e. before the date of maturity of the forward contracts. It. was further submitted by the authorized representative that the gain/loss in forward contract for foreign exchange transactions backed by liability in foreign exchange on account of purchase/sales of goods are business losses covered by Section 28 of the Act and not losses in the nature of 'speculation' as defined in section 43(5) of the Act.
8.4 It has been further submitted that in the subsequent year i.e. Financial Year 2008-09 relevant to A.Y.2009-10 on settlement of the said 2 forward contracts, there was a gain of Rs.1,96,26,284/- which is credited to the Profit & Loss A/c and shown as business income in the financial year 2008-09 relevant to A.Y.2009-10. Hence, the net foreign currency derivative loss is of Rs. 3,93,03,528/- (Rs.5,89,29,812/-Less Rs.1,96,26,284/-). 8.5 The appellant company made the transactions of import purchase of raw materials and export sales of manufactured goods in the normal course of business. The liability for payment to suppliers for import purchase in foreign exchange is subject to risk of losses on account of fluctuation in exchange rate of foreign currency. To safe guard against such losses and to hedge against the unforeseen future loss due to fluctuation in rate of foreign exchange transactions of purchase & sales company makes the forward contract in the normal course of business to buy/sell the foreign exchange as per the market condition and advice of the bank. Thus, losses incurred in forward contracts for foreign exchange in the normal course of business are not speculative transactions and similar the said transactions not regarded as speculative transaction as per the proviso
(a) below the Section 43(5) of the Act and is a business loss covered by section 28 of the Act. It is submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAl and RBI's guidelines, the companies were required to revalue un-matured contracts as per rates of exchange notified by Foreign Exchange Dealers' Association of India (FEDAI). Accordingly, on the balance sheet date, based on the exchange rate on that date, provision of profit/loss substitutes the figures booked at the time of contract. Thus, revalued loss/profit is debited to the profit and loss account. Further, this treatment is as per principles of accounting which required the current assets to be marked to the market rate.
8 6 The ratio laid down in the decision of Income-tax Appellate Tribunal, Mumbai Bench-"C" Special Bench, Mumbai in the case of DCIT vs. M/s. Bank of Bahrain & Kuwait (ITA No.4404 & 1883/Mum72004) is squarely applicable to the appellant company.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 41DCIT vs. M/s. Arvind Ltd.
8.7 The loss incurred by the appellant company on account of evaluation of contract on the last day of accounting year i.e. before the date of maturity of forward contract be allowed as business loss for the following reasons :- ......................... 8.8 Considering all the above facts together, I am inclined to agree with the contention of the appellant company that the loss incurred by the appellant company on account of foreign exchange hedging transactions in forward contracts which is backed by the trading liability of the appellant company on account of import purchases is a business revenue loss and not speculative loss as held by the A.O. The case of the appellant company squarely falls under proviso (a) to Sec. 43(5) of the Act and accordingly, the transactions entered into by the appellant company in respect of hedging of the probable loss on account of fluctuation in the rate of foreign exchange in forward contract are not speculative transactions. The A.O. has failed to bring on record any cogent material evidence is support of his finding that the loss suffered by the appellant company is speculative loss, Therefore, the action of the A.O to disallow the same as speculative loss is unjustified on the facts of the case and accordingly, the disallowance made by him is deleted. The appellant, accordingly, gets the relief of Rs.5,89,29,812/-." Following the above findings of the CIT(A), the Hon'ble Ahmedabad bench has allowed the issue in favour of assesse. Tho ratio of the above judgment squarely applies to the facts of the present case wherein forward contract was entered only to mitigate the risk of exposure towards change in the rate of exchange against purchase of raw material for the purpose of business. It is immaterial that contract was entered between USD and Swiss Dollar instead of Rupee since the ultimate purpose was to settle liability for purchase of raw material in USD for the purpose of business.
