Income Tax Appellate Tribunal - Mumbai
Grindwell Norton Ltd, Mumbai vs Assessee
1 I.T.A No.434/ Mum/2009
I.T.A..No.406/M/2009
C.O.No231/M/2009
Grindwell Norton Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI G BENCH, MUMBAI
[Coram : Pramod Kumar AM and V Durga Rao, JM]
ITA No. 434/Mum/09
Assessment year: 2004-05
Grindwell Norton Limited ................................ Appellant
C/o Kalyaniwalla & Mistry, Kalptaru Heritage, 5 h floor
t
127, Mahatma Gandhi Road Fort, Mumbai 400 001
PAN : AAACG8752E
Vs.
Dy Commissioner of Income Tax
Circle 1(1), Mumbai .......................... Respondent
ITA No. 406/Mum/09
Assessment year: 2004-05
Dy Commissioner of Income Tax
Circle 1(1), Mumbai ................................ Appellant
Vs.
Grindwell Norton Limited .......................... Respondent
C/o Kalyaniwalla & Mistry, Kalptaru Heritage, 5 t h floor
127, Mahatma Gandhi Road, Fort , Mumbai 400 001
PAN : AAACG8752E
CO No. 231/Mum/09
Arising out of ITA No. 406/Mum/09
Assessment year: 2004-05
Grindwell Norton Limited ................................ Appellant
C/o Kalyaniwalla & Mistry, Kalptaru Heritage, 5 h floor
t
127, Mahatma Gandhi Road, Fort , Mumbai 400 001
PAN : AAACG8752E
Vs.
Dy Commissioner of Income Tax
Circle 1(1), Mumbai .......................... Respondent
2 I.T.A No.434/ Mum/2009
I.T.A..No.406/M/2009
C.O.No231/M/2009
Grindwell Norton Ltd
Appearances:
M M Golvala, alongwith Akram Khan, for the assessee
Pavan Ved , for the Assessing Officer
ORDER
Per Pramod Kumar :
1. This set of cross appeals, as also assessee's cross objection, call into question correctness of CIT(A)'s order dated 29 t h October 2008, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2004-05. As a matter of convenience, therefore, both the appeals, alongwith the assessee's cross objection, are being taken up together for disposal by way of this consolidated order.
2. We will first take up the appeal filed by the assessee.
3. In the first ground of appeal, following grievance is raised :
The learned CIT(A) erred in holding that the surplus of Rs 1,43,90,679, arising on prepayment of deferred sales tax, was a revenue receipt liable to tax under section 41(1) of the Income Tax Act. The appellant submits that the Assessing Officer be directed to treat the said surplus as a capital receipt not liable to tax.
4. Learned representatives fairly agree that the issue is now covered in favour of the assessee by Special Bench decision in the case of Sulzer India Ltd Vs JCIT (42 SOT 457) wherein it has been held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a). There is no dispute that material facts of the case before us are the same as were the facts before the Special 3 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd Bench in Sulzer's case. Learned Departmental Representative, however, makes elaborate submission in support of his stand that the Special Bench decision in the case of Sulzer India Limited (supra) calls for a reconsideration and that it is not correct. He submits that even though the issue is covered by the Special Bench decision, we must take independent view of the matter since the Special Bench decision is, what he terms as, per incurium. Broadly, his stand is that what is to be taxed under the head 'profits and gains of business and profession' and if a benefit like part remission of the deferred sales tax liability is not taxable as a profit of the business, it can be taxed as gains of business. It is then pointed out that the circular relied upon by the Special Bench was in the context of Section 43B and it cannot be construed to be of application in all the matters relating to the Income Tax Act. It is also pointed out that sales tax authorities are not in the business of granting loans and the nature of concession received from the sales tax authorities cannot be treated as a simplictor lender borrower transaction. Our attention is then invited to the accounting treatment extended to the sales tax deferral transactions, which, according to the learned Departmental Representative, shows that a taxable benefit did accrue to the assessee. Learned counsel for the assessee, on the other hand, takes us through the order of the Special Bench, demonstrates similarity of material facts between Sulzer's case and assessee's case, and points out that all the arguments which are now advanced before us have already been dealt with by the Special Bench. Learned Departmental Representative may not be happy with the conclusions arrived at by the Special Bench and he may still carry on pointing out, what he perceives as errors, this Division Bench is certainly not the forum to adjudicate upon his submissions.
