Income Tax Appellate Tribunal - Mumbai
Perfect Circle India Ltd, Mumbai vs Assessee on 6 September, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'C' BENCH
BEFORE SHRI D.MANMOHAN, VICE PRESIDENT &
SHRI T.R.SOOD, ACCOUNTANT MEMBER
Sr.No. I.T.A.No. Appellant Respondent A.Y
1 3829-M-10 Perfect Circle India Ltd., DY.CIT, 2001-02
Mumbai. Circle 5(2),
Mumbai.
PAN: AAACP 0482 E
2 3875-M-10 Dy.CIT, Cir.5(2), Mumbai Perfect Circle 2001-02
India Ltd.
3 7631-M-07 Perfect Circle India Ltd., Dy.CIT, Cir.5(2), 2004-05
Mumbai Mumbai
4 7653-M-07 Dy.CIT, Cir.5(2), Mumbai Perfect Circle 2004-05
India Ltd.,
Mumbai
5 638-M-10 Perfect Circle India Ltd., Dy.CIT, Cir.5(2), 2005-06
Mumbai Mumbai
6 4180-M-10 Perfect Circle India Ltd., Dy.CIT, Cir.5(2), 2006-07
Mumbai Mumbai
Assessee by : Shri Santosh Parab.
Department by : Shri Alexander Chandy.
Date of Hearing: 06/09/2011
Date of Pronouncement:
ORDER
Per T.R.SOOD, AM:
These cross appeals are heard together and they are being disposed of by this common order.
2. I.T.A.No.3829/M/10 - A.Y 01-02 [assessee's appeal]: In this appeal assessee has raised the following grounds:
"On the facts and in the circumstances of the case and in law-
The learned CIT(A) erred in confirming the reopening of the assessment under sec.147.
Without prejudice to the above, The learned CIT(A) erred in confirming the action of the Assessing Officer of disallowing expenses to the tune of Rs.1,20,181 treating them as prior period expenses.2
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
3. The Ld. Counsel of the assessee pointed out that original assessment was completed u/s.143[3] vide order dated 9-3-2004. The AO issued a notice u/s.148 on 31-3-2008 which was served on the assessee on 1-4-2008. The Ld. Counsel submitted that notice is beyond period of six years and the time limit would expire on 31-3-2008, therefore, the notice was beyond time.
4. On the other hand, Ld. DR submitted that notice was served on the assessee on 31-3-2008 itself and he produced the original records to prove the date of service.
5. We have considered the rival submissions carefully. Though date of receipt on the original receipt is mentioned as 31-3-2008, but AO himself has mentioned the date of service as on 1-4-2008. Even if same is reckoned to be 1-4-2008, even then notice has to be treated as validly served. The Hon'ble Supreme Court has considered this issue in the case of R. K. Upadhyay vs. Shanbhai P. Latel [166 ITR 163]. In that case the notice was issued u/s.147[b] on 31-3-1970 but same was sent by registered post and received by the assessee on 3-4-1970. The Hon'ble court analysed the provisions of sections 148 and 149 and noted that the scheme of 1961 I.T.Act was different from 1922 I.T.Act and a clear distinction has been made between the "issue of notice and service of notice". It was further observed that once a notice was issued u/s.148 within the period of limitation, jurisdiction becomes vested in the ITO to proceed to re-assess. It was specifically noticed that sec.148 used the term "service" whereas sec.149 which deals with 3 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 the limitation used the expression "issue of notice". Therefore following this decision, we hold that notice has been issued and served within the period of limitation. Therefore, we uphold the reopening of assessment.
6. Ground No.2: After hearing both the parties, we find that during assessment proceedings AO noticed that expenditure of Rs.1,20,181/- was in the nature of prior period expenses was not allowable. On enquiry, assessee filed the necessary details for such expenditure which was rejected by the AO by observing that explanation was of general nature.
7. On appeal, the issue was decided by the Ld. CIT(A) against the assessee by observing that it cannot be said that expenditure has crystalised during the year.
8. Before us, Ld. Counsel of the assessee referred to various documents at pages 36 to 43 of the paper book and pointed out that the concerned expenditure was on account of maintenance etc., and for the same bills itself were received during the current year and, therefore, the liability to pay such expenditure has crystalised in this year only.
9. On the other hand, Ld. DR submitted that if the expenditure was in the nature of maintenance, assessee could have easily provided the same in the concerned year.
4
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
10. We have considered the rival submissions carefully and find that on page-36 following details of prior period expenditure have been filed before us:
Clause 22(B): PRIOR PERIOD EXPENDITURE DEBITED TO P & l A/C. V.NO. Date Particulars Amount POT 3369 30-03-00 NIIT -Oracle 7.3 Enterprise 30,875 Edition 1.2.2000 to 31-3-2000 POT 1706 30-03-00 Hughes Escort Comm Ltd. 65,093 Annual Maintainance charges for 1-2-2000 to 31-3-2000 Pot 1700 08-05-00 Hughes Escort Comm Ltd. 24,213 Satellite access charges Network monitoring charges for Chennai Office 1-2-2000 to 31-3-2000 Total 120,181 However, none of the bills placed before us matched with the above items. The bill of NIIT of page 38 is for Rs.1,85,250/-. Bills on pages 39 to 42 of the paper book are from Hughes Escort Comm Ltd. for Rs.16,667/-, Rs.41,667/-, 19355/- and 1,03,871/-. These bills do not match with the details provided. Moreover, it has not been made clear which particular bill has been received late. Therefore, we are unable to accept the contentions of the Ld. Counsel of the assessee. Though, if a particular bill is received late and liability to pay that expenditure crystalises later on, such liability can be allowed in later year, but there have to be specific details of the same and reasons for receiving such late invoices. Since bills furnished before us themselves do not tally with the details therefore, we are of the opinion, that addition has 5 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 been correctly confirmed by the ld. CIT(A) and accordingly, we confirm the order of the ld. CIT(A).
