Income Tax Appellate Tribunal - Mumbai
Vinati Organics Ltd., Mumbai vs Department Of Income Tax on 21 May, 2013
आयकर अपीलीय अिधकरण,
अिधकरण बी खंडपीठ मुब
ं ई
INCOME TAX APPELLATE TRIBUNAL,MUMBAI - 'B' BENCH.
सव[ौी डȣ.
डȣ.मुमोहन,
मुमोहन,उपाÚय¢ / एवं ौी राजेÛि,ले
ि लेखा सदःय
Before S/Sh.D.Manmohan,Vice-President & Rajendra,Accountant Member
आयकर अपील सं./
./ITA No.3015/M/2006,िनधा[रण वष[/Assessment Year-2002-03
Asst.Comm.Income-Tax Range Vinati Organics,Ltd. Shiv Ashish
2nd floor,Andheri Kurla Road,
8(3) Aaykar Bhanvan Vs. Sakinaka,Andheri(East)
Mumbai-400072
M K Road,Mumbai-400020
PAN: AAACV6538K
(अपीलाथȸ /Appellant) (ू×यथȸ / Respondent)
आयकर अपील सं./
./ITA No. 952/M/2012,िनधा[रण वष[ /Assessment Year-2003-04
आयकर अपील सं./
./ITA No. 431/M/2012,िनधा[रण वष[ /Assessment Year-2003-04
आयकर अपील सं./
./ITA No.644 /M/2012,िनधा[रण वष[ /Assessment Year-2004-05
Vinati Organics,Ltd. Shiv Ashish Asst.Comm.Income-Tax Range
2nd floor,Andheri Kurla Road,
Sakinaka,Andheri(East) Vs. 8(3) Aaykar Bhanvan
Mumbai-400072
M K Road,Mumbai-400020
PAN: AAACV6538K
(अपीलाथȸ /Appellant) (ू×यथȸ / Respondent)
अपीलाथȸ ओर से / Appellant by : Mohit Jain
ू×यथȸ कȧ ओर से/Respondent by : Vijay Mehta/Sunil Hirawat/
Shashikant Gupta.
सुनवाई कȧ तारȣख / Date of Hearing : 21-05-2013
घोषणा कȧ तारȣख / Date of Pronouncement : 05-06-2013
आयकर अिधिनयम,
अिधिनयम 1961 कȧ धारा 254(
254 ( 1 ) के अÛतग[ त आदे श
Order u/s.254(1)of the Income-tax Act,1961(Act)
2
ITA No.3015/M/2006
Vinati Organics,Ltd.
PER RAJENDRA, A.M.
Appeals have been filed by assessee and the Assessing Officer(AO) raising following Grounds of Appeal for AYs 2002-03,2003-04 and 2004-05:
(Appeals by the Assessee-company):
1.ITA No./952/M/2012,AY-2003-04 The learned C1T(A) erred in confirming the disallowance of Rs.38,42,463/- being the Research & Development expenses claimed by the appellant.Under the facts and circumstances of the matter, he ought not to have confirmed the said disallowance of Rs.38,42,463/-.
2.The learned CIT(A) erred in confirming the disallowance of Rs.8,75,000/- being the weighted deduction claimed u/s.35(2AA) of the I T Act. 1961. Under the facts and circumstances of the matter, he ought not to have confirmed the said disallowance of Rs.8,75,000/-.
3.The learned CIT(A) erred in confirming the disallowance of Rs.26,70,748/- being the interest paid on the amount borrowed for the purpose of business. Under the facts and circumstances of the matter, he ought not to have confirmed the said disallowance of Rs.26,70,748/-.
4.The learned CIT(A) erred in confirming the disallowance of Rs.94,228/- being the leasehold land written off by treating the same as capital in nature. Under the facts and circumstances of the matter, he ought not to have confirmed the said disallowance of Rs.94,228/-.
5.The learned CIT(A) erred in confirming the disallowance of Rs.51,788/- out of telephone expenses.
Under the facts and circumstances of the matter, he ought not to have confirmed the said disallowance of Rs.51,788/-.
6.The appellant craves leave to amend, alter or modify the above grounds of appeal or add a new ground of appeal, as deemed necessary at or before the time of hearing.
2.ITA/431/M/2012, AY.2003-04 "1.The learned CIT(A) erred in confirming the penalty levied u/s.271(1)(c) without appreciating that the appellant has neither concealed the income nor furnished inaccurate particulars of income. Under the facts and circumstances of the matter, no penalty is leviable u/s.271 (1) (c) of the Act.