We are urged to follow the Special Bench decision and delete the impugned addition.
5. In our considered view, it is useful to remember that, as laid down by the Apex Court in the case of Ambika Prasad Mishra v. State of U.P. AIR 1980 SC 1762 (@ 1764), "Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent.... A decision does not loose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned....". A special bench 4 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd decision of the Tribunal is a binding judicial precedent for the division benches, and we must respectfully follow the binding precedents. Revenue authorities may not be happy with the conclusions arrived at by the Special Bench, and they have every right to make submissions against the same at higher judicial forum but this Division Bench is certainly not the forum to adjudicate upon such submissions. That apart, we are in most respectful and considered agreement with the conclusions arrived at by the Special Bench and we find that all the necessary aspects of the natter have been considered by the Special Bench in a very comprehensive and elaborate order. The findings of the Special Bench in Sulzer's case (supra) can be summarized as follows:
In order to invoke the provisions of section 41(1), the following conditions must be fulfilled :
(i)In the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee.
(ii)The assessee must have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof. In case either of these events happen, the deeming provision enacted in closing part of sub-section (1) comes into play.
(iii) The amount obtained by the assessee or the value of benefit accruing to him is deemed to be profit and gain of the business or profession and it becomes chargeable to income-tax as an income of that previous year. [Para 70] Further, on a plain reading of section 41(1), it is also clear that the provisions contained in section 41(1) do not make any distinction between any contractual trading liability or any statutory trading liability. Even if any statutory liability is remitted or ceased of, or any amount, whether in cash or in any other manner, has been obtained in respect of the expenditure incurred by way of statutory liability, the same would be deemed to be the profit and gain of the business of the assessee and would, accordingly, be chargeable to income-tax as the income of that year in which such benefit or amount is obtained. [Para 71] On the plain reading of the above provisions of section 38(1), (2), (3), (4), of the Bombay Sales Tax Act, 1959, it provides the manner as to how the payment of tax, penalty and interest, as prescribed, may be made. The first proviso states that the Commissioner may, in respect of any particular dealer or person for the reason to be recorded in writing, extend the date of payment or allow him to pay such an amount by instalments without prejudice to the levy of penalty, interest or both. The second proviso provides that the Commissioner may, in respect of a dealer to whom an eligibility certificate has been granted, extend the date of 5 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd payments or grant a moratorium for payment of dues or provide instalments subject to such conditions as may be prescribed. The third proviso says that the State Government or the Commissioner may, by general or special order where a dealer to whom incentive by way of deferment of sales tax or purchase tax or both under 1979 scheme, 1983 scheme or 1988 scheme or as the case may be electronic Scheme or 1988 scheme or 1993 packaging scheme of incentive, have been granted by virtue of eligibility certificate and where a loan liability equal to the amount of any such tax payable by such dealer has been raised by the SICOM or other designated authorities, deem that such tax has, in the public interest, been paid. The fourth proviso provides that where an entitlement certificate has been granted to the eligible unit for availing of the incentives by way of deferment of sales tax, etc., such eligible unit may, in respect of the periods during which the said certificate is valid, at its option, prematurely pay in place of the amount of tax deferred by it an amount equal to the net present value of the deferred tax as may be prescribed and on making such payments, in the public interest, the deferred tax shall be deemed to have been paid. [Para 73] In the instant case, the assessee had collected total amount of Rs. 752.01 lakhs towards sales tax during the years 1989-90 to 2001-02. It was treated as a loan liability payable after 12 years in six annual/equal instalments and, thus, the assessee treated the said liability as unsecured loans in its books of account.
