Income Tax Appellate Tribunal - Ahmedabad
Madhur Industries Limited, Ahmedabad vs Assessee on 28 February, 2005
-1-
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A" AHMEDABAD
Before S/Shri Bhavnesh Saini, JM and D.C.Agrawal, AM
ITA No.1281/Ahd/2005
Asst. Year :2001-02
Income-tax Officer, V/s. Madhur Industries Ltd.,
Wd-4(4), Ahmedabad. Madhur Complex,
Stadium Circle,
Navrangpura, Ahmedabad.
PAN No.AABCM 3786D
(Appellant) .. (Respondent)
AND
ITA No.1291/Ahd/2005
Asst. Year :2001-02
Madhur Industries V/s. Income-tax Officer, Wd-
Ltd., Madhur Complex, 4(4), Ahmedabad.
Stadium Circle,
Navrangpura,
Ahmedabad.
PAN No.AABCM 3786D
(Appellant) .. (Respondent)
Revenue by :- Shri Raheev Agarwal, CIT/DR
Assessee by:- Shri S. N. Soparkar, AR
ITA NO.1281/Ahd/2005
ITA NO.1291/Ahd/2005
Asst. Year 2001-02
ORDER
PER D.C.Agrawal, Accountant Member.
These are two cross appeals -one filed by the Revenue and the other filed by the assessee against the order of ld. CIT(A) dated 28.02.2005. The grounds raised by the revenue are as under :-
1. The ld. CIT(A) has erred in law as well as on facts of the case in reducing the addition made by the AO from Rs.77.22 to 20.39 lacs for Mumbai Division on the basis of the export turnover ratio of Mumbai Division at Rs.18.97 crores from the total turnover of Rs.32.32 crores.
2. The ld. CIT(A) has erred in law as well as on facts of the case in arriving at the cost of fund interest of Marine Export, Veraval at Rs.2,50,290/- as against the cost of fund interest calculated by the A.O. at Rs.1,80,500/- on the basis of export turnover ratio of Marine Export, Veraval at Rs.2.3 crores from the total turnover of Rs.32.32 crores.
2. Whereas the grounds raised by the assessee are as under :-
1. The Ld. CIT(A) has erred in law and on facts in confirming the action of AO in including the amount of Rs.21,465675/- being DEPB license receivable to the gross total income of the appellant.
Under (he facts and circumstances of the case, no such DEPB license benefit has accrued to or received by the appellant and therefore the same ought to have been excluded iron] the gross total income of the appellant.
2. The Ld, C1T(A) has erred in law and on facts in allocating the interest expenses to Trading Export division at Mumbai and Veraval on the basis of proportionate turnover of the business without appreciating that there was no nexus between the runds borrowed and utilized by the respective units and further the appellant was having sufficient interest free funds so asnottociill for any disallowance of interest at all.
2ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02
3. The Ldr CIT(A) has erred in law and oh tacts in confirming the action of AO in reducing the amount of bad debt from the profits while calculating deduction u's 80HHC of the Act
4. The Ld. CIT(A) has erred in law and on facts in confirming the action of AO in allocating various indirect expenses to Marine Export Division at Veraval on the basis of proportionate turnover of the appellant without appreciating that the appellant had maintained separate books of accounts for each division and expenses incurred at various divisions both direct as well as indirect have been properly recorded in such separate books of accounts of each unit.
5. The Ld, C1T(A) has erred in law and on tacts in confirming the action of AO in disallowing interest of Rs,4,53.400/- on notional basis. Ld, CIT(A) has further erred in law and on facts in not appreciating that the appellant was having sufficient interest free funds at its disposal to cover for any alleged interest free advances given by it,
6. The ld. C1T(A) has erred in law and on facts in confirming the action of AO in disallowing depreciation on furniture and building amounting to Rs,24,675/-.
7. The Learned C1T(A) has erred in law and on facts in continuing the levy of interest under section 234B and 234C of the Act.
8. Initiation of penalty proceedings u/s 27l(l)(c) of the Act is not justified.
3. The facts of the case are that assessee is in the business of manufacturing 'masalas'. It has head office and factory which is situated at Ahmedabad. It also has two divisions one at Mumbai and the other at Veraval from where it is carrying out export trading. The expenses incurred by the assessee for export trading are both direct and indirect. It is claimed that separate sets of books of accounts are kept in head office and the divisions. During the assessment year assessee has been doing 3 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 trading from head office, and export business from the Mumbai division. It started another division from Veraval from where it is carrying out export business in marine products.