2.The learned CIT(A) erred in upholding the penalty of Rs.32,08,630/- u/s. 271(1)(c) relying on the decision of Supreme Court in the case of Dharmendra Textiles Processors 306 ITR 277/166 Taxman 65, which is not applicable to the case of the appellant. Under the facts and circumstances of the matter, he ought not to have upheld the penalty of Rs.32,08,630/- u/s.271 (1) (c) of the Act.
3.The learned CIT(A) erred in confirming the penalty of Rs.32,08,630/- levied u/s. 271(1)(c) of the l.T. Act,1961.Under the facts and circumstances of the matter, he ought not to have confirmed the said penalty of Rs.32,08,630/-.
4.The appellant craves leave to amend, alter or modify the above grounds of appeal or add a new ground of appeal, as deemed necessary at or before the time of hearing."
3.ITA/644/M/2012,AY-2004-05
1.The learned CIT(A) erred in confirming the disallowance of Rs,3,02,000/- being the Research & Development expenses claimed by the appellant. Under the facts and circumstances of the matter, he ought not to have confirmed the said disallowance of Rs.3,02,000/-.
2.The learned CIT(A) erred in confirming the disallowance of Rs.75,000/- being the weighted deduction claimed u/s.35(2AA) of the IT. Act, 1961. Under the facts and circumstances of the matter, he ought not to have confirmed the said disallowance of Rs.75,000/-.
3.The learned CIT(A) erred in confirming the disallowance of Rs.1,87,626/- being the leasehold land written off by treating the same as capital in nature. Under the facts and circumstances of the matter, he ought not to have confirmed the said disallowance of Rs.1,87,626/-.
4.The appellant craves leave to amend, alter or modify the above grounds of appeal or add a new ground 3 ITA No.3015/M/2006 Vinati Organics,Ltd.
of appeal, as deemed necessary at or before the time of hearing.
(Appeal filed by the AO)-
ITA No.3015/ M/2006,AY-2002-03:
"On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the assessee is entitled to deduction u/s.80IA on Foreign Exchange Rate fluctuation difference when the same is not derived from the industrial undertaking.
2.On the facts and in the circumstances of the case and in law, the C1T(A) erred in directing the AO to consider miscellaneous credit balance written back (Rs.9,354/-)& miscellaneous receipts(Rs.15,66,258/-) comprising scrap sales(Rs.4,31,216/-)liability no longer required (Rs.1,19,745/-)bad debts written off earlier(Rs.10 lakhs) and miscellaneous receipts(Rs.15,297/-)while calculating deduction u/s.80IA of the if Act 1961.
3.On the facts and in the circumstances of the case and in law, the CIT(A)erred in directing that foreign exchange gain,credit balance written back & miscellaneous receipt should not be excluded from the profits of the business for computing deduction u/s.80HHC.
4.On the facts and in the circumstances of the case in law, the CIT(A) erred in deleting the disallowance made on account of Research & Development expenses(Rs.21,45,147/-)and weighted deduction u/s.35(2AA) (Rs.50,000/-)."
Assessee-company is engaged in the business of manufacturing of chemicals. Details of dates of filing of returns,incomes returned,dates of assessment,assessed incomes, dates of orders of the CIT(A)can be summarised as under :
AY. Date of filing Returned Date of Assessed Dt. of orders
of Return Income (Rs.) assessment Income of CIT(A)
2002-03 30.10.2002 4.19 Crores 29.03.2005 4.85Crores 24.02.2006
2003-04 28.11.2003 (-)43.81 lakhs 31.03.2006 1.08 Crores 09.11.2006
2004-05 27.10.2004 (-)1.12Crores 20.12.2006 (-)1.06Crores 14.11.2007
ITA No./952/M/2012,AY-2003-04 :
2.First two Grounds of appeal pertains to disallowance of Research and Development(R&D) exp
-enses.During the assessment proceedings AO found that assessee had debited a sum of Rs.38.42 lakhs under the head R&D expenses.Moreover assessee had further claimed Rs.8.75 lakhs as weighted expenses u/s.35(2AA) being 25% of Rs.35 lakhs.AO directed assessee to file details in this regard.After considering the submissions of the assessee AO held that the assessee had not filed any clarification or justifica -tion in respect of the R&D expenses,that the assessee had not fulfilled the condition laid down in section 35(2AA) of the Act,that assessee had not submitted required forms,that it had also not furnished details of expenses on which weighted deduction was claimed.Finally,he disallowed the both the claims made by the assessee. 2.1.Against the order of the AO assessee preferred an appeal before the First Appeal Authority (FAA).After considering the submissions of the assessee and the assessment order he held that as per sub-rule (7)(d)of Rule 6,governing the deduction duration of the programme could not be extended,that in the case under consideration extension was evident,that assessee had not submitted necessary documents to the DGIT (Exemption),that nature of project was not pure 4 ITA No.3015/M/2006 Vinati Organics,Ltd.
scientific,that conditions stipulated by rule 6 were not fulfilled.Finally he held that assessee was not entitle to R&D expenses of Rs.38,42,463/- as well as weighted deduction of Rs.8,75,000/-. 2.2.Before us,Authorised Representative(AR) submitted that same issue had arisen in earlier years also i.e.AY.2001-02 and 2002-03,that issue was restored back to the file of the AO by the Tribunal for fresh adjudication.Departmental Representative (DR)supported the order of the Revenue authorities.