[Para 76] Pursuant to the amendment made to sub-section (4) of section 38 of the Bombay Sales Tax Act, 1959 by substituting the 4th proviso which provides for payment of Net Present Value (NPV) of deferred taxes under the package scheme of incentives, the State Government by Notification No. STR-12.02/CR-102/taxation- 1, dated 16-11-2002, introduced rule 31D in the Bombay Sales Tax Rules, 1959 (BST Rules) laying down the procedure for determination of such NPV. The procedure for determination of NPV of the amount of deferred taxes having been published, the Deferral Units may exercise the option under 4th proviso to sub- section (4) of section 38 of the Bombay Sales Tax Act, 1959 of pre-maturely repaying at NPV, the amount of deferred taxes. Rule 31D of the Bombay Sales Tax Rules has been provided with a table and the notes below it for determination of NPV. For example, the payment of BST Rs. 27,903 and CST Rs. 70,171 due on 1-5- 2003 was deposited on 30-12-2002, i.e., four months before the due date, the discounted percentage of deferred tax to be paid as NPV was prescribed in the said table at 96.4955 per cent and, accordingly, the NPV amount of BST and CST was worked out at Rs. 26,925 and Rs. 67,712, respectively, as per certificate dated 27-12-2002 and the same was paid on 30-12-2002 as per the certificate dated 25-8-2003. This amount was paid by the assessee as per offer made by the State Government who appointed the State Industrial & Investment Corporation of Maharashtra Limited (SICOM) for settlement of the deferred sales tax liability by an immediate one-time payment. Accordingly, the assessee had paid an amount of Rs. 337.13 lakhs to SICOM, which according to the assessee represented the NPV as determined by SICOM. The payment was made to SICOM on 30-12-2002 as per certificates dated 25-8-2003. The revenue had placed no 6 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd material on record to show that the net present value (NPV) of a future sum was not the same or in the process of calculation of present value of a future sum there was any conversion gain to the assessee. It was also not the case of the revenue that there was no such conversion provided under the BST Act, or the Table provided for determination of NPV was not applicable to the case of the assessee. In the absence thereof it was not possible to accept the contention of the revenue that there was a remission or cessation of the trading liability. [Para 77] Having regard to the law laid down by the Supreme Court and by the High Courts in various decided cases, it was found that to invoke the provisions of section 41(1), the first requirement is as to whether in the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee. In the case of the assessee the revenue's plea was that the assessee had obtained the benefit of deduction of sales tax liability under section 43B as per the CBDT's Circular No. 496, dated 25-9-1987. However, it was found that in the said circular it had been clearly stated vide para 5 that '...the statutory liability shall be treated to have been discharged for the purposes of section 43B' [Emphasis supplied]. Thus, the benefit of deduction was allowed for the purpose of section 43B only and not under any other provisions of the Act. There was no dispute that the Assessing Officer had also applied the aforesaid Board Circular while giving the benefit of deduction under section 43B. It is settled law that the circulars are binding on the department. It is also settled law that the Court cannot add words to statute or read words into it which are not there. This being so, it was to be opined that the first requirement of section 41(1) has not been fulfilled in the facts of the case. [Para 104] The other requirement of section 41(1) is that the assessee must have subsequently : (i) obtained any amount in respect of such loss and expenditure, or (ii) obtained any benefit in respect of such a trading liabilities by way of remission or cessation thereof. In the instant case, the sales tax collected by the assessee during the years 1989-90 to 2001-02 amounting to Rs. 752.01 lakhs was treated by the State Government as a loan liability payable after 12 years in six annual/equal instalments. Subsequently, pursuant to the amendment made to the fourth proviso to section 38(4) of the Bombay Sales Tax Act, 1959 which provides that where an entitlement certificate has been granted to the eligible unit for availing of the incentives by way of deferment of sales tax, etc., such eligible unit may, in respect of the periods during which the said certificate is valid, at its option, prematurely pay in place of the amount of tax deferred by it an amount equal to the net present value of the deferred tax as may be prescribed and on making such payments, in the public interest, the deferred tax shall be deemed to have been paid. In the instant case the assessee had opted for the offer of SICOM, an implementing agency of the State Government and repaid an amount of Rs. 337.13 lakhs to SICOM which according to the assessee represented the NPV of 7 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd the future sum as determined and prescribed by SICOM. The said payment was made to SICOM on 30-12-2002 as per certificates dated 25-8-2003. It has already been demonstrated that NPV is equivalent to future value of the sum. In other words, what the assessee was required to repay after 12 years in six annual/equal instalments, the same was repaid by the assessee, in the public interest, as NPV is equivalent to the Future Value of the sum. Further, there was no iota of evidence to show that there had been any remission or cessation of liability by the State Government. Thus, one of the requirements spelt out for the applicability of section 41(1)(a) had not been fulfilled in the facts of the instant