4. In departmental appeal ground No.1 and in assessee's appeal ground No.2 relate to allocation of interest expenditure debited to head office account, but allocated by the AO, between Bombay Division and Head Office, thereby reducing the benefit of export deduction available to the assessee under section 80 HHC in respect of trading items from Mumbai Division. The AO observed that assessee has prepared separate P & L a/c of export divisions and expenses, direct and indirect, relating to export divisions are debited in their respective profits and loss account. Though the assessee has debited in the books of Mumbai division interest expenses of Rs.10,36,042/- paid to the bank but on verification of its balance sheet it was noticed that a sum of Rs.433.85 lacs were transferred from head office to the Mumbai division at the end of the accounting year. The head office had in all debited a sum of Rs.1,86,88,165/- as interest expenses which included the sum of Rs.10,36,042/-. The AO required the assessee to explain why not proportionate expenditure under the head "interest" be not allocated from head office to the Mumbai export division. The assessee submitted that the head office and export divisions are separate divisions and distinct units, separate books of accounts for them are maintained, their bank a/cs are separate, independent bank limits are obtained, the expenses relating to export are debited to export divisions and those relating to head office are debited to head office separately. In addition, the assessee explained that assessee has received a sum of Rs.35,01,755/- as "share badala expenditure" which is credited only in the head office. The AO further 4 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 inquired and found that assessee has taken huge loan from Madhupura Mercantile Co-op. Bank Ltd. and diverted funds as advance to its group concern. The assessee has recovered interest on advance given by it to others and net interest is debited as expenses in P & L a/c. Rejecting the explanation furnished by the assessee the AO worked out interest on sum of Rs.429 lacs being average funds transferred to the export division from the head office and thus reduced the export profit by Rs.77.22 lacs being interest worked out @ 18% on Rs.429 lacs.
5. Ld. CIT(A) upheld the finding of the AO that some interest is required to be allocated to the export division but he directed to allocate interest on turnover basis. According to ld. CIT(A) cash flow statement has not been provided in respect of borrowed funds transferred to the export division from head office, therefore, it is not possible to work out allocation of interest on actual cash utilisation basis. According to him the total export turnover of Mumbai division is 18.97 crores whereas total turnover of the assessee is 32.32 crores. According to him interest debited to the head office is Rs.35,15,310/-, therefore, in the ratio of turnover of export division to total turnover of the assessee, interest attributable to Mumbai division works out to Rs.20,38,880/-. He accordingly confirmed allocation of interest from head office to Mumbai division to this extent for reducing export profit for computation of deduction u/s 80 HHC and thus allowed partial relief to the assessee. The department is against this relief whereas the assessee is in appeal against the allocation sustained by ld. CIT(A).
6. Before us, ld. DR submitted that firstly onus is on the assessee to provide day to day cash flow statement so that utilization of fund borrowed from head office could be worked out and accordingly interest 5 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 could be calculated. In the absence of such cash flow statement AO was justified in taking an average of opening balance and closing credit balance from the head office to the export division. Secondly, the ld. CIT(A) was incorrect not to consider the total interest paid by the head office and rather allocating only net interest debited to the head office account. It has to be shown by the assessee that receipt of interest by it was from advancing of interest bearing funds. If assessee is receiving interest on delayed recovery of sale proceeds then that should not be adjusted against interest payment. The assessee has to show the nexus of interest expenditure against interest income before netting. Once a sum of Rs. 4.29 crores is outstanding throughout the year to the export division from head then interest has to be allocated on such outstanding sum. If export division would have borrowed fund from elsewhere it would have to pay interest on this sum then why not proportionate interest borne by the head office on the daily utilization of funds should be allocated to the export division. In fact according to the ld. DR, deduction under section 80 HHC has been calculated by not allocating interest from head office to the export division.
7. Ld. AR on the other hand, submitted that system of accounting has been the same in earlier years. No interest allocation was done in earlier years. Therefore, following the principles of consistency no disturbance in the account so maintained separately for export division and head office should be done. He referred to the decision of Hon. Karnataka High Court in CIT vs. Sridev Enterprises (1991) 192 ITR 165 (Kar) for the proposition that if no disallowance of interest is done by the department in earlier year on the advances given by the assessee on the presumption that such advances were out of borrowed funds then advances to the firm shown at the first day of the year should be excluded 6 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 for the purposes of computing of disallowance of deduction. He also referred to the decision of Hon. Supreme Court in Radhaswami Satsang case 193 ITR 321(SC) for the proposition that department should take consistent stand. The ld. AR also submitted that export division and head office are maintaining separate books of account, their accounts are separately audited, therefore, there is no case for allocating interest from head office to the export division. He then submitted that no funds have been borrowed in the current year because opening balance was Rs.443 lacs and closing balance was Rs.423 lacs. Thus there is a reduction in borrowed funds and if no interest is allocated in the earlier year on sum of Rs.443 lacs then there is no case for allocating any interest on Rs.429 lacs. Finally he concluded that even if any allocation is to be done then interest already debited in the export division should be set off against what is required to be allocated, as per any formula. Ld. AR also pointed out that head office had its own capital to the extent of Rs.4 crores which included current years' profit, therefore, it cannot be said that only interest bearing funds were transferred to export division. In fact first the interest free funds/capital available with the head office should be considered as advanced to the export division and then, if required, interest bearing funds should be considered as transferred.