2.3.We have heard the rival submissions and perused the material before us.We find that while deciding the issue of R&D expenditure and weighted deduction B Bench of ITAT,Mumbai(ITA 1934/M/2005 and CO291/M/05-AY 2001-02 dated 29.07.2011) had held as under:
"6.We have considered the rival submissions, perused the relevant material on record and gone through the orders of the authorities below. In this case, the AU has given a finding that no details of R&D expenses, on which weighted deduction has been claimed, were furnished and on similar issue for AY 2000-01 addition on account of R&D expenses was made since it was-found on cross verification with the National Chemical Laboratory and the Indian Institute of Chemical Technology that the assessee had not carried out any R&D expenditure. In fact, it had spent the said amount for the purpose of sponsorship, transfer of know-how and such matters other than 'actually carrying out R&D: The AO further gave a finding that the National Chemical Laboratory,Pune had also confirmed that it had not carried out any transaction with the assessee company. On the basis of the above finding, the AU disallowed the claim of the assessee. On appeal, the CIT(A) observed that similar issue came up for consideration in assessee's own case for AY 2000-01,wherein the AO had disallowed R&D expenses of Rs. 67, 23,582/- and weighted deduction of Rs 11,51,362/- u/s 35(2AA) of the Act On appeal, the the allowance made by the AO were upheld by the CIT(A) vide order No.CIT(A)XXIX/ IT)8(3) (4)/ IT/73/03/04 dtd. 24/02/06 and this year are different. In AY 2000-01 R&D expenditure was disallowed u/s 35(1) and the year under consideration the claim is made u/s 35(2AA) of the Act, which is supported all the relevant documents and the contentions of the learned AR in this regard are found to be correct. It is seen from the appeal order for AY 2000-01that a finding was recorded to the fact that the above deduction has been claimed u/s 35(1). Therefore, it was examined whether the conditions laid down u/s 35(1) have been fulfilled or not and it was found that the conditions laid down in the said section have not been fulfilled, therefore, after recording detailed reasons, the claim of the assessee of Rs.67,23,582 /-in AY 2000-01 was disallowed by the AO was upheld. However, this year, it is seen that the claim of assessee of Rs. 51,00,000/- has been made u/s 35(2AA), which is Supported by relevant forms such as Form Nos. 3CG, 3CG and 3CI and, therefore, the CIT(A) allowed the claim of the assessee after detailed finding, hi the light of the findings of the CIT(A) that the assessee claimed R& D expenditure in AY 2000-01 u/s 35(1) whereas it the year under consideration the same expenditure was claimed u/s 35(2AA) of the Act We find that the claim u/s 35(2AA) is not born out from the order of the AO. Therefore, in view of the contra findings of AO & CIT(A), we remit the matter back to the file of the AO with a direction to verify the claim of the assessee whether the claim is u/s 35(1) of u/s 35(2AA) and decide the same in accordance with law after providing reasonable opportunity of being heard to the assesee. This ground of appeal is treated as allowed for statistical purposes. ."
We find that in year under consideration there is no material difference in facts.Therefore,in the interest of justice we are remitting back the both the grounds of appeal to the file of the AO with a direction to decide the issue afresh after affording a reasonable opportunity of hearing to the assessee.
5 ITA No.3015/M/2006Vinati Organics,Ltd.
Ground nos.1and 2 are partly decided in favour of the assessee.
3.Next Ground of appeal pertains to disallowance of Rs.26,70,748/- being the interest paid on the borrowed amounts.During the assessment proceedings AO found that the assessee had claimed interest expenses of Rs.26.7 lakhs as revenue expenditure in its computation of total income,that the assessee had capitalised the same in the in its books of a/cs.After obtaining explanation of the assessee he disallowed the said expenditure u/s.36(1)(iii)of the Act. 3.1.Against the order of the AO assessee preferred an appeal before the First Appeal Authority(FAA). After considering the submissions of the assessee and the assessment order he held that similar issue had came up for consideration for the AY 2002-03,that in that year FAA had upheld the disallowance made by the AO,that following the same he would like to confirm the order of the AO.