11. In the result, assessee's I.T.Appeal No.3829/M/10 for A.Y 2001- 02 is dismissed.
12. I.T.A.No.3875/M/10 [revenue's appeal] A.Y 2001-02: In this appeal Revenue has raised the following ground:
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the assessing officer to work out the deduction u/s.80HHC in accordance with the decision of ITAT Special Bench, Bombay in the case of Topman Exports which the department has not accepted."
13. After hearing both the parties, we find that the above issue is covered by the decision of the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colour & Chemical [328 ITR 461]. In this case it was held as under:
"Under sub section (1) of Section 80HHC, a deduction is allowed to the extent of profits "derived by the assessee" from the export of goods to which the Section applies. Since the deduction is in respect of profits derived from export, sub section (3) laid down a formula on the basis of which export profits have to be computed. Under clause (a) of sub section (3) the expression "profits derived from export" are defined to be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. However, where an assessee carries on the business of export of trading goods, clause (b) defines export profits to be the export turnover in respect of such trading goods which is to be reduced by the direct and indirect costs attributable to the export. In the application of the formula to a manufacturer exporter, clause (a) refers to the profits of the business. The expression profits of the business.
The expression "profits of the business" means profits as computed under the head of 'profits and gains of business or profession' under Sections 28 to 44D and they are thereupon to be reduced to the extent provided by clauses (1) and (2). Section 28 elucidates incomes which shall be chargeable to income tax under the head of "Profits and gains of business or profession". Clauses (iiia), (iiib) and (iiic) were inserted into the Section by the Finance Act of 1990. By the Finance Act, 2005, 6 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 Parliament inserted a specific clause, namely, clause (iiid) in section 28 to the effect that profits on transfer of DEPB, i.e. the amount received on transfer of DEPB is income chargeable to tax under the head "profits and gains of business or profession".
As regards the deduction under Section 80 HHC, the Legislature substituted Explanation (baa) in Section 80HHC so as to exclude 90% of the profits received on transfer of DEPB from the profits of business for the purposes of Section 80HHC and inserted the second and third provisos to Section 80HHC(3). The second proviso it was provided that in the case of an assessee having an export turnover not exceeding Rs.10 crores, the profits computed under Section 80HHC(3) shall be increased by 90% of the sum referred to in Section 28(iiid). the 3rd proviso it was provided that in the case of an assessee having an export turnover exceeding Rs.10 crores, the profits computed under Section 80HHC(3) shall be increased by 90% of the sum referred to in Section 28(iiid) subject to the two conditions set out therein. What constitutes application seeking DEPB credit would make no difference to the taxability of the entire amount received on transfer of the DEPB credit under Section 28(iiid). profits under Section 28(iiid) is the amount received on transfer of the DEPB credit and not the amount of credit which the assessee was entitled to under the DEPB scheme. In other words, the amount equivalent to the face value of DEPB as well as the amount received in excess of the DEPB would constitute profits of business under Section 28(iiid) and merely because, a part of such profits of business (face value) was offered to tax in the year in which the credit accrued to the assessee would not be a ground to hold that such profit was not covered under Section 28(iiid). Where the face value of the DEPB credit is offered to tax as business profits under Section 28(iiid) in the year in which the credit accrued to the assessee, then any further profit arising on transfer of DEPB credit would be taxed as profits of business under Section 28(iiid) in the year in which the transfer of DEPB credit took place There is another perspective from which the issue can be looked at. The DEPB credit to which an exporter is entitled is a form of an export incentive. No part of the credit that is available under the DEPB scheme can fall for classification under clause (iiib) of Section 28 which deals with cash assistance, received or receivable against any scheme of the Government of India. As the legislative history of the provision would show clause (iiib) was enacted by Parliament at a time when the export incentives that were available were (i) Import entitlement licences; (ii) Cash compensatory support; and (iii) Duty drawback. The DEPB scheme was not even in existence when clause (iiib) came to be enacted into Section 28 by the Finance Act of 1990. The DEPB scheme was brought into existence with effect from 1 April 1997. Clause (iiid) of Section 28 was inserted by the Amending Act of 2005 with effect from 1 April 1998. The value of the DEPB credit can by no means be regarded as a cash assistance which is received or 7 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 receivable by a person against exports under any scheme of the Government of India.
It cannot be inferred from the speech of the Finance Minister that the insertion of clause (iiid) in Section 28 was made with a view to tax only the amount which has been received in excess of the face value of the DEPB credit. DEPB credit was introduced with effect from 1 April 1997 which was after the insertion of clause (iiib) in Section 28; (b) Section 28(iiib) refers to cash assistance (by whatever name called) received by the assessee from the Government pursuant to a scheme of the Government. The amount received on the transfer of the DEPB credit is not received by the assessee from the Government pursuant to a scheme of the Government within the meaning of clause (iiic) and (c) When Section 28(iiid) specifically deals with profits realized on the transfer of the DEPB credit, it would be impermissible as a matter of first principle to bifurcate the face value of the DEPB and the amount received in excess of the face value of the DEPB. the entirety of the sale consideration would fall within the purview of Section 28(iiid)." Following the above decision, we allow the ground of appeal raised by the Revenue.
14. In the result, Revenue's appeal in I.T.A.No.3875/M/10 for A.Y 2001-02 is allowed.
15. I.T.A.No.7631/M/07 - [assessee's appeal] A.Y 04-05: In this appeal, the assessee has raised the following grounds:
1. The learned CIT(A) erred in confirming the action of Assessing Officer [AO] of disallowing Rs.1,09,61,257 incurred on tooling and repairs treating it as capital in nature and not accepting the contention of the assessee that the impugned expenditure in fact was revenue in nature and had no enduring benefit.