case. [Para 105] Alternatively, it was contended by the revenue that the assessee was required to comply with procedure laid down in clauses 6.21 and 6.22 of the State Government's Resolution. According to the revenue the assessee had, admittedly, failed to do so. Therefore, the question of conversion of deferred sales tax liability into interest free loan did not arise. Further, there was no modified eligibility certificate incorporating the change from deferred sales tax liability to interest free loan. However, it was found that the assessee on the basis of letter issued by SICOM to the sales tax authority had passed necessary entries in the books of account claiming the difference of deferral amount as capital receipt. Merely because the sales tax authorities had not issued the modified eligibility certificate did not mean that the payment of Rs. 337.13 lakhs made by the assessee could not be accepted as having been paid at NPV of the future sum of Rs. 752.01 lakhs towards discharge of full liability. It is settled law that the law does not contemplate or require the performance of an impossible act- lex non cogit ad impossibilia. Further, both the parties had agreed during the course of their arguments that the entries recorded in the books of account were not determinative of the nature of transaction. Even assuming for the sake of argument that the assessee did not get modified eligibility certificate or the repayment of loan paid by the assessee at its NPV of future sum, then in those circumstances, merely because the assessee had passed necessary entries in its books of account, it could not be held that there was any cessation or remission of liability. [Para 106] The assessee was liable to pay sales tax amounts collected from 1-11-1989 to 31- 10-1996, payments of which were deferred under the scheme, and the amounts were payable after twelve years in six equal annual instalments commencing from 1-5-2003, which meant that the liability was payable in future. Later on, the State Government came out with a scheme by which it was provided that if some dealers opted, then they could pay the future liability at a discounted value or what one may call net present value immediately. Thus, in this situation, it could not be construed as remission of liability, because the State Government had not waived of any of the liability as given in the illustrations. Had the State Government accepted lesser amount after twelve years or reduced such instalments, then it could have been a case of remission or cessation. However, in the instant case the State Government had chosen to receive the money immediately which was receivable from 1-5-2003 to 1-5-2008. The amount of Rs.
8 I.T.A No.434/ Mum/2009I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd 337.13 lakhs was actually paid to SICOM on 30-12-2002. Thus, the amount which was payable from 1-5-2003 to 1-5-2008, had been paid on 30-12-2002. Thus, it did not satisfy the condition of actual remission in praesenti. It was a simple case of collecting the amount at net present value which was due later on and even the formula for collecting the net present value was also given by the SICOM and the amounts had been paid as per that formula. Therefore, such payment of net present value of a future liability could not be classified as remission or cessation of the liability so as to attract the provisions of section 41(1)(a). [Para 108] For the reasons stated above, it was to be held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a). [Para 109]
6. As facts of the present case are materially similar to the case in Sulzer's case (supra), and respectfully following the law so laid down by the Special Bench, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance. The assessee gets the relief accordingly.
7. Ground No. 1 is thus allowed.
8. In the second ground of appeal, the assessee has raised the following grievance:
The learned CIT(A) erred in allocating a sum of Rs 2,62,713 to the earning of dividend income. The appellant submits that the allocation is erroneous in fact and in law, and that the Assessing Officer be directed to recompute the total income without making the said allocation.
9. The relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has received dividend income of Rs 87,57,108 but has not offered any expenses for disallowance under section 14 A. The contention of the 9 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd assessee was that no direct expenses have been incurred to earn this dividend income, but this contention was rejected. The Assessing Officer disallowed 10% of dividend earnings as expenses incurred to earn the same. In appeal, CIT(A) upheld the disallowance in principle but reduced to the quantum of disallowance to 3% of dividend earnings, which worked out to Rs 2,62,713. The assessee is not satisfied and is in further appeal before us.
10. Having heard the rival contentions and having perused the material on record, we consider it appropriate to restrict the disallowance to 2%, as has been done by the coordinate benches in group cases . To this limited extent, part relief is granted to the assessee.
11. Ground No 2 is thus partly allowed.
12. In ground no. 3, the assessee has raised the following grievance:
The learned CIT(A) erred in confirming the recomputation of deduction under section 80 HHC by excluding 90% of the following items:
a) Prepaid Sales tax b) Insurance Claim c) Penalty on bounced cheque
13. As far as gains on prepaid sales tax is concerned, learned representatives agree that in the event of ground no. 1, i.e. challenging addition of surplus arising on prepayment of deferred sales tax, is allowed, this issue will not for any adjudication and will have to be dismissed as infructuous. As ground no. 1 is already allowed earlier in this order, we dismiss ground 3(a) as infructuous.