3.2.Before us, Authorised Representative(AR) submitted that the assessee borrowed and utilised the funds for carrying of its business,that interest on borrowed funds was allowable expenditure even if it was capitialised in the balance sheet.Departmental Representative (DR) relied upon the orders of the AO and FAA.
3.3.We have heard the rival submissions and perused the material before us.We find that while deciding the same issue for the AY 2002-03 B Bench of ITAT Mumbai (ITA No.2796/Mum/ 2006 order dated 30.08.2011)had held as under :
"15.We have heard both the sides, perused the record and gone through the orders of the authorities below as well as decision cited. The issue involved in this ground is pertaining to interest expenditure incurred by the assessee for setting up the unit at Lote, Parashuram. The case of the assessee is that the above expenditure incurred for the extension of the existing business whereas the AO and CIT(A) doubted that the facts of the case are not clear whether the above expenditure incurred for the extension of existing business or for the new business. To decide the issue we refer to the judgment of the Hon'ble Supreme Court in the case of Core Health Care Ltd.,(supra), on which reliance placed by the assessee, wherein the Apex Court held that "it makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account.". The Apex Court further held as under:"Unlike section 37 which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasizes the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. The Legislature has, therefore, made no distinction in section 36(1)(iii) between 'capital borrowed for a revenue purpose' and capital borrowed for a capital purpose. An assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. "Actual cost" of an asset has no relevancy in relation to section 36(1)(iii)."
16.The case of the assessee is that interest expenditure was incurred in relation to the expansion of the existing business. The learned CIT(A) has observed in his order that it is not clear from the details submitted by the assessee whether for expansion of the existing business or new business. We find that to decide the issue involved in this appeal, it is necessary to arrive at a decision that the expenditure is in relation to expansion of the existing business or altogether for new business. We, therefore, in the interest of justice, set aside the order of the CIT(A) and restore the issue back to the file of the CIT(A) with a direction to decide that the expenditure incurred by the assessee is for expansion of the existing business or a new business, then, adjudicate the issue following the judgment of the Apex Court in the case of Core Health Care Ltd.(supra) after providing reasonable opportunity of hearing to the assessee in the matter. Accordingly, this 6 ITA No.3015/M/2006 Vinati Organics,Ltd.
ground of appeal of the assessee is treated as allowed for statistical purpose." As the facts and circumstances of the case are identical to the facts of AY 2002-03,so following the order for that AY we are also remitting back the matter to the file of the AO for fresh adjudi - cation with a direction of affording reasonable opportunity of hearing to the assessee. Ground no.3 is partly allowed in favour of the assessee.
4.Next Ground of appeal pertains to disallowance of Rs.94,228/- being the leasehold land written off.During the assessment proceedings AO found that the assessee had debited to P & L account an amount of Rs.94,228/- under the head leasehold land written off.He held that said expenditure was of capital nature and hence not an allowable expenditure.
4.1.Against the order of the AO assessee preferred an appeal before the First Appeal Authority (FAA).After considering the submissions of the assessee and the assessment order he held that the assessee had not disclosed actual terms and conditions of the acquisition of the land in question,that even for leased plot of land duration of lease period was very important factor.As a result he confirmed the addition made by the AO.
4.2.Before us, Authorised Representative(AR) submitted that expenditure incurred by the assessee was allowable revenue expenditure.He relied upon the case of Enterprising Enterprises delivered by the Apex Court(293ITR437).Departmental Representative (DR)supported the orders of the AO and FAA.He relied upon the case of Mukund Ltd.(291ITR(AT)249).On query from the Bench it was admitted that lease agreement was not made available to both of the Revenue Authorities.AR was directed to file the same.
4.3.We have heard the rival submissions and perused the material before us. It is found that lease agreement for the year under consideration is for following three premises ; i.)Plot no.B-12 and B-13/1,MIDC Industrial Area,Mahad,
ii).Plot no.RL 17 & RL 18 , MIDC Industrial Area,Mahad,
iii).Plot no. A-20, MIDC Industrial Area,Lote-Parsuram.