2. The learned CIT(A) erred in confirming the AO's action of disallowing interest expenditure to the tune of Rs.46,75,955 attributing the same to investment and hence treating it as non-business expenditure. The CIT(A) ought to have appreciated the fact that the entire investment was made from internal accruals and further that the investment was made with a cogent business rationale.
3. The learned CIT(A) further erred in confirming the AO's action of disallowing Rs.30,42,000 which was for provision for commission/turnover discount treating the provision as contingent in nature. The CIT(A) ought to have appreciated the facts that the provision was made based on the sales made during the year and were only paid in the subsequent year and hence the expenditure related to the year and was allowable.8
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
4. The learned CIT(A) erred in confirming the AO's action of disallowing commission paid to Directors amounting to Rs.2,74,000 treating the same as non business expenses.
5. The learned CIT(A) erred in confirming the AO's action of disallowing the bad debts to the tune of Rs.5,73,000.
6. The learned CIT(A) further erred in confirming the AO's action of disallowing advance written off to the tune of Rs.9,71,000.
7. The learned CIT(A) further erred in confirming the disallowance of an adhoc amount of Rs.1,l79,000 being 20% of staff welfare expenses treating it as non business expenditure without going into the true nature and purpose of the expenditure.
8. The learned CIT(A) further erred in confirming the disallowance of an adhoc amount of Rs.14,82,800 being 10% of the total miscellaneous expenses treating it as non business expenditure without going into the true nature and purpose of the expenditure.
9. The learned CIT(A) further erred in confirming the disallowance of an adhoc amount of Rs.5,11,691 being 10% of foreign travel expenses alleging that specific details were not submitted.
10. The learned CIT(A) erred in confirming the AO's recalculation of the claim under 80HHC as follows:
i) The learned CIT(A) has erred in confirming the inclusion of excise duty amounting to Rs.6,48,04,705 and export benefits amounting to Rs.1,27,92,846 in the total turnover considered for calculating the claim under Sec.80HHC.
ii) The learned CIT(A) has erred in confirming reduction of 90% of the miscellaneous income amounting to Rs.2,84,66,100 [100% being Rs.3,16,29,000] while arriving at the business profit for the purpose of calculating the claim u/s.80HHC. The miscellaneous income included income which was earned in regular course of business and hence are not required to be deduction @ 90% u/s.80HHC(3).
iii) The learned CIT(A) has erred in not including 90% export incentive to the tune of Rs.1,15,13,361 while calculating the profit for the purpose of claim u/s.80HHC.
Without prejudice to the above, the CIT(A) has directed to recompute the deduction u/s.80HHC in accordance with the amended provisions of Section 80HHC read with Section 28.
11. The learned further erred in confirming the AO's action of not allowing carried forward of long term capital loss Rs.4,58,50,060 stating that it was only a paper transaction,
16. Ground No.1: After hearing both the parties, we find that during the assessment proceedings AO noticed that assessee has claimed various expenditure under the head tooling, spares and repairs amounting to Rs.1,32,26,962/-. The assessee was specifically 9 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 requested to explain as to why the expenditure should not be treated as capital in nature. In response, it was stated that all expenditure was in the nature of revenue and there was no enduring benefit accruing to the assessee. However, no details or explanation in respect of each assets were furnished and, therefore, AO made an addition of Rs.1,32,26,962/-.
17. On appeal, ld. CIT(A) observed that even before him no material was brought to his attention that expenditure of 13 items mentioned by the AO was either items of 100% depreciation or consumables in the process of business activity. Therefore, action of the AO for disallowing tooling expenses amounting to Rs.1,09,61,257/- was upheld. However, expenditure amounting to Rs.22,65,705/- which was on account of spares and repairs was allowed.
18. Before us Ld. Counsel of the assessee submitted that all the relevant details were filed before the AO and in this regard referred to pages 41 to 50 of the paper book. He further submitted that assessee was in the business of manufacturing Piston Rings and Casting Rings which required frequent tooling. Such tools had very short duration of life and, therefore, no enduring benefit was obtained when tools were brought.
19. On the other hand, Ld. DR strongly supported the order of the CIT(A).
20. After considering the rival submissions, we find that at page 41 only a note claiming that some tools were required for manufacturing 10 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 which had a very little shelf life. However, details attached from pages 42 to 50 are only for very small items. The bills furnished are for Rs.65.335/-, Rs.28,752.92/-, Rs.78,043/-, Rs.75,636/-, Rs.61,884/-, Rs.22,766/-, Rs.r54,562/-, Rs.4667/-, and Rs.1,30,768/-. However, AO has mentioned the following tooling expenses:
WS ITEMS Description
T12CUT 10020100 Rs.15,61,596 CTB CUTTER
100X2,0X100T
T14CUTBRZO150XBRAZED Rs.10,01,997 G&S CUTTER 1.15
T14CUTBRZO150XBRZED Rs. 8,70,379 G&S CUTTER 1.40
T14CUTBRZO190XBRAZED Rs. 2,16,526 G&S CUTTER 2.00
T14CUTSCB0070X Rs. 7,56,310 G&S CUTTER 2.5
T14CUTSCB0125XCARBIDE 24T Rs.12,10,156 BRAZED
T14CUTSCB09024 CARBIDE 24T Rs.22,59,936 G&S CUTTER 0.70
T14CUTSSCB 11524 CARBIDE Rs.18,38,216 G&S CUTTER 0.90
24T G&S CUTTER 1.15
T14CUTTRIALXXX TEETH Rs. 1,31,095 TRIAL CUTTER
1.15X32
12300UNCHBRADMA SPACER Rs. 3,45,184 MARKING PUNCH
PRADMA
T62INSTAPERFIL MARKIN Rs. 4,23,079 TAPER FILLERGAUGE
WITH
T99DWHD12V9U06W06 Rs. 1,00,508 DIAMOND WHEEL
D12V9
INSERT SPAN 1203
T99INS120300ALMICROFINI Rs. 2,46,275
EDL
Total Rs.1,09,61,257
The above clearly shows that certain heavy items like cutters have been claimed as tooling expenses. But bills for the same have not been filed before the AO or CIT(A) or even before us. Therefore, in the absence of details, it is very difficult to accept the contentions of the Ld. Counsel of the assessee. For example, we do not know how many cutters have been purchased through such bills which range from 11 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 Rs.7,56,310/- to Rs.22,59,936/-. Therefore, in the absence of details, we confirm the addition made by the Ld. CIT(A).