14. As regards ground 3(b), i.e. exclusion of 90% of insurance claim received by the assessee, learned representatives agree that the issue is 10 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd covered in favour of the assessee by Hon'ble Bombay High Court's judgment in the case of CIT Vs Pfizer Limited (330 ITR 62), even as learned Departmental Representative dutifully relied upon the orders of the authorities below. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, we uphold the grievance of the assessee and direct the Assessing Officer not to exclude the insurance claim receipts. Ground No. 3 (b) is thus allowed.
15. In ground 3(c), assessee's grievance is against exclusion of penalty on bounced cheque, for the purpose of computing deduction under section 80 HHC. The stand of the assessee is that penalty on bounced cheque is levied when a cheque given by the customer bounces, and it is in the nature of additional sales proceeds. The authorities below, on the other hand, is that penalty on bounced cheque is an earning which is not form business and cannot therefore be included in the income which is eligible for deduction under section 80 HHC. We are unable to see any merits in the stand of the authorities below. The penalty on bounced cheque, as assessee rightly contends, is an integral part of the business receipts and cannot be viewed as a separate source of income. It is like an additional sale proceeds which is received from customers whose cheques bounce. It cannot be viewed in isolation from the business in the course of which such charges are levied on the customers. We, therefore, uphold the grievance of the assessee and direct the Assessing Officer to grant relief in this respect as well. Ground No. 3 (c) is thus allowed.
16. Ground No. 3 is thus partly allowed in the terms indicated above.
17. In ground no. 4, the assessee has raised the following grievance :
The learned CIT(A) erred in confirming the action of the Assessing Officer in reducing deduction allowable under section 80 IB Rs 61,25,635 from the 'adjusted profits of the business' without 11 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd computing deduction under section 80 HHC. The appellant submits that deduction under section 80HHC be computed without reducing the deduction allowed under section 80 IB.
18. It is sufficient to take note of the fact that this issue was decided against the assessee, by the CIT(A), by relying upon Special Bench decision of this Tribunal in the case of ACIT Vs Rogini Garments ( 108 ITD
49) which has subsequently been approved by the larger bench in the case of ACIT Vs Hindustan Mint Agro Products Pvt Ltd (119 ITD SB 107) and by Hon'ble Delhi High Court in the case of Great Eastern Exports Vs CIT ( 196 Taxman 145). These decisions were, however, disapproved by Hon'ble jurisdictional High Court in the case of Associated Capsules Pvt Ltd Vs DCIT (197 Taxman 84), and, while doing so, Hon'ble jurisdictional High Court has observed as follows:
37. Strong reliance was also placed by the Counsel for the revenue on the Special Bench decisions of the Tribunal in the case of Rogini Garments (supra) and Hindustan Mint & Agro Products (P.) Ltd. (supra), which are affirmed by the Delhi High Court in the case of Great Eastern Exports (supra). Reliance is also placed on decision of the Kerala High Court in the case of Olam Exports (India) Ltd. (supra) which supports the case of the revenue.
38. We find it difficult to subscribe to the views expressed by the Delhi High Court in interpreting the provisions of section 80-IA(9). In that case, in fact, the Counsel for the revenue had argued (see para 38 of the judgment) that section 80-IA(9) applies at the stage of allowing deduction and not at the stage of computing deduction under other provisions under heading 'C' of Chapter VI-A. It was argued that in the matter of grant of deduction, the first stage is computation of deduction and the second stage is the allowance of the deduction.
Computation of deduction has to be made as provided in the respective sections and it is only at the stage of allowing deduction under section 80-IA(1) and also under other provisions under heading 'C' of Chapter VI-A, the provisions of section 80-IA(9) comes into operation. While accepting the arguments advanced by the Counsel for the Revenue, it appears that the Delhi High Court failed to 12 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd consider the important argument of the revenue noted in para 38 of its judgment. Moreover, without rejecting the argument of the revenue that section 80-IA(9) applies at the stage of allowing the deduction and not at the stage of computing the deduction, the Delhi High Court could not have held that section 80-IA(9) seeks to disturb the method of computing the deduction provided under other provisions under heading 'C' of Chapter VI-A of the Act. In these circumstances, we find it difficult to concur with the views expressed by the Delhi High Court in the case of Great Eastern Exports (supra). For the same reason, we find it difficult to subscribe to theviews expressed by the Kerala High Court in the case of Olam Exports (India) Ltd. (supra).