From the agreements for plots no. B-12 and B-13/1,MIDC Industrial Area,Mahad and Plot no. A-20, MIDC Industrial Area,Lote-Parsuram it is clear that agreements are for a period of 95 (ninety five) years.In our opinion FAA had rightly pointed out that in case of a leased property duration of lease period was very important.Plots of land at serial no.i).and iii).at Mahad and Lote Parsuram have been leased out by State Government authorities to the assessee for a fairly long period-almost a century.In these circumstances we are unable to agree with the assessee that the expenditure incurred by it on account of writing off of leasehold land should be allowed as revenue expenditure.In our opinion it is a capital expenditure and cannot be allowed u/s.37 of the Act,as far as plots at serial no.i) and iii).are concerned. We have perused the order of the Hon'ble Supreme Court relied upon by the AR.We find that the facts of the that case are not applicable in the case under consideration.In that matter rent was paid by lessee for acquiring leasehold right to extract minerals for a period of ten years only. In our opinion case cited by the AR in of no help in deciding the issue before us,whereas facts of the case of Mukund Ltd.(supra)are similar to the case under consideration 7 ITA No.3015/M/2006 Vinati Organics,Ltd.
4.3.1.It is not clear that amount written off as lease land included the rent of plot no.RL 17 and 18 also or not.It appears that agreement for these plots were for constructing housing society.In our opinion this points needs further investigation. If no amount has been paid under the head lease rent for these plots,it has to disallowed.If portion of it was paid for the plots mentioned at serial no.ii),AO should allow after verification.For this limited purpose matter is restored back to the file of the AO.
Therefore, partly confirming the order of the FAA we decide ground no.4 against the assessee,in part.
5.Last ground of appeal is about disallowance of telephone expenditure amounting to Rs.51, 788/-.During the assessment proceedings AO found that Rs.1.03 lakhs was incurred for the telephones installed at the residences of the Directors.He directed the assessee to justify the expenditure. As per the AO assessee failed to do so.He held that said item of expenditure was of personal nature.He made an adhoc disallowance of 50% of the Rs.1-03 lakhs i.e.Rs.51,788/-. 5.1.Assessee-company preferred an appeal before the First Appeal Authority(FAA). After considering the submissions of the assessee and the assessment order he held that the assessee had not made out case for deletion of the addition and confirmed the order of the AO. 5.2. Before us, Authorised Representative(AR)submitted that FAA had passed one line order,that he had not given any reason for upholding the order of the AO,that in the case of a company such disallowance could not be made. He relied upon the cases of Sayaji Iron and Engg. Co.(253ITR
749)delivered by the Hon'ble High Court of Gujarat.Departmental Representative (DR) suppor - ted the orders of the AO and FAA.
5.3.We have heard the rival submissions and perused the material before us.We find that FAA has not mentioned the issue of proportionate disallowance of telephone expenditure at all while confirming the order of the AO.Thus,his order is a non-speaking order.In our opinion in the case of a company making a disallowance on account of personal nature of expenditure is not proper. In the case under consideration neither AO nor FAA has given any reason for the ad hoc disallo - wance.Respectfully,following the principles enumerated by the Hon'ble High Court of Gujarat in the case of Sayaji Iron and Engg. Co.(supra) we decide ground no.5 in favour of the assessee. As a result appeal filed by the assessee stands partly allowed.
ITA/431/M/2012, AY.2003-04
6.Though there are four grounds of appeal in the filed by the assessee for the same AY ,but effective ground is about confirmation of the penalty of Rs.32,08,630/- levied u/s. 271(1)(c) by the AO. During the assessment proceedings AO made additions/disallowances under six heads. He issued a notice u/s.274 r.w.s.271(1)(c)of the Act to the assessee for levying penalty for furnishing inaccurate particulars of income. Meanwhile FAA had confirmed addition on account of interest capitalised,R&D expenditure,lease hold written off,telephone expenditure and excess depricia -tion.After considering the reply filed by the assessee AO held that it had made a patently wrong claim u/s. 35 of the Act,that assessee had made wrong claims under the heads interest paid and depreciation, that if the case was not selected for scrutiny excess claim made by the assessee would have been allowed,that onus was on the assessee to prove the genuineness of 8 ITA No.3015/M/2006 Vinati Organics,Ltd.
the expenses claimed by it in the return,that assessee had not produced evidence before the AO or the FAA about the claims made by it, that non furnishing of evidences and justification for the deduction claimed in the return of income amounted to furnishing of inaccurate particulars of income.Finally,he levied a penalty of Rs.32,08,630/- u/s.271(1)(c)of the Act. 6.1. Assessee preferred an appeal before the First Appeal Authority(FAA). After considering the submissions of the assessee and the assessment order he held that penalty u/s.271(1)(c) was imposable in loss cases also after the decision of the Hon'ble Apex Court delivered in the case of Gold Coin Health Food Pvt.Ltd.,that assessee itself had admitted that it had claimed excess depreciation under the head depreciation,that assessee had revised statement of income for claiming correct depreciation,that revision of the claim was made after assessment proceedings started,that revision of the claim was not voluntary.Relying upon the decision of the Hon'ble Supreme Court delivered in the matter of Dharmendra Textile Processors (166Taxman65)he held that willful concealment was not essential ingredient of for levying penalty u/s.271(1)(c)of the Act.He upheld the penalty levied by the AO.