21. Ground No.2: During assessment proceedings, AO noted that assessee had claimed interest amounting to Rs.2,80,90,000/-. It was further found that assessee had invested a sum of Rs.11.12 crores in the equity shares of Spicer India Ltd. In response to a query, it was mainly submitted that there was cogent business reasons for investment in Spicer India Ltd. and the investment was made in the earlier years. AO was not satisfied and he disallowed a proportionate amount of interest.
22. On appeal, the ld. CIT(A) confirmed the addition because, according to him, income if any, attributable to the shares was exempt u/s.14A.
23. Before us, Ld. Counsel of the assessee submitted that this issue may be remitted to the file of the AO in view of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co.Ltd. vs. DCIT [328 ITR 81].
24. On the other hand, Ld. DR strongly supported the order of the CIT(A).
25. After considering the rival submissions, we agree with the observations of the Ld. CIT(A) that income, if any, from the investment would be exempt lu/s.14A and, therefore, interest was rightly disallowed. Similar view has been taken by the Special Bench of the 12 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 Tribunal in the case of Cheminvest Ltd. [121 ITD 318] wherein it was held as under:
"Section 14A, read with section 10(34), of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income - Assessment year 2004-05 - Whether since dividend income is exempted from tax by virtue of section 10(34), interest paid on borrowed capital utilized in purchase of shares, being expenditure incurred in relation to dividend income not forming part of assessee's total income, cannot be allowed as a deduction - Held, yes - Whether such disallowance under section 14A can be made even in a year in which no exempt income has been earned or received by assessee - Held, yes."
However, at the same time interest has been disallowed on proportionate basis, which means indirectly Rule 8D has been applied which is not permissible in the light of the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co.Ltd. vs. DCIT [supra] wherein it was held that Rule 8D is applicable only from A.Y 2008-09 and has no retrospective application. In fact, the Hon'ble High Court held as under:
"Held, that the provisions of rule 8D of the Rules which have been notified w.e.f. March 24, 2008 shall apply with effect from asst. yr. 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub-section.(1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While 13 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case."
Therefore, following the above decision, we set aside the order of the ld. CIT(A) and remit the matter to the file of the AO to recompute the disallowance of interest in the light of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co.Ltd. vs. DCIT [supra].
26. Ground No.3: After hearing both the parties, we find that during assessment proceedings it was noticed by the AO that assessee had made a claim under the head 'commission and trade discount' amounting to Rs.30,42,000/-. This amount was debited as provision in the month of March, 2004 and, therefore, assessee was requested to explain why this claim should not be disallowed being of a contingent nature as liability has not been crystalised. In response, it was stated that though provision was made during the year, but credit notes were issued in the succeeding year. The AO did not find merit in this contention because, according to him, the liability on account of commission and trade discount was a contingent liability which has not crystalised during the year and, therefore, he disallowed this claim.
27. The ld. CIT(A) decided the issue vide para 4.3 which is as under:
"4.3 I have gone through the arguments and submissions of the Ld. AR as well as the contents of the impugned Assessment Order on this issue. I have also gone through the details submitted for commission and discount to the tune of Rs.169.42 lacs, wherein details are furnished for cash discount to the tune of Rs.50.24 lacs and 14 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 commission to the tune of Rs.119.17 lacs respectively. It is seen that the appellant has provided turnover discount at certain rate for completing transactions such as Rs.9,40,390/- is provided on 31-12- 2003 @ 3.5% provision for the transactions from April to December, 2003. But no % [percentage] is mentioned against the provision of Rs.30 lacs made on 31-03-2004 & mentioned as provision for TOD. Thus, it cannot be said that this provision is not a provision but crystalized liability like the earlier one whereagainst % [percentage] is mentioned. Therefore, I do not find any merit in the arguments and submissions of the Ld. AR on this issue and there appears no need to interfere with the action of the Ld. AO that is, otherwise justified. Accordingly, the action of the AO on this issue is upheld and the appeal fails on this ground."
28. Before us, Ld. Counsel of the assessee pointed out that trade discount as well as commission is given to the various dealers on the basis of various schemes of the company as well as turn over of the dealer. Such commission and trade discount was being allowed on monthly or quarterly basis to various dealers. Therefore, at the end of the year it is not possible to issue all the credit notes and accordingly a provision is made on the basis of the calculation of the turnover etc. Therefore, this liability cannot be said to be of contingent nature. He submitted that details of credit notes were furnished before the AO [copy of which is available at pages 52 to 57 of the paper book].
29. On the other hand, Ld. DR supported the order of the CIT(A).
30. After considering the rival submissions, we find force in the submissions of the Ld. Counsel of the assessee. It is not generally possible to issue all the credit notes pertaining to the last quarter of the year at the end of the year and that is why assessee has created a provision on the basis of the calculations. Details of credit notes issued to various parties had been furnished at pages 52 to 57 of the paper book and actual trade discount has been credited to parties by debiting 15 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 the provision. Therefore, in our opinion, this provision was in respect of actual expenditure and is allowable. However, since AO has not verified the details with reference to credit notes as per details filed, we set aside the order of the ld. CIT(A) and remand the matter to the file of the AO with a direction to verify the amount of provision with actual credit notes as per details filed and then allow the claim.