39. In the result, we hold that section 80-IA(9) does not affect the computability of deduction under various provisions under heading 'C' of Chapter VI-A, but it affects the allowability of deductions computed under various provisions under heading 'C' of Chapter VI-A, so that the aggregate deduction under section 80-IA and other provisions under heading 'C' of Chapter VI-A do not exceed 100 per cent of the profits of the business of the assessee. Our above view is also supported by the C.B.D.T. Circular No. 772 dated 23-12-1998, wherein it is stated that section 80IA(9) has been introduced with a view to prevent the tax-payers from claiming repeated deductions in respect of the same amount of eligible income and that too in excess of the eligible profits. Thus, the object of section 80-IA(9) being not to curtail the deductions computable under various provisions under heading 'C' of Chapter, it is reasonable to hold that section 80-IA(9) affects allowability of deduction and not computation of deduction. To illustrate, if Rs. 100 is the profits of the business of the undertaking, Rs. 30 is the profits allowed as deduction under section 80-IA(1) and the deduction computed as per section 80HHC is Rs. 80, then, in view of section 80-IA(9), the deduction under section 80HHC would be restricted to Rs. 70, so that the aggregate deduction does not exceed the profits of the business.
13 I.T.A No.434/ Mum/2009I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd
19. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, we uphold the grievance of the assessee and direct the Assessing Officer to recompute deduction under section 80 HHC, in the light of law so laid down by Their Lordships.
20. Ground No. 4 is thus allowed.
21. In ground no. 5, the assessee has raised the following grievance:
The learned CIT(A) erred in confirming the disallowance of Rs 20,35,641 being write off of capital work in progress. The appellant submits that the Assessing Officer be directed to allow the same.
22. The expenses in question were incurred for developing an alternative machine for manual setting of crude setting equipment but since this project was unsuccessful and had to be abandoned, the loss on capital work in progress has arisen. This claim was made before the Assessing Officer by way of a letter but Assessing Officer did not deal with the same. In appeal, however, CIT(A) rejected the same on merits. Aggrieved, assessee is in appeal before us.
23. Having heard the rival submissions and having perused the material on record, we see no reasons to interfere in the matter for the short reason that factual elements embedded in assessee's submissions are not borne out of material on record before us. We, therefore, approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
24. Ground No. 5 is thus dismissed.
25. In the result, appeal of the assessee is partly allowed in the terms indicated above.
14 I.T.A No.434/ Mum/2009I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd
26. We now take up the appeal filed by the Assessing Officer.
27. In the first ground of appeal, the Assessing Officer has raised the following grievance:
On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs 54,15,964 on account of unutilized MODVAT credit without appreciating the fact that the addition was rightly made by the Assessing Officer in view of the provisions of Section 145 A of the Act.
28. Even though learned Departmental Representative relies upon the stand of the Assessing Officer, learned representatives agree that the issue is covered in favour of the assessee by orders of the coordinate bench in the cases of Cobot India Limited Vs DCIT ( ITA No. 4/Mum/4), which has been approved by Hon'ble Bombay High Court, and that whether assessee follows the inclusive method or exclusive method, there is no impact on taxable profits. In the year 2009, similar addition for the assessment year 2002-03, was remanded to the Assessing Officer by a coordinate bench, but no orders have been passed by the Assessing Officer in this regard. We have also noted that in the immediately preceding year, the relief granted by the CIT(A) on this issue has not been carried in further appeal. All this shows that the dispute has been allowed to reach finality and there are no good reasons to agitate this issue in this particular year. In view of these discussions, as also bearing in mind entirety of the case, we approve the impugned relief granted by the CIT(A) and decline to interfere in the matter.
29. Ground No. 1 is dismissed.
15 I.T.A No.434/ Mum/2009I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd
30. In ground no. 2, the Assessing Officer has raised the following grievance:
On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the disallowance under section 14A of the Act to the extent of Rs 2,62,713 only, holding that the disallowance of 3% of the exempt income can be considered to be expenses attributable to earning the dividend income, which is without any reasonable basis.
31. While dealing with assessee's grievance against confirmation of estimated disallowance under section 14A, we have reduced the same to 2% of dividend earnings, in accordance with the stand taken by the coordinate benches in group vases. In this view of the matter, the grievance raised by the Assessing Officer is rendered infructuous and is to be dismissed as such.
32. Ground No. 2 is dismissed.
33. In ground no. 3, the Assessing Officer has raised the following grievances:
3(a) On the facts and circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to treat the income from agency commission, service charges, scrap sales and sales tax as a part of business profit for the purpose of working out deduction under section 80 HHC.