6.2.Before us,Authorised Representative(AR) submitted that penalty was imposed for five items, that three disallowances had been challenged before the Tribunal,t hat decision in quantum appeal should be followed,that assessee had committed error in claiming depreciation at a higher rate, that same was rectified during the assessment proceedings, that assessee did not get any benefit from claiming higher depreciation, that over all claim of depreciation would remain same, that assessee had negative income of 43 lakhs.He relied upon the case of Glow Tech Steels P. Ltd. delivered by the Hon'ble Gujarat High Court(280ITR133).Departmental Representative (DR)supported the orders of the AO and FAA 6.3.We have heard the rival submissions and perused the material before us.While deciding the quantum appeal for the AY under consideration we have remanded back issues of interest capita
-lisation,R&D expenses along with deduction of section 35(2AA),to the file of the AO for passing fresh adjudication.In these circumstances,we are of the opinion that penalty for furnishi - ng inaccurate particulars of income cannot be imposed for these items.As far as claim of lease - hold written off is concerned we have upheld the addition made/confirmed by the AO/FAA for four plots of land.We have held that expenditure incurred under that particular head could not be treated revenue expenditure.But,upholding an addition in quantum proceedings does not result in automatic levy of penalty for furnishing inaccurate particulars of income.Assessee had not furnished details of leased plots and it was on that basis AO had made the addition.There was difference of opinion between the AO and the assessee about the treatment to be given to the said expen -diture.assessee claimed it was an expenditure of revenue nature,whereas AO and the FAA held it to be of capital nature.But,on the basis of such a difference provisions of section 271(1)(c)cannot be invoked.Similarly,assessee had filed all the details about the telephone expen
-diture,but AO and the FAA held that part of it had to be disallowed.We have already held that confirmation of an addition should not and cannot be the basis for levying 271(1) (c) penalty. So, no penalty should have been levied for telephone-expenses-disallowance.Similarly,in our opinion,the excess claim of depreciation on staff quarters cannot be treated as furnishing inaccurate particulars of income, considering the peculiar facts of the case under consideration.It was the first AY when the rate fo depreciation was reduced from 40% to 5% on staff quarters. assessee by mistake made a claim at 40%, but later on revised the depreciation chart.It is a fact that revision was done only after AO pointed out the applicable rates of the depreciation for the 9 ITA No.3015/M/2006 Vinati Organics,Ltd.
relevant AY.But,fact remains that assessee withdrew its claim and claim is about depreciation on staff quarters.We find that Hon'ble Gujarat High Court has in similar circumstances in the case of Glow Tech Steels P.Ltd.(supra) had confirmed the order of the Tribunal.Considering the peculiar facts of the case under consideration and respectfully following the orders of the Hon'ble High Court of Gujarat pronounced in the matter of Glow Tech Steel,we reverse the order of the FAA.
As result appeal filed by the assessee stands allowed.
ITA/644/M/2008, AY.2004-05
7.Out of the three grounds of appeal for the year under consideration two pertain to R&D expenses and weighted deduction i.e.deduction claimed u/s.35(2AA)of the Act.While deciding the similar issues for the AY 2003-04 we have remitted back both the matters to the file of the AO(para2.3). Following the same issues of R&D expenses and weighted deduction are sent back to the file of the AO.
Ground nos. 1&2 filed by the assessee stands partly allowed.
8.Next Ground is about disallowance of Rs.1.87 lakhs being the leasehold land written off.While deciding the same issue for AY we have decided the matter against the assessee for the plots of land which been leased for a period of 95 years.We have remitted the matter of other plots to the file of the AO(para 4.3).Following the same,we decide ground no.3 partly in favour of the assessee.