31. Ground No.4: After hearing both the parties, we find that during assessment proceedings AO noticed that under the miscellaneous expenses a sum of Rs.5,48,000/- has been debited as directors commission. In response to a query, it was stated that the claim had been made on the basis of the Board's resolution and commission has been paid to the two directors who was promoter of the company one of the directors was a technocrat and had given valuable services. The AO did not accept these submissions by observing that contention of the assessee is not supported by any evidence to show the nature of services provided by the said directors.
32. Before the ld. CIT(A) a copy of Board/s resolution along with the letter dated October 3, 2006 was filed in which it was mentioned that an agreement of 1% commission could be made with non-executive directors. It was further clarified that commission was paid to only two directors viz., Mr. S.K.Maheshwari who is a technocrat and Mr. D.C.Anand who is a promoter of the company and was the guiding force behind success of the company. The ld. CIT(A) decided the issue vide para 5.2 which is as under:
16
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 "I have gone through these submissions. I find that the Ld. AO has not examined this issue properly. 1% of the net profit as commission to non executive directors can not be said excessive payment as far as it is concerned with respect to Mr. S.K.Maheshwari who is a technocrat. But certainly such payment of commission to Mr. D.C.Anand who is not only the promoter director of the company but also chairman of the company, is not justified as chairman cannot be said to be a non-executive. Therefore, the payment made to the chairman is found disallowable and addition to the tune of Rs.2,74,000/- only is sustained. The commission paid to Mr. S.K.Maheshwari is allowed. The appeal succeeds partially on this ground."
33. Before us, Ld. Counsel of the assessee reiterated the submissions made before the CIT(A) and pointed out that commission was paid to non executive director. However, he admitted that no agreement in terms of the Board's resolution had been executed by the assessee.
34. On the other hand, Ld. DR supported the order of the CIT(A).
35. After considering the rival submissions, we find that ld. CIT(A) has correctly adjudicated the issue by allowing the commission in the case of Mr. S.K.Maheshwari who is a technocrat. Since the company has not executed any agreement with Mr. D.C.Anand in terms of the Board's resolution, the amount has been correctly disallowed. Therefore, we decline to interfere with the order of the ld. CIT(A) and reject this ground.
36. Ground No.5: After hearing both the parties, we find that during assessment proceedings AO noticed that assessee has made a claim of Rs.5,73,000/- as bad debts. The assessee was requested to explain the nature thereof and the year in which it was originally taxed. In response, it was stated as under:
17
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 "These are normal business bad debts, written off every year based on the age of the outstanding amount. Any amount recovered subsequently, if any, is shown as recovery of bad debts."
37. On appeal, ld. CIT(A) confirmed the disallowance in view of the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Girish Bhagwat Prasad [256 ITR 272].
38. Before us, Ld. Counsel of the assessee submitted that after the amendment w.e.f. 1-4-1989 the only condition required for claiming bad debt is that same must have been written off and, therefore, CIT(A) was not correct in referring to the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Girish Bhagwat Prasad [supra]. He also placed reliance on the decision of the Hon'ble Bombay High Court in the case of DIT (International Taxation) vs. Oman International Bank [313 ITR 128].
39. On the other hand, Ld. DR pointed out that no details have been filed and the Hon'ble High Court in the above decision has also observed that atleast writing off of the bad debt has to be bona fide.
40. We have considered the rival submissions carefully and find that no details of bad debts written off have been filed before the AO or CIT(A) or even before us and it is simply stated that some bad debts have been written off. We further find that, no doubt, after 1-4-1989 the requirement of law for claiming a bad debt is that same must have been written off, but the Hon'ble Bombay High Court in the case of DIT vs. Oman International Bank [supra] has also observed at placitum 17 & 18 as under:
18
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 "10. Let us refer to some dictionary meanings of the word "bad debt".
Chambers 20th Century Dictionary refers to bad debt as "a debt that cannot be recovered". Mitra ' s Legal & Commercial Dictionary refers to bad debt as "a debt becomes bad debt when the creditor has no reasonable chance of recovering it from the debtor as held in Deoniti Prasad vs. CIT AIR 1953 Pat 360. The Law Lexicon refers to bad debt as "debt which cannot reasonably be collected. A debt about which there is no reasonable expectation of recovery; a debt believed to be unrecoverable." Reference may also be made to p. 878 of the "Law and Practice of Income-tax by Kanga, Palkhiwala & Vyas, 9th Edn. where the learned Jurist opined as under : "Under the amended clause, the requirement of ' establishing ' that the debt had become bad in the relevant accounting year is dispensed with; all that the assessee has to show is that the bad debt has been written off as irrecoverable. But, the subject-matter of the clause is still ' any bad debt ' and ' not any debt ' . The consequences of the amendment are mainly three : (i) The assessee cannot arbitrarily, irrationally or mala fide treat a good debt as bad, write it off in his accounts. (ii) Where the assessee has acted bona fide and reasonable, the AO cannot substitute his own subjective judgment, but must accept the assessee 's decision, as to the quality of the debt. (iii) The assessee is not obliged to write off and claim the debt in the very year in which it becomes bad. He can write it off and claim it in a subsequent year in which the debt continues to remain bad." 11. All this would indicate that when the assessee treats the debt as a bad debt in his books the decision has to be a business or commercial decision and not whimsical or fanciful. The decision must be based on material that the debt is not recoverable. The decision must be bona fide. The difference between the position, pre-amendment and post-amendment would be that the burden is no longer on the assessee and can be claimed in the year it is written off in the books of account as irrecoverable. The AO if he is to disallow the debt as a bad debt must arrive at a conclusion that the decision was not bona fide. The AO only in those circumstances and to that extent may interfere. All that the assessee must do is to be prima facie satisfied based on the information available that the debt is bad and that would be sufficient requirement of the amended provisions."