8. Ld. DR in the rejoinder submitted that interest is not direct cost but it is an indirect cost therefore, allocation of interest is required to be done in accordance with the Explanation to section 80 HHC, and clause (e) thereof. Section 80 HHC does not consider maintenance of separate books of accounts for export division and domestic division as a condition. It considers entire business as a whole whether exported or traded domestically. Ld. DR then submitted that the interest free capital, if at all assessee has, has been diverted to other business and it is not available for giving to the export division. In any case onus is on the 7 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 assessee to show that it was interest free capital and not interest bearing funds, which was advanced to the export division.
9. We have considered the rival submissions and perused the material on record. The first issue to be addressed is whether following the earlier assessment year no allocation of interest should be done. In our considered view if the facts relating to total interest debited in the head office and interest debited or required to be debited in the export division are not considered by the AO then it cannot be said that AO had formed an opinion and accordingly it cannot be said that he considered it proper not to allocate any further interest from head office to the export division in addition to whatever is already debited on account of funds borrowed by the export division directly on its own account from the bank. There is no material placed on record to suggest that AO has applied his mind and considered that no allocation in earlier years was necessary. In our considered view consistency is the recognized principle and curbs out an exception from the principle of res judicata, if facts and circumstances of the case remain the same and position of law has not changed. In any case there is a necessary condition inherent in the "principle of consistency"
that stand of the AO in the past should be legally correct and there is no error, either of law or of fact. It is also a judicially recognized principle that there is no heroism to continue to commit errors from one year to another. If AO has not at all considered the issue; or assessment has been accepted under section 143(1); or all the necessary facts for applying mind on the issue are not brought into the knowledge of the AO; or while accepting a position in the earlier assessment years, grave error of law or fact has been committed; or there has been change in law; or there is a judicial decision on the subject; or there are discovery of new facts which were not available in the earlier years then principle of consistency 8 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 cannot bind the AO and he has to apply his mind afresh and arrive at a fresh decision. In the present case as already stated the entire details of interest paid by the head office, funds borrowed by the head office, or advances given by the head office to others are not shown to have been submitted to the AO. Material placed before us do not show that he had in fact applied his mind and taken a stand which remain uncontroverted till the present Asst. Year. In our considered view if head office is paying interest on the borrowed funds and funds are transferred to division or sister concern without interest then first presumption is that it has transferred such interest bearing funds to the export division. Onus is on the assessee to show that it had interest free capital which was available for transfer to the export division. In any case no cash flow statement in the current year or in the earlier year has been shown to support the stand taken by ld. AR. Notwithstanding, in any case profit from export division has to be computed in accordance with sub-sec.(3)(b) of section 80 HHC. Merely because assessee has maintained separate books of accounts for export division operation of sub-section (3)(b) cannot be excluded. Thus the AO is within his power to work out 'direct cost' and 'indirect cost' attributable to export of such trading goods. The 'direct cost' 'indirect cost' 'trading goods' are defined in Explanation to section 80 HHC as under :-
Explanation :
(d) "direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods ;
(e) "indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover ;
(f) "trading goods" means goods which are not manufactured or processed by the assessee.9
ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02
10. Once AO is legally duty bound to compute the profits derived from export as per sub-section 3(b) then merely because it has not been done in the past would not justify that it should not be done this year also. The decision of Hon. Karnataka High Court in Sridev Enterprises (supra) referred to by the ld. AR would not be applicable for the reason that no new facts are discerned in the Asst. Year in question in that case and there was no provision like sub-section (3)(b) of section 80 HHC for application. Thus we approve the action of the authorities below in allocating interest being "indirect cost" for computing profit of export division. We reject the arguments of ld. AR that if assessee is maintaining the books of accounts separately for export division then no such allocation is required. Our view is supported by decision of Hon. Kerala High Court in CIT vs. Pari Agro Industries Ltd. (2002) 257 ITR 41 (Ker) on which ld. DR strongly relied.