ITA No.3015/ M/2006,AY-2002-03:
9.Ground nos.1 and 2 are inter-related and inter-dependent.During the assessment proceedings AO found that the assessee had claimed deduction amounting to Rs. 1.08 Crores u/s.80IA of the Act.He further found that the assessee had shown following items under the head other income in its P & L A/c:
Interest Received (Gross)- Rs.1,31,734/-,Cash Discount recieved Rs.4,47,039/-,Exchange fluctuation Rs.difference Rs.4,69,192/-,Misc.Credit Balances written back Rs.9,354/-,Misc. Receipts Rs.15,67,258 /-,Export Benefits/Import Entitlements Rs.49,66,369/-(Total Rs.75.90 lakhs).AO was of the opinion that the said amounts were not result of manufacturing activities of the assessee.In other words these benefits were not derived from the manufacturing activities of the assessee. He proposed to disallow the same,so issued a show cause notice to the assessee in this regard.After considering the reply of the assessee he held that cash discount received by the assessee was income derived from industrial undertaking,that other items of income could not be held to be income of the industrial undertaking,that assessee was not eligible for claiming deduction u/s.80IA of the Act,that income from interest was to taxed as income under the head other sources,that exchange gain could not be treated income derived by the industrial undertaking,that income from scrape sale etc.did not represent the income derived from the undertaking and hence entitled for deduction. Finally,he recalculated the deduction u/s.80IA and restricted it to Rs.5.88 Crores as against Rs.6.60 Crores claimed by the assessee. 9.1.Against the order of the AO assessee preferred an appeal before the First Appeal Authority (FAA).After considering the submissions of the assessee and the assessment order he held that assessee had received total other income of Rs.76.24 lakhs,that AO had made a disallowance of 10 ITA No.3015/M/2006 Vinati Organics,Ltd.
Rs.71.43 lakhs,that claim made by the assessee for exchange fluctuation rate should be allowed,that claim of the assessee of gross interest received and of the export benefits/import entitlement had to be disallowed,that miscellaneous credit balance written back was an allowable item.He further held that out of the miscellaneous receipts sums received on account of 'scrap sales','liability no longer required','bad debts written off earlier',and 'miscellaneous receipts' were entitled for 80IA deduction.
9.2.Before us,Departmental Representative (DR) submitted that items of income,allowed by the FAA,were not the direct sources of income of the industrial undertaking,that expenditure allowable could not become items of eligible for deduction under the provisions of chapter VIA of the Act.Authorised Representative(AR) submitted that issue of fluctuation of foreign exchan - ge had arisen in earlier year also,that issue was decided against the Revenue by the ITAT.With regard to various receipts AR submitted that source of the-items-in question was directly related to the activities of the assessee,that a common thread was running among all the receipts,that debit entries of these items reduced the profits of the assessee,that bad debt was the only account entry, that rest of the items were business entries,that similar issues had been decided in favour of th assessee. He relied upon cases of Sadhu Forging Ltd.(336ITR444-Hon'ble Delhi High Court),Sundaram Industries Ltd.(253ITR396- Hon'ble Madras High Court),Amar Raja Batteries Ltd (91ITD280-Hyd),M/s.SprayEngineering Devices Ltd.(ITA/701/Chd/2009, dtd.22. 06. 2012), 9.3. We have heard the rival submissions and perused the material before us.We find that while deciding the issue of foreign exchange fluctuation B Bench of ITAT,Mumbai(ITA 1934/M/2005 and CO291/M/05-AY 2001-02 dated 29.07.2011) had held as under:
"9. We have heard the both the parties and perused the relevant material on record.We find that the issue in dispute is covered by the judgment p1 the Hon'ble jurisdictional High Court in the case of CIT Vs Rachna Udhyog, [2010] 230 CTR (Bom)72 wherein the Court held that "exchange rate difference arises out of and is directly related to sale transaction involving export of goods of the industrial undertaking and, therefore, the difference on account of exchange rate fluctuation is entitled to deduction u/s 8O-IB~. Respectfully following the said ratio we .hereby uphold the order of the CIT(A) in directing the AO to allow the assessee's claim that Rs. 87,412/- being exchange fluctuation."
Respectfully following the above mentioned order,we decide ground no.1.-i.e. issue of gains on account of foreign exchange fluctuation-against the AO.
9.3.1.We find that issue of sale of scrap and eligibility of scrap-sale for 80IB-deduction had been decided by the Hon'ble Delhi High Court in the case of Sadhu Forging Ltd.(supra).Following is the decision of the Hon'ble Court-
"There could not be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts from sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from the industrial undertaking for the purpose of computing deduction under section 80-IB.."
In the case of Amar Raja Battery(supra)ITAT,Hyderabad has decided that amounts pertaining to; 'Credit balances written back', 'Claims received''Miscellaneous receipts','Bad debts written off in earlier years recovered',Profit on sale of miscellaneous assets';were to be considered part of the income that was eligible for 80IB deduction.Similarly in the case of Spray Engineering Devices Ltd.(supra)it was held that amount received on recovery of bad debts was income derived from industrial undertaking.Respectfully following the decisions of the coordinating benches of Hyderabad and Chandigarh we decide ground no.2 against the AO 11 ITA No.3015/M/2006 Vinati Organics,Ltd.