The above clearly shows that bonafides of the assessee have to be verified before allowing the claim. It is not possible to claim every write off as bad debt. Since no details have been filed before us despite of fact that claim has been rejected for non filing of the details, we are constrained to confirm the order of the ld. CIT(A). 19
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
41. Ground No.6 was not pressed before us, therefore, same is dismissed as not pressed.
42. Grounds Nos.7, 8 & 9 are in respect of disallowance of 50% of staff welfare expenses, 15% of miscellaneous expenses and 10% of foreign travel expenses. These expenses were disallowed by the AO because, according to him, no specific details were furnished and some of the expenditure could not be in relation to business.
43. On appeal, the disallowance was restricted to 20% of staff welfare expenses and 10% each in the case of miscellaneous and foreign travel expenses.
44. Before us, Ld. Counsel of the assessee submitted that this issue is covered in favour of the assessee by the order of the Tribunal in assessee's own case in I.T.A.No.2067/Mum/07 for A.Y 2003-04.
45. On the other hand, Ld. DR strongly supported the order of the CIT(A).
46. After considering the rival submissions, we find that the Tribunal has decided these issues vide paras 8, 10 & 11 which are as under:
"8. We have heard the rival contentions and also perused the orders of the lower authorities. The CIT(A) also gave a finding that expenditure is for business purposes. We find that in the case of the assessee assessment year 2001-02 the Tribunal vide its order dated 17-3-2008 in I.T.A.No.335/M/2005 rejected the appeal filed by the revenue by confirming the order of the CIT(A). Following the above findings, since facts are same in this year we confirm the order of the CIT(A) and dismiss ground No.2."
"10. We have heard both the parties. Considering the facts and the adhoc disallowance made by the AO, we uphold the order of the CIT(A). There is no scope to made adhoc disallowance. The ground is accordingly dismissed.20
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
11. Ground No.4 is in respect of deletion of disallowance of Rs.3,54,954/- on foreign travel expenses at 10% of the claim. The AO made the disallowance by holding that specific information regarding person, purpose and place of visit has not been furnished. The learned CIT(A) on appeal deleted the addition. After hearing both the sides, we find that the issue was allowed by the Tribunal in the assessee's own case for the assessment year 2001-02 in I.T.A.No.335/Mum/2005 vide order dated 17-3-2008. Respectfully following the same, since the facts and reasons for disallowance are same, we dismiss the ground raised by the revenue."
Following the above order, we decide the above issue in favour of the assessee.
47. Ground No.10: The Ld. Counsel of the assessee pointed out that there were various issues involved in respect of deduction u/s.80HHC and some of them have been allowed in favour of the assessee by the CIT(A). Therefore, the only grievance raised through this ground by the assessee was in respect of DEPB entitlements and he fairly conceded that the issue regarding DEPB is covered against the assessee by the decision of the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colour & Chemical [328 ITR 461].
48. On the other hand, Ld. DR supported the order of the CIT(A).
49. On the other, Ld. DR supported the order of the CIT(A).
50. After considering the rival submissions we find that the issue regarding DEPB has been decided by the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colour & Chemical [supra] against the assessee and the relevant para has been already reproduced by us above while adjudicating assessee's appeal for A.Y 2001-02. Therefore, following the same, this issue is decided against the assessee. 21
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
51. Ground No.11: After hearing both the parties, we find that during assessment proceedings AO noticed that assessee had claimed carried forward of long term capital loss and sale of shares of Spicer India Ltd amounting to Rs.4,58,50,060/-. AO requested the assessee to explain the details of the claim by furnishing evidence in support of cost of acquisition and sale price. The assessee was also requested to give details of transfer of shares and whether same were transferred through stock exchange. The assessee was also required to furnish details of payments etc. In response, it was stated as under:
" The aforesaid shares were sold at cost price that is Rs.10 per share and hence there was no book profit and loss accounted for the same. The company has however returned a capital loss the details of which have been filed along with the return. The shares of the company were not listed on any Stock Exchange and hence the transaction of sale was not routed through the Stock Exchange.
The shares were sold on March 29, 2004. The balance sheet of the Spicer India Limited is enclosed. On perusal of the same, it can be observed that the company was making losses and its networth was less than Rs.10 and hence the sale was made at Rs.10 per share."
The AO did not find force in the above contentions and observed that Spicer India Ltd. was a related company and was not listed. He was of the view that the reply given by the assessee was very vague and, therefore, the transaction was nothing but a paper transaction and accordingly rejected the claim of the assessee.
52. On appeal, ld. CIT(A) the issue vide para 12.3 which is as under:
"12.3 I have gone through the submissions of the Ld. AR as well as the contents of the impugned assessment order. I have also gone through the submissions of Ld. AR in the form of note on sale of 1,11,20,000 equity shares of Spicer India Ltd. contained in their letter dated 29-11-2006 submitted before the Ld. AO during the assessment proceedings. It is seen that the shares were sold in March 2004.22
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 There is no dispute that Spicer India Ltd. is not a listed company. However, I find that no business expediency has been brought out as to why it was necessary to sell these shares at huge loss just two days before the close of the financial year. Therefore, findings of the Ld. AO appear to be judicious in the facts and circumstances of the instant case and there appears no need to interfere with the action of the Ld. AO on this issue. Accordingly, the action of the Ld. AO in disallowing Long Term Capital Loss to the tune of Rs.4,58,50,060/- is upheld and the appeal fails on this ground."
53. Before us, Ld. Counsel of the assessee submitted that Spicer India Ltd. was started along with the US collaborators. Later on U.S. collaborators wanted to carry on with this business on their own. Since Spicer India Ltd. was continuously suffering loss, therefore, assessee also agreed to sell its shares at the cost price and therefore it was a actual loss. The loss has arisen because of indexation and hence same should have been allowed.
54. On the other hand, Ld. DR supported the order of the CIT(A).
55. We have considered the rival submissions carefully and find that AO as well as CIT(A) has discussed this issue summarily. The ld. CIT(A) has simply observed that no business expediency was there when these shares were sold. Therefore, in the interest of justice, we set aside the order of the ld. CIT(A) and remit this issue to the file of the AO with a direction to re-examine the issue.