6.6. It is observed that AO has denied such loss mainly relying on instruction No.3/2010 which was issued by CBDT on 23'" March, 2010 and on the date of filing the return such Instruction was not on Statute hence it cannot be made applicable in current year. It is also observed that Hon'ble Ahmedabad ITAT in above referred case has decided the issue in favour of Assessee even after above referred CBDT Instruction. It is also observed that Hon'ble Ahmedabad ITAT in the case of DC/7 V/s Elite Core Technologies Pvt Limited in ITA No. 197 and 508/Ahd/2016, dated 31st March, 2010 has held that CBDT Instruction No. 3/2010 do not bind the appellate Authorities and decision of Woodward Governor dealing with deducibility of foreign exchange Marked-to-Market Loss would prevail on such instruction. The Hon'ble Delhi High Court in the case of Munjal Showa Limited V/s DCIT has also held that CBDT Instruction No. 3/2010 cannot override the existing decision of Hon'ble Supreme Court/High Court on similar issue. Reliance is also placed on following decisions:
(i) Hon'ble Hyderabad ITAT in case of VST Industries V/s Addl. CIT vide ITA No.647/Hyd/2012 dated 23/08/2013
(ii) Hon'ble Bangalore ITAT in case of Subex Ltd. V/s DCIT (68 taxmann.com 233) dated 18/03/2016
(iii) Hon'ble Bangalore ITAT in case of Quality Engineering & Software Technologies (P) Ltd., V/s DCIT (52 taxmann.com 515) dated 14/11/2014
(iv) Hon'ble Mumbai ITAT in case of Reliance Industries Limited V/s CIT (40 taxmann.com 431), dated 20/11/2013.
Considering the facts discussed herein above and relying upon the decisions referred supra including decisions of Hon'ble Jurisdictional ITAT and High Court, disallowance of loss of Rs.16,08,17,279/- ctotes made by AO is deleted. Thus, entire disallowance made by AO for Rs.16,08,17,279/-is deleted. During the course of Assessment Proceedings, Appellant has claimed that even provision created for loss debited "hedge reserve" amounting to Rs.106,40,81,277/- should be allowed as deduction and same was not allowed by AO. This issue is not emanating from the assessment order and the addition for Rs. 76,08,77,279/- made by the A.O. is already deleted in proceeding para, hence this ground of appeal is infructuous and the same is dismissed. The related ground of appeal is partly allowed."
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 42 DCIT vs. M/s. Arvind Ltd.
46. Heard both the sides and perused the material on record. The assessee entered into contracts for hedging its USA dollar export by taking USD-INR forward contracts and total market to market loss was debited at Rs. 89.22 crores. The dispute is pertained to market to market loss of Rs. 16.8 crores as outstanding contract as on 31st March, 2009. The Assessing Officer was of the view that such market to market losses was notional and contingent in nature and same cannot be allowed as per Instruction No. 3/2010 issued by CBDT on 23rd March, 2010. The ld. CIT(A) has deleted the addition after following the decision of Co-ordinate Bench of the Ahmedabad in the case of Adani Enterprises Ltd. (55 taxman.com 375), case of Heavy Metal Tubes Ltd. vide ITA No. 1951/Ahd/2011 dated 30th June, 2014 and decision of DCIT vs. Flite Core Tech. Pvt. Ltd. In the light of the above facts and finding reported in the order of ld. CIT(A) as elaborated above and after considering the decision of Co-ordinate Benches of ITAT Ahmedabad cited in the order of ld. CIT(A) on similar issue and facts, we do not find any infirmity in the decision of ld. CIT(A). Therefore, this ground of appeal of the revenue is dismissed.
Ground No. 3 to 3.1 (restricting addition made on account of disallowance u/s. 14A r.w.r. 8D of I.T. Act from Rs. 5,62,68,667/- to Rs. 17,21,275/-) filed by revenue
47. As the facts and issue involved in ground no. 1 of appeal vide I.T.A. No. 249/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 2054/Ahd/2018 Assessment Year 2009-10, therefore, after applying the decision adjudicated vide I.T.A. No. 249/Ahd/2016 I.T.A Nos. 249/Ahd/2016 & 9 others Page No 43 DCIT vs. M/s. Arvind Ltd.
as supra in this order, this ground of appeal of the revenue is dismissed.
Ground No. 1 (Sustaining disallowance of administrative expenditure to the extent of Rs. 17,21,275/- u/s. 14A) filed by assessee
48. As the facts and issue involved in ground no. 1 of appeal vide ITA No. 249/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 1960/Ahd/2018 Assessment Year 2009-10, therefore, after applying the decision adjudicated vide ITA No. 249/Ahd/2016 as supra in this order, ld. CIT(A) has rightly restricted the disallowance to the extent of Rs. 17,21,275/-, therefore, both the grounds of appeal of revenue and assessee are dismissed.
Ground No. 3.2 (Restricting addition of Rs. 5,62,68,667/- to Rs. 17,21,275/- u/s. 115JB of the Act) filed by revenue
49. As the facts and issue involved in ground no. 3 of appeal vide I.T.A. No. 1846/Ahd/2016 Assessment Year 2011-12 are similar as in ITA No. 1960/Ahd/2018 Assessment Year 2009-10 therefore after applying the decision adjudicated vide I.T.A No. 1846/Ahd/2016 as supra in this order, this ground of the appeal of the assessee is dismissed.
Ground No. 4 (Deleting addition of Rs. 7,54,682/- made on account of cessation of liability u/s. 41(1) of the Act)
50. As the facts and issue involved in ground no. 3 of appeal vide I.T.A. No. 2057/Ahd/2016 Assessment Year 2011-12 are similar as in ITA I.T.A Nos. 249/Ahd/2016 & 9 others Page No 44 DCIT vs. M/s. Arvind Ltd.
No. 2054/Ahd/2018 Assessment Year 2009-10, therefore, after applying the decision adjudicated vide I.T.A No. 2057/Ahd/2016 as supra in this order, this ground of appeal of the revenue is dismissed.
Ground No. 5 (Deleting the addition of Rs.1,14,741/- made on account of disallowance u/s. 40(a)(ia) of the act) filed by revenue
51. During assessment, the Assessing Officer observed that assessee has made payment of Rs. 1,14,741/- as recruitment expenses to Perfect Connection Ltd. without deducting tax on the aforesaid payment. These expenses was disallowed as per provision of section 40(a)(ia). In appeal, the ld. CIT(A) has allowed the claim of expenses holding that same was of the nature of reimbursement of expenditure which does not require deduction of tax. The relevant part of decision of ld. CIT(A) is as under:-
"10.3 / have carefully considered the Assessment Order and submission filed by the Appellant. The Appellant has made payment of Rs. 1,14,741/- as Recruitment Expenses of Perfect Connection Limited. The AO has observed that as payment is in nature of contract, Assesses need to have deducted TDS on such payment hence he made disallowance of Rs.1,14,741/- under Section 40(a)(ia) of the Act. However, on careful consideration of ledger account submitted by Appellant which was also part of submission during Assessment Proceedings that Appellant has reimbursed travelling tickets of candidates which does not involve any contractual payment as observed by AO. This expenditure is purely reimbursement of expenditure which does not require deduction of TDS hence the addition made by the AO for Rs.1,14,741/- is deleted. This ground of appeal is allowed.
52. Heard both the sides and perused the material on record. Without reiterating the facts as above, we do not find any infirmity in the decision of ld. CIT(A), since the Assessing Officer has not disproved the fact that assessee has made payment on account of reimbursement of expenditure on which no TDS is deductable. Therefore, this ground of appeal of the Revenue stands dismissed.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 45 DCIT vs. M/s. Arvind Ltd.
Ground No. 6 & 6.1 (long term capital loss of Rs. 6,58,40,160/- as against long term capital gain of Rs. 5,30,66,091/- offered in the original return of income and revised return of income) filed by revenue
53. During the course of assessment the assessee has brought to the knowledge of the Assessing Officer vide letter dated 29th March, 2012 that because of error in computing the income under the head long term capital gain, it has omitted to take correct cost of acquisition while computing the long term capital loss of Rs. 7,640,519/- on the sale of Rs. 7,13,383 shares of Arvind Brand Ltd. The assessee further submitted that correct long term loss on the sale of those shares would have worked out to the amount of Rs. 1,265,46,770/- as against the loss of Rs. 76,40,519/- computed in its return of income. The assessee has given the working as per which the long term capital gain of Rs. 5,30,66,091/- shown in the revised return was required to be re-stated as long term capital loss of Rs. 6,58,40,160/-. The aforesaid submission of the assessee was not considered by the Assessing Officer. Subsequently, in the appellate proceedings, the ld. CIT(A) referred the decision of Hon'ble Bombay High Court in the case of CIT vs. Pruthvi Brokers and Shareholders 349 ITR 336 and decision of Hon'ble Gujarat High Court in the case of Mitesh Impax 46 taxman.com 390 wherein it is stated that assessee can claim additional claim before CIT(A) even though no revised return of income is filed. Therefore, in accordance with the findings laid down in these decisions, the ld. CIT(A) has directed the Assessing Officer to allows the losses as per provision of the act after verification of the working given by the assessee.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 46 DCIT vs. M/s. Arvind Ltd.
54. After hearing both the sides and perusing the decision of the ld. CIT(A) based on the finding of Hon'ble Jurisdictional High Court as supra we do not find any error in the direction of the ld. CIT(A). Therefore, this ground of appeal of the revenue stands dismissed.
Ground No. 2 (addition of Rs. 6937768/- on account of provident fund and ESI) filed by assessee
55. As the facts and issue involved in ground no. 4 of cross objection vide CO No. 43/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 1960/Ahd/2016 Assessment Year 2009-10, therefore, after applying the decision adjudicated vide CO No. 43/Ahd/2016 as supra in this order, this ground of appeal of the revenue is dismissed.
56. Ground No. 3: - Regarding initiation of penalty is immature at this stage and the same is dismissed.
ITA No. 2182/Ahd/2018 A.Y. 2015-16 filed by revenue and ITA No.1961/Ahd/2018 A.Y. 2015-16 filed by assessee Ground No. 1 (Restricting disallowance u/s. 14A r.w.r. 8D of the act from Rs. 31,61,27,434/- to Rs. 3,07,53,555/- filed by revenue & Ground No. 1 (Sustaining disallowance of administrative expenditure to the extent of Rs. 3,07,53,555/-) filed by assessee
57. During the course of assessment, the Assessing Officer noticed that the assessee has earned dividend income to the extent of Rs. 1,01,23,808/- which was claimed as exempt. The assessee has suo moto disallowed a sum I.T.A Nos. 249/Ahd/2016 & 9 others Page No 47 DCIT vs. M/s. Arvind Ltd.
of Rs. 24,33,945/- u/s. 14A of the Act. On query, the assessee has given detailed submission incorporated at page no. 3 to 10 of the assessment order pointing out that no other expenditure has been incurred during the year under consideration which is attributable to earning of exempt income. However, the Assessing Officer has not agreed with the submission of the assessee and computed the disallowance u/s. 14A in accordance with Rule 8D of the I.T. Rule, 1962 to the amount of Rs. 31,61,434/-.
58. The ld. CIT(A) has restricted the disallowance to the extent of Rs. 3,07,53,555/- after taking into consideration that assessee has also earned long term capital gain of Rs. 9.69 crore which was exempt u/s. 10(38) of the Act.
59. During the course of appellate proceedings before us, the ld. counsel has vehemently contended that Assessing Officer has not given explicit finding as to why suo motto disallowance is not acceptable. He has also submitted that Assessing Officer has not pointed out any defect in the disallowance worked out by the assessee and resorted to Rule 8D without the required jurisdiction.
60. The ld. counsel has submitted that facts and issue in the case of the assessee is squarely covered by the decision of ITAT Special Bench in the case Vineet Investment Pvt. Ltd. 85 taxman.com 415 that only those investment are to be considered for computing average value of investment which yielded exempt income during the year. On the other hand, the ld. Departmental Representative has supported the order of the Assessing Officer.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 48 DCIT vs. M/s. Arvind Ltd.
61. Heard both the sides and perused the material on record. Without reiterating the facts as elaborated above in this order during the course of assessment, the Assessing Officer has computed disallowance u/s. 14A r.w.s. 8D to the amount of Rs. 31,61,27,434/-. The ld. CIT(A) has restricted the such disallowance to the extent of Rs. 3,07,53,555/-. The ld. CIT(A) counsel has referred the submission made to the ld. CIT(A) dated 19-06- 2018. In its submission dated 19-06-2018 the assessee has specifically brought to the knowledge of the ld. CIT(A) the following judicial pronouncements:-
(i) Decision of ITAT Delhi in case of ACIT Vs. Vineet Investment Pvt.
Ltd. [2017] 82 taxmann.com 415 (Delhi-Trib) dated 16.06.2017.
(ii) Decision of Hon'ble ITAT Hyderabad in case of Ocean Sparkle Ltd. in ITA no. 438/Hyd/2016 dated 08/06/2018
(iii) Decision of Hon'ble ITAT Kokata in case of Ratansingh Jivandas Suraiya in ITA No. 1691/Kol/2013 dated 22.04.2016
(iv) Decision of Hon'ble ITAT Ahmedabad in case of Sarabhai Holding Pvt. Ltd. in ITA no. 2328/Ahd/2012 dated 11.04.2011 that only those investment are to be considered for computing average value of investment which yielded exempt income during year.
With the assistance of the ld. representatives, we have gone through the decision of the Special Bench of the ITAT Delhi in case of ACIT vs. Vineet Investment Pvt. Ltd. (2017) 82 taxmann.com 415 (Delhi-Trib) dated 16.06.2017. In Vineet Investment (P) Ltd. it is held by the Special Bench of the Tribunal that only those investment are to be considered by computing average value of investment which yielded exempt income during the year. We are of the considered view that ratio laid in the above decision is I.T.A Nos. 249/Ahd/2016 & 9 others Page No 49 DCIT vs. M/s. Arvind Ltd.
squarely applicable in the instant case. Therefore, we set aside the order of the ld. CIT(A) for the impugned assessment year and restore the matter to the file of the Assessing Officer to make a de-novo order after following the ratio laid down in Vineet Investment Pvt. Ltd. (supra) after giving a reasonable opportunity of being head to the assessee. In the result, this ground of appeal of Revenue and assessee are partly allowed for statistical purpose.
Ground No. 2 (Deleting the addition of Rs. 31,61,27,434/- while computing the book profit u/s. 115JB of the Act) filed by revenue
62. As the facts and issue involved in ground no. 3 of cross objection vide CO No. 43/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 2182/Ahd/2016 Assessment Year 2015-16, therefore, after applying the decision adjudicated vide CO No. 43/Ahd/2016 as supra in this order, this ground of appeal of the revenue is dismissed.
Ground No. 2 (Sustaining the addition of Rs. 2058614/- on account of employee's contribution to Provident Fund and ESI) filed by assessee
63. As the facts and issue involved in ground no. 4 of cross objection vide CO No. 43/Ahd/2016 Assessment Year 2010-11 are similar as in ITA No. 2182/Ahd/2016 Assessment Year 2015-16, therefore, after applying the decision adjudicated vide CO No. 43/Ahd/2016 as supra in this order, this ground of appeal of the assessee is dismissed.
I.T.A Nos. 249/Ahd/2016 & 9 others Page No 50 DCIT vs. M/s. Arvind Ltd.
64. Ground No. 3:- Initiation of penalty proceedings u/s. 271(1)(c) is immature at this stage and becomes infructuous and dismissed.
65. In the result, the appeal ITA 1960/Ahd/2018, CO 43/Ahd/2016, ITA 1846/Ahd/2016, CO 42/Ahd/2019 and 1961/Ahd/2018 filed by assessee are partly allowed and appeal ITA 2054/Ahd/2018, ITA 249/Ahd/2016, ITA 2057/Ahd/2018, ITA 273/Ahd/2018 and ITA 2182/Ahd/2018 filed by revenue are dismissed.
Order pronounced in the open court on 30-09-2021
Sd/- Sd/-
(MAHAVIR PRASAD) (AMARJIT SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad : Dated 30/09/2021
आदे श क त ल प अ े षत / Copy of Order Forwarded to:-
1. Assessee
2. Revenue
3. Concerned CIT
4. CIT (A)
5. DR, ITAT, Ahmedabad
6. Guard file.
By order/आदे श से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण,
अहमदाबाद