11. Now coming to the basis to be adopted for allocation, we find that in absence of day to day cash flow statement from head office to export division turnover is the most suitable criteria which is also approved by Explanation (e) as reproduced above. The total turnover of assessee has been shown in the assessment order and appellate order as under :-
Domestic sales H.O. Rs.11,04,16,125/- Export sales Marine Div. Rs. 2,30,17,123/- Export sales of Mum. Div. Rs.17,54,39,191/-
12. The total interest charges debited by the assessee including export divisions are given in the assessment order as under :-
10ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 Local Export division Total Interest 1,76,52,123 10,36,042 1,86,88,165 Bank charges 1,20,209 11,29,872 12,50,081 Total 1,77,72,332 21,65,914 1,99,38,246
13. To the extent the assessee is able to establish nexus of interest bearing funds transferred/advances to non-trade work (for earning income other than trade in head office, export divisions at Mumbai and Veraval) then interest attributable to that extent would be excluded from the total interest payment i.e. if interest bearing funds are diverted to any other income other than income from domestic trade and export trade then interest on such borrowed funds so diverted will be excluded from the total interest payment. Whatever balance is left, it would be allocated in the ratio of turnover of three divisions to the total turnover. Out of such interest allocated to the three divisions namely -head office, export division at Mumbai and Marine division at Veraval, interest specifically debited to the respective division would be further reduced and only the balance after such deduction would be further debited from the export profits. Interest earned by respective divisions in their trade will be considered only after allocation of interest. It will not have any effect on reducing the interest burden to be allocated to the respective divisions.
14. Notationally we clarify the computation of allocable interest as under:-
Let us say "A" is total interest payment on borrowed funds utilized in domestic trade, export trade and others.
"B" is the interest attributable to the advancing of interest bearing borrowed funds to others 11 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 "C" is the interest debited in the Mumbai export division.
"Te" is the export turnover of Mumbai division, "Tt" is the total turnover of all the divisions "Tm" is the turnover of Marine division of Veraval. "Td" is the turnover of domestic trade Then - Tt = Td + Tm + Te Allocable interest "I" = A-B Interest allocated to Mumbai division Te = (A-B) x Te Tt Similar calculation can be done for Marine division
15. For carrying out necessary calculation and for giving an opportunity of being heard to the assessee for submitting evidence for showing nexus as spelt out above, we restore this issue to the file of AO.
16. As a result ground no.1 in Revenue's appeal and ground no.2 in assessee's appeal are allowed but for statistical purposes.
17. Ground No.2 of Revenue's appeal is regarding allocation of interest to the Marine division. This issue is covered by our above discussion and accordingly for calculating allocable interest we restore the matter to the AO as per direction given above while disposing of ground No.1 above. Accordingly this ground of Revenue is allowed for statistical purposes.
18. In assessee's appeal, ground No.1 relates to calculating includible profit on DEPB licence. The assessee had actually received a sum of 12 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 Rs.9,97,573/- and made a provision of DEPB amount of Rs.21,46,675/-. According to the AO the entire sum of Rs.31,44,248 (Rs.21,46,675 + 9,97,573)is includible. On the other hand, assessee had considered same as export incentive and claimed deduction u/s 80 HHC thereon. The AO analysed section 28(iiia), 28(iiib), 28(iiic) and the provisions of Foreign Trade (Development & Regulation) Act, 1992 and relied on the decisions of Hon. Supreme Court in the cases of CIT vs. Sterling Foods 237 ITR 579(SC) and Hindustan Lever Ltd. vs. CIT 239 ITR 297 (SC) and came to the conclusion that the assessee is not entitled to any deduction u/s 80 HHC on DEPB license. Ld. CIT(A) on the other hand confirmed the view of the AO.
19. We have heard the parties. The issue is now covered by the decision of the Tribunal Special Bench in the case of Topman Exports vs. ITO (2009) 125 TTJ Mumbai (SB) 289. Accordingly only the profit element on DEPB license has to be considered as income and deduction under section 80 HHC has to be calculated in accordance with judgment given in Topman Exports' case (supra). Thus for calculating allowable deduction on DEPB licence in accordance with the judgment in Topman Exports case we restore the matter to the file of AO. Ground No.1 in assessee's appeal is allowed but for statistical purposes.
20. Ground No.3 relates to not allowing the deduction of claim of bad debts from the profits while calculating deduction under section 80 HHC. During the assessment year in question the assessee company wrote off bad debts of Rs.17,84,996/- in respect of sales made to Chief Brand Product Ltd. Since bad debts are written off in the books, profits of the business are reduced. The AO observed that on the one hand assessee has reduced the bad debt in the FY 00-01 relevant to the present Asst. Year 13 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 but added back in the export profits for computing deduction under section 80 HHC. The AO observed that in Asst. Year 1999-2000 also the assessee had reduced the profits by the same amount considering it as a loss.