56. In the result, assessee's appeal in I.T.A.No.7631/M/10 is partly allowed for statistical purposes.
57. I.T.A.No.7653/M/07 - [revenue's appeal] A.Y 04-05: In this appeal, Revenue has raised the following grounds of appeal:
1) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in directing to treat the expenses incurred at Rs.22,65,705/- on Stores & Spares as revenue expenses ignoring the 23 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 fact that the findings and detailed reasoning given by the Assessing Officer while holding the same to be capital in nature.
2) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in deleting the disallowance made by the Assessing Officer in respect of commission paid to Mr. S.K.Maheshwari at Rs.2,74,000/- ignoring the finding given by the Assessing Officer.
3) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in restricting the disallowance out of staff welfare expenses to Rs.1.79 lakhs as against disallowance of Rs.35,55,000/-
made by the Assessing Officer, ignoring the detailed reasoning given by the Assessing Officer.
4) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in restricting the disallowance of miscellaneous expenditure to Rs.14,82,800/-, the same being 10% of total miscellaneous expenditure, as against the disallowance made by the Assessing Officer at Rs.22,24,200/-, ignoring the detailed reasoning given by the Assessing Officer.
58. Ground No.1: After hearing both the parties, we find that during the assessment proceedings AO had noted that assessee had claimed certain expenses on tooling, spares and repairs. In response to a query that why it should not be treated as capital expenditure, it was stated that the expenditure was in the nature of revenue as no enduring benefit has been obtained. The AO disallowed a total sum of Rs.1,32,26,962/-.
59. On appeal, the ld. CIT(A) confirmed the disallowance on account of tooling expenses amounting to Rs.1,09,61,257/-. However, as far as sum of Rs.22,65,705/- is concerned, same was allowed as this expenditure was in respect of spares and stores which, according to the ld. CIT(A), were in the nature of consumables or had become obsolete.
60. Before us, Ld. DR strongly supported the order of the AO. 24
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
61. On the other hand, Ld. Counsel of the assessee reiterated the submissions which were made by him while arguing the assessee's appeal.
62. We have considered the rival submissions. While adjudicating the assessee's appeal in this respect, we have already confirmed the addition of Rs.1,09.61.257/- which was made for tooling expenses. However, we find that ld. CIT(A) has correctly allowed the claim of Rs.22,65,705/- because same is on account of spares and repairs which are of consumables nature. Therefore, we find nothing wrong in the order of the ld. CIT(A) and confirm the same.
63. Ground No.2: After hearing both the parties, we find that the AO had disallowed a sum of Rs.5,48,000/- on account of commission to directors because assessee has not furnished the details regarding services provided by such directors.
64. On appeal, ld. CIT(A) allowed the commission amount to Rs.2,74,000/- to Mr. S.K.Maheshwari who was a technocrat.
65. Both the parties have made idential submissions which were made during the assessee's appeal.
66. We have considered the rival submissions and have already extracted the relevant para of the CIT(A)'s order while adjudicating the assessee's appeal which is again reproduced hereunder:
"I have gone through these submissions. I find that the Ld. AO has not examined this issue properly. 1% of the net profit as commission to non executive directors can not be said excessive payment as far as it is concerned with respect to Mr. S.K.Maheshwari who is a technocrat. But certainly such payment of commission to Mr. D.C.Anand who is not only the promoter director of the company but 25 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 also chairman of the company, is not justified as chairman cannot be said to be a non-executive. Therefore, the payment made to the chairman is found disallowable and addition to the tune of Rs.2,74,000/- only is sustained. The commission paid to Mr. S.K.Maheshwari is allowed. The appeal succeeds partially on this ground."
We are of the opinion that the ld. CIT(A) has rightly allowed the commission paid to Mr. S.K.Maheshwari who was a technocrat and, therefore, decline to interfere with the order of the ld. CIT(A).
67. Ground Nos.3 & 4: Both these grounds have been adjudicated by us while adjudicating assessee's appeal in ground Nos.7 & 8 wherein we have deleted the addition by following the order of the Tribunal for A.Y 2003-04 vide para-46. In view of the same, we dismiss these grounds.
68. In the result, revenue's appeal in I.T.A.No.7653/M/10 for A.Y 04-05 is dismissed.
69. I.T.A.No.638/M/10 [assessee's appeal] A.Y 2005-06: In this appeal assessee has raised the following grounds:
" On the facts and in the circumstances of the case and in law-
1. The learned CIT(A) erred in confirming the AO's action of disallowing commission paid to Directors amounting to Rs.9,50,000 treating the same as non business expenses.
2. The learned CIT(A) erred in confirming the AO's action of disallowing the bad debts to the tune of Rs.5,30,184.
3. The learned CIT(A) further erred in confirming the AO's action of disallowing advance written off to the tune of Rs.13,93,559.
4. The learned CIT(A) further erred in confirming the at 20% of srs.80,44,494 of staff welfare expenses treating it as non business expenditure without going into the true nature and purpose of the expenditure.
5. The learned CIT(A) further erred in confirming the disallowance at 10% of the total expenditure of Rs.1,64,05,528 of miscellaneous expenses treating it as non business expenditure without going into the true nature and purpose of the expenditure.26
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
6. The learned CIT(A) further erred in confirming the disallowance of an adhoc amount of Rs.1,43,816 being 10% of foreign travel expenses alleging that specific details were not submitted.
70. Ground No.1: After hearing both the parties, we find that in this year also AO has disallowed commission paid to the director amounting to Rs.9,50,000/- because nature of services provided by the director has not been approved.
71. On appeal, ld. CIT(A) has adjudicated the issue vide para 2.3 which is as under:
"2.3 I have considered the submissions of the Appellant. The Appellant vide letter dated 24-11-2009, admitted that there is no contractual obligation to give commissions to the directors. Therefore, it cannot be said that the Appellant company has incurred any liability to pay till the board decided to pass a resolution for giving commissions to the directors. In the present case board resolution is passed on 23-05-2005. This date falls after the end of the financial year. This commission is paid on the basis of net profit of the Appellant company. The Appellant is maintaining the books of account on mercantile basis and therefore, an expenses can be allowed as deduction only if the liability to pay arises during the year under consideration. In the present case, since there was no liability to pay commissions under any contract, liability to pay arises on the date of board resolution only. The board resolution is dated 23-05-2009, and therefore it cannot be said that any liability to pay commission arose in the current year. Therefore, deduction claimed by the Appellant cannot be allowed. The action of the Assessing Officer is upheld. This ground of appeal is not allowed."
72. Both the parties submitted that the issue involved is similar to the issue regarding director's commissions in A.Y 2004-05.
73. After considering the rival submissions, we find that while adjudicating the issue regarding directors commission, we have confirmed the order of the ld. CIT(A) in allowing the commission only in respect of Mr. S.K.Maheshwari who is a technocrat. Since no agreement has been made with Mr. D.C.Anand, commission paid to him was disallowed. Therefore, in this year also, we are of the opinion 27 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10 that commission paid only to Mr. S.K.Maheshwari who was a technocrat, is allowable and accordingly we direct the AO to allow the commission paid to Mr. S.K.Maheshwari. As far as commission paid to Mr. D.C.Anand is concerned, same cannot be allowed, because he is not a technical director and no agreement has been entered into. Therefore, this ground is partly allowed.
74. Ground No.2: In this year also AO had disallowed bad debts amounting to Rs.5,30,184/- because no details were furnished.
75. On appeal, ld. CIT(A) confirmed the addition observing that even in the decision of CIT vs. vs. Oman International Bank [supra]the Hon'ble Bombay High Court has observed that mere writing off bad debt is not enough and assessee had to show that its decision to write off the bad debt was bona fide.
76. Both the parties made similar submissions.
77. After considering the rival submissions, we find that this issue has been adjudicate by us vide para-40 wherein claim for bad debt was rejected in the absence of details. Since in this year also no details have been filed, therefore, we reject the claim of the assessee.
78. Ground No.3 was not pressed before us, therefore, same is dismissed as not pressed.
79. Grounds Nos.4,5, & 6: In these grounds additions of 20% of staff welfare expenses, 10% of miscellaneous expenses and 10% of foreign travel expenses have been challenged 28 ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
80. Both the parties have made the similar submissions as in A.Y2004-05
81. After considering the rival submissions we find that these issues have been decided in favour of the assessee vide para-46 above in view of the order of Tribunal in A.Y 2003-04. Therefore, these issues are decided in favour of the assessee.
82. I.T.NO. 4180/M/10[assessee's appeal] A.Y 06-07: In this appeal the assessee has raised the following grounds:
On the facts and in the circumstances of the case and in law-
1) The learned CIT[A] erred in confirming the disallowance of commission paid to Directors amounting to Rs.1,30,000 treating the same as non business expenses.
2) The learned CIT[A]] erred in confirming the disallowance of the bad debts to the tune of Rs.,.5,64,271.
3) The learned CIT[A] erred in confirming the disallowance of advance written off to the tune of Rs.13,10,560.
4) The learned CIT[A] erred in confirming the adhoc disallowance at 20% of the total expenditure of Rs.87,94,825 of staff welfare expenses treating it as non business expenditure without going into the true nature and purpose of the expenditure.
5) The learned CIT[A] erred in confirming an adhoc disallowance at 10% of the total expenditure of Rs.1,48,02,880 of miscellaneous expenses treating it as non business expenditure without going into the true nature and purpose of the expenditure.
6) The learned CIT[A] erred in confirming the adhoc disallowance of Rs.1,89,960 being 10% of foreign travel expenses alleging that specific details were not submitted.
83. Ground No.1: In this year the commission has been paid only to Mr. S.K.Maheshwari who is a technocrat. The commission paid has also been held to be allowable by us vide para-35. Therefore, in this year also, we are of the view that the commission paid to him is allowable and, accordingly, we direct the AO to allow the commission. 29
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
84. Ground No.2: In this year also AO had disallowed bad debts amounting to Rs.5,64,271/- because no details were furnished.
85. On appeal, ld. CIT(A) confirmed the addition observing that even in the decision of CIT vs. vs. Oman International Bank [supra]the Hon'ble Bombay High Court has observed that mere writing off bad debt is not enough and assessee had to show that its decision to write off the bad debt was bona fide.
86. Both the parties made similar submissions.
87. After considering the rival submissions, we find that this issue has been adjudicate by us vide para-40 wherein claim for bad debt was rejected in the absence of details. Since in this year also no details have been filed, therefore, we reject the claim of the assessee.
88. Ground No.3 was not pressed before us, therefore, same is dismissed as not pressed.
89. Grounds Nos.4,5 & 6: In these grounds additions of 20% of staff welfare expenses, 10% of miscellaneous expenses and 10% of foreign travel expenses have been challenged.
90. Both the parties have made the similar submissions as in A.Y 2004-05
91. After considering the rival submissions we find that these issues have been decided in favour of the assessee vide para-46 above in view of the order of Tribunal in A.Y 2003-04. Therefore, these issues are decided in favour of the assessee.
30
ITA NOS.3829,3875,7631 7653,638 & 4180/M/10
92. In the result, assessee's appeal in I.T.A.No.4189/M/10 for A.Y 06-07 is partly allowed for statistical purposes.
Order pronounced in the open Court on this day of 21/9/2011.
Sd/- Sd/-
(D.MANMOHAN) (T.R.SOOD)
Vice President Accountant Member
Mumbai: 21/9/2011.
P/-*