3(b) On the facts and circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to adjust the interest receipts against interest paid and consider the net amount as other income for the purpose of working out deduction under section 80 HHC.
34. As far as ground no. 3 (b) is concerned, learned representatives agree that the issue is now covered against the assessee by Hon'ble Bombay High Court's judgment in the case of CIT Vs Asian Star Co Ltd (326 ITR 56). Respectfully following Hon'ble Bombay High Court 16 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd judgment, we vacate the relief granted by the CIT(A). Ground No. 3 (b) is thus allowed.
35. With regard to ground no. 3 (a), learned counsel for the assessee fairly concedes that the income from agency commission cannot be treated as business profit. He points out that assessee has suo motu reduced the agency commission from business profits, as evident from page 7 of the assessment order
36. However, as far as service charges in ground 3(a) are concerned, learned counsel urges us to take up this issue along with grievance raised in the cross objection. Grievance raised in the cross objection is as follows:
Without prejudice to the contention of the respondent that ground 3(a) in the appeal filed by the department requires to be dismissed, in any event the respondent submits that the expenditure earned to earn the service receipts must be netted (reduced) before arriving at the figure which is to be reduced from the 'profits and gains from business or profession' under Explanation (baa) below Section 80 HHC.
37. The assessee assembles the effluent treatment plant at customer's site and service charges represent charges received by the assessee in respect of the same. There are direct costs involved in this activity. While Assessing Officer was of the view that service charges are received for services rendered by the assesse, the CIT(A) has granted relief on the ground that since these activities are part and parcel of assessee's business, the service charges receipt cannot be excluded from business profits. The Assessing Officer is aggrieved and is in appeal before us.
38. Having heard the rival contentions and having perused the material on record, we are of the considered view that the service charges receipts are not in respect of export business and should be excluded as such, 17 I.T.A No.434/ Mum/2009 I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd what is to be excluded is the earnings from service charges, on net basis, because there are direct and clearly identifiable expenses incurred to earn the same, and any other approach will result in distortion of results. Accordingly, while we uphold the grievance of the Assessing Officer, we also uphold the grievance of the assessee raised in the cross objection.
39. As regards exclusion of scarp sales and sales tax refund, learned representatives agree that the issues are covered in favour of the assessee by decisions of the coordinate benches in the cases of Kodak India Pvt Ltd (8923/Mum/04) and Diamond Dyechem Ltd ( ITA 3342/Mum/06), copies of which were placed before us. Learned Departmental Representative, however, dutifully relied upon the stand of the Assessing Officer. Consistent with the stand taken by the coordinate benches, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
40. Ground No 3 is thus partly allowed in the terms indicated above.
41. In ground no. 4, the Assessing Officer's grievance is as follows:
On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of entrance fees paid to club at Rs 1,01,645.
42. As regards this grievance of the Assessing Officer, we have noted that what has been disallowed are the normal club expenses and not the entrance fees. Learned representatives agree that the issue is covered in favour of the assessee by Tribunal's order for 1995-96 and the relief granted by the CIT(A), on this issue, in the intervening years has not even been called into question before the Tribunal.
18 I.T.A No.434/ Mum/2009I.T.A..No.406/M/2009 C.O.No231/M/2009 Grindwell Norton Ltd
43. We are unable to see any particular reason for this issue being challenged in this particular year. In any event, even on merits, the matter is covered in favour of the assessee by Tribunal's decision. Respectfully following the same, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
44. Ground No. 4 is thus dismissed.
45. In the result, while appeal of the Assessing Officer is partly allowed, cross objection filed by the assessee is allowed. To sum up, while appeals filed by the assessee as also by the Assessing Officer are partly allowed in the terms indicated above, cross objection filed by the assessee is allowed. Pronounced in the open court today on 7th day of March, 2011.
Sd/- sd/-
(V Durga Rao ) (Pramod Kumar)
Judicial Member Accountant Member
Mumbai; 7 t h day of March, 2011.
Copy forwarded to :
1. The appellant
2. The respondent
3. Commissioner , Mumbai
4. Commissioner (Appeals) , Mumbai
5. Departmental Representative, G bench, Mumbai
6. Guard File
True Copy
By Order etc.
Assistant Registrar
Income Tax Appellate Tribunal
Mumbai benches, Mumbai