21. He accordingly disallowed the claim of bad debt under section 80 HHC of Rs.17,84,996/-. Ld. CIT(A) confirmed the same for the same reasoning.
22. We have heard the parties. In our considered view assessee cannot make double claim once by reducing the business profits under section 36(1)(vii) and again claiming deduction under section 80HHC thereon. If bad debt claim is disallowed by the AO then it should be considered as business profit i.e. business profits will be enhanced by the same amount and accordingly would be entitled for deduction under section 80 HHC. In any case deduction can be claimed either as a bad debt or under section 80 HHC, not both ways. For verification we restore the matter to the file of AO. This ground of assessee is allowed but for statistical purposes.
23. Ground No.4 relates to allocation of indirect expenses to the Marine Export Division on the basis of proportionate turnover. The only ground taken by the assessee against allocation of such indirect cost is that it has been maintaining separate books of accounts and, therefore, profits of the division should be computed only in accordance with the books so maintained. However, while discussing the issue of allocation of interest as per ground no.2 of the assessee's appeal and ground no.1 of Revenue's appeal, we have held that inspite of assessee maintaining separate books of accounts for head office or export division, the export profits have to be computed in accordance with sub-sec.(3)(b) of section 80 HHC which view is supported by the decision of Hon. Kerala High 14 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 Court in CIT vs. Pari Agro Industries (supra). In view of this, we uphold the allocation of indirect cost and overhead expenses to marine division but for computing such allocation we direct the AO to adopt the same methodology as laid down by us for allocating interest cost. In other words, total indirect cost should be worked out including all the three divisions, some indirect cost for non-trading activities should be separately kept aside and reduced from the total overall indirect cost of the assessee and the balance should be distributed in the ratio of turnover. Out of this whatever indirect cost which is already debited to the respective division should be further reduced from allocated indirect cost and only the difference should be further reduced from the profits worked out as per books of accounts maintained for the marine division and accordingly deduction under section 80 HHC should be computed. Therefore, this ground of assessee is also allowed but for statistical purposes.
24. Ground No.5 relates to disallowance of interest of Rs.4,53,400/- on notional basis. This has been discussed by CIT(A) in para 5.1.3 while disposing of ground No.6.1 of the assessee in the appeal before him. The case of the Revenue is that assessee has not charged interest from advances made to M/s Madhur Share & Stock Ltd., a sister concern of the assessee. The funds were transferred from head office and interest was being debited on the borrowed funds in the accounts of the head office. This was mentioned in the audit report as per point no.7. The AO worked out notional interest on the advances made to Madhur Shares & Stock Ltd. and disallowed the same. Ld. CIT(A) confirmed the disallowance.
25. We have heard the parties. The claim of the ld. AR is that the funds advanced are for business purposes as assessee is also earning badala 15 ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02 charges while dealing in trade of shares. Since funds were given for business purposes then following principles laid down by Hon. Supreme Court in case of S.A. Builders (2007) 288 ITR 1 no disallowance is called for. The submission of the ld. DR is that no nexus has been established by the assessee.
26. Ld. DR also submitted that assessee must show that funds advanced were in the running account of the assessee with M/s Madhur Shares & Stocks Ltd. and was not separate account. Business connection is to be shown by the assessee which has not been done in this case.
27. We, however, restore the matter to the file of AO for giving an opportunity of being heard to the assessee to show the copy of accounts of assessee company in the books of account of Madhur Shares & Stocks Ltd. and further to show that advances were given in connection with business and assessee has earned business profit from that concern. This ground of assessee is allowed for statistical purposes.
28. Ground No.6 is not pressed by ld. AR hence the same is rejected as not pressed.
29. Ground No.7 relates to charging of interest under section 234B & 234C. This is consequential and would depend upon finally assessed income, accordingly it does not require any specific adjudication. The same is accordingly disposed of.
30. Ground No. 8 is regarding initiation of penalty proceedings which is premature. We reject it.
16ITA NO.1281/Ahd/2005 ITA NO.1291/Ahd/2005 Asst. Year 2001-02
31. In the result, the appeal of Revenue and that of assessee are allowed for statistical purposes.
Order pronounced in Open Court on 5.2.2010
Sd/- Sd/-
(Bhavnesh Saini) (D.C.Agrawal)
Judicial Member Accountant Member
Ahmedabad,
Dated : 5/2/2010
Mahata/-
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
17