10..Next Ground of Appeal is about eligibility of certain items of income for computing 80HHC deduction.During the assessment proceedings AO found that in calculation of deduction u/s. 80HHC the assessee had not taken in to account the foreign exchange gain,credit balance written back and miscellaneous receipt.After considering the submissions of the assessee,he held that these items should be included in computing the profits of the business for computing deduction u/s. 80HHC.
10.1.assessee preferred an appeal before the FAA.After considering the submissions of the assessee and the assessment order he held that while deciding the issue of eligibility of 80IA deduction he had taken a particular view,that AO should not exclude 90% of foreign exchange gain,credit balance written back and miscellaneous receipt from the profits of business for the purpose of computing and allowing deduction u/s.80HHC of the Act,that assessee would be entitled to deduction u/s.80HHC of the Act on the profits on transfer of DEPB licence. 10.2.Before us,Departmental Representative (DR) supported the order of the AO.Authorised Representative(AR) submitted that all the three items were to be included while calculating the eligible deduction of 80HHC,that these items were part and parcel of business of the assessee,that these items were directly related to exports.He relied upon the cases of Extrusion Process P.Ltd. (303 ITR-AT-267Mumbai), Prakash L. Shah (115ITD167,SB-Mumbai),Mazda Ltd.(ITA No.85/AHD/ 2008,AY-2004-05-Dtd.21.05.2010).
10.3.We have heard the rival submissions and perused the material before us.We find that in the case of Prakash L.Shah(supra) it has been held :
"We therefore, hold that the view of the ld. CIT(A) in directing the inclusion of the gain due to exchange rate difference in the year of receipt and allowing deduction u/s 80HHC ....."
Respectfully following the decision of the Special Bench(supra) we are of the opinion that FAA had rightly held that while calculating 80HHC deduction AO should not exclude 90% of foreign exchange gain.We further find that balance two items are also covered by the orders of the Extrusion Process P.Ltd.(supra) and Mazda Ltd.(supra).It has been held by the Tribunal that credit balance written back and miscellaneous receipt should not be excluded while computing 80HHC deduction.Therefore,following these decisions,we uphold the order of the FAA and decide ground no.3 against the AO.
11.Last ground of appeal is about deleting of the disallowance made on account of Research & Development expenses and weighted deduction u/s.35(2AA)of the Act.While deciding the appeal for the AY 2003-04 filed by the assessee we have restored back the matter to the file of the AO for fresh adjudication.We have noted that while deciding the appeal for AY 2001-02 Tribunal had taken note of the fact that in AY.2002-03 issue was decided in favour of the assessee.Before,usAR and DR agreed that if matter is restored back to the file of the AO,they had no objection.We have discussed the issue at length in preceeding paragraph(para.2.3.)of our order.Following the same we remit back the issue to the file of the AO to pass fresh order after hearing the assessee.
Ground no.3 is partly decided in favour of the AO.
As a result appealS filed by the assessee and AO for AY 2002-03,2003-04,2004-05 stand partly allowed.Penalty appeal for the AY 2003-04(ITA/431/M/2012),filed by the assessee stands allowed.
12 ITA No.3015/M/2006Vinati Organics,Ltd.
पǐरणामतःिनधा[ǐरती और िनधा[ǐरती-अिधकारȣ कȧ िनधा[रण वष[ 2002-03,2003-04,2004-05 कȧ अपीलɅ आंिशक Ǿप से मंज़ूर कȧ जाती है .िनधा[ǐरती कȧ वष[ 2003-04(आईटȣए/431/M/2012), कȧ जुमा[ने कȧ अपील मंज़ूर कȧ जाती है .
Order pronounced in the open court on 5th June,2013 आदे श कȧ घोषणा खुले Ûयायालय मɅ Ǒदनांक 5th जून,2013 को कȧ गई ।
Sd /- sd/-
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डȣ.मुमोहन/
मुमोहन D.Manmohan) राजेÛि/
(राजे ि Rajendra)
उपाÚय¢ /Vice-President लेखा सदःय /Accountant Member
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मुंबई/Mumbai,Ǒदनांक/Date: 5 , June 2013
TNMM
आदे श कȧ ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. Assessee /अपीलाथȸ
2. Respondent /ू×यथȸ
3. The concerned CIT (A) /संबƨ अपीलीय आयकर आयुƠ
4. The concerned CIT /संबƨ आयकर आयुƠ
5. DR "B" Bench, ITAT, Mumbai /ǒवभागीय ूितिनिध बी खंडपीठ,आ.अ.Ûयाया.मुंबई
6. Guard File/गाड[ फाईल स×याǒपत ूित //True Copy// आदे शानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai