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Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
The assessee is engaged in the business of manufacture and sale of machine tools. For the assessment year 2008-09, the assessee filed its return of income declaring income of Rs.27,56,74,120/-. The return was selected for scrutiny and the ld. AO vide order u/s 143(3) of the Act dated 10.12.2010 made certain additions. Against this assessee carried the appeal before ld. CIT(A).
The ld. CIT(A) vide order dated 10.12.2010 granted partial relief. Aggrieved by the order of ld. CIT(A) both assessee and revenue have filed appeals before this Tribunal in (Department) and 1123/Bang/2011 (by assessee) was came in appeal before this Tribunal. The Tribunal has partly allowed the appeal filed by the assessee and dismissed the appeal filed by the revenue. Thereafter, revenue filed an appeal before the Hon'ble Bharat Fritz Werner Ltd., Bangalore Page 2 of 9 High Court of Karnataka, which vide order dated 09.02.2021 disposed off the appeal. On the issues pertaining to disallowance of write off of expenditure relating to loose tools and disallowance the Hon’ble High Court observed that “The Tribunal has not recorded whether assessee has produced the CD containing the details as requested by the AO at the time of hearing before him. Therefore, in the opinion of High Court, the matter requires adjudication afresh by this Tribunal. Hence, this issue has ben remitted to Tribunal for fresh consideration.” Regarding the second issue, disallowance of interest on loans given to sister concerns, the Hon’ble High Court has observed that “The Tribunal has not recorded any finding whether or not the interest free loans were given from borrowed funds or from the assessee’s own funds to its sister concerns”. 2.1 In the meanwhile, Assessee then preferred a review petition before the Hon'ble High Court on the issue pertaining to disallowance of interest on the loans given to sister concerns as the Hon'ble High Court had not adjudicated on the submission of the Assessee that when an assessee has sufficient own funds then the presumption is that the loans given to sister concerns is out of such surplus funds. The Hon'ble High Court vide order dated 08.07.2022 disposed of the review petition confining the scope of remand on the aforesaid issue only to the extent to verify if the Assessee had sufficient own funds. Now the issue before us is with regard to following two issues only: a) Disallowance of write off of expenditure relating to loose tools amounting to Rs.4,41,08,588/- and; b) Disallowance of interest on the loans given to sister concerns amounting to Rs.67,66,700/- Bharat Fritz Werner Ltd., Bangalore Page 3 of 9 3. With regard to write off of expenditure relating to loose tools, the ld. A.R. submitted that the Assessing Officer had disallowed the above expenditure on the ground that the Assessee has failed to furnish details of inventory. The ld. CIT(A) upheld the order of the Assessing Officer. On appeal by the assessee to this Tribunal, the Tribunal held that the Revenue has not disputed the incurring of the expenditure and the only reason for disallowance was that the expenditure was capital in nature. Further, the accounting method of the Assessee for the last 14 years of following the practice of write off of tools was not disputed by the Revenue. The Tribunal therefore had held the same to be a revenue expenditure. On appeal by the Revenue to the Hon’ble High Court, the High Court remanded the matter for fresh consideration. 3.1 The ld. A.R. further submitted that the procurement and use of loose tools is an integral part of the Assessee's manufacturing activity. Loose tools are in the nature of consumables which get consumed in the manufacturing process and the average life of the tools does not last for a period more than two years. Therefore, he submitted that the loose tools cannot be said to have an enduring benefit. Reliance in this regard is placed on the decision of the Hon'ble High Court of Punjab and Haryana in CIT v. Metalman Auto (P.) Ltd. [2011] 11 taxmann.com 51 (P&H) in Paragraphs 9-10. 3.2 Further, he submitted that the assessee having filed all the required details in a CD before the Assessing Officer, the Assessing Officer has arrived at an erroneous conclusion that no details have been produced. This fact was accepted by the ld. D.R. in the appeals for the subsequent years (order dated 30.9.2021 passed in to 2049/Bang/2019 at para 6).
Bharat Fritz Werner Ltd., Bangalore Page 4 of 9 3.3 He further submitted that the Assessee has been consistently following the practice of charging off the cost of the tools acquired over a period of two years and the said accounting treatment has been accepted by the Revenue for previous years. When the accounting treatment has been consistently accepted by the Revenue for the earlier assessment years, the same should be accepted even during the subsequent years unless there is any materiel change in the facts. Reliance in this regard is placed by the ld. A.R. on the decision of the Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT (193 ITR 321) at Paragraph 13.
On the other hand, the ld. D.R. relied on the order of ld. CIT(A).
We have heard the rival submissions and perused the materials available on record. Admittedly, the appeals by the assessee for assessment year 2010-11, 2011-12, 2012-13 & 2014-15 came in appeal before this Tribunal in to 2049/Bang/2019 and the revenue also came in appeal before this Tribunal for these assessment years in ITA Nos.2244 to 2247/Bang/2019. In ITA No.2244/Bang/2019 for the assessment year 2010-11, the Tribunal while disposing of revenue’s appeal vide order dated 30.9.2021 with regard to disallowance of expenditure claimed on loose tools discussed this issue and observed as under: “6.0 The next issue relates to the disallowance of expenditure claimed on loose tools. The assessee has claimed Rs.1,99,96,112/- as expenditure towards loose tools. It is submitted that the loose tools, grinding wheels and cutting wheels purchased by the assessee are written off over a period of 2 years, i.e., 50% of the cost is written off in the year of purchase and the remaining 50% is written off in the succeeding year. However, the AO took the view that the assessee should have followed systematic method of inventory management for consumption of loose tools etc and the expenditure should be claimed on the basis of actual consumption. Accordingly, the AO disallowed the above said claim of the assessee.
6.1 The Ld CIT(A) noticed that an identical disallowance made by the AO in AY 2008-09 has been deleted by the Tribunal in the assessee’s own case in dated 21.12.2012.
Bharat Fritz Werner Ltd., Bangalore Page 5 of 9 6.2 We heard the parties on this issue and perused the record. The Ld D.R submitted that the assessee had furnished purchase and consumption of details of loose tools etc., before the AO in AY 2008-09. However, the assessee has not furnished those details during the year under consideration. Accordingly, she submitted that the decision rendered in AY 2008-09 is distinguishable. On the contrary, the Ld A.R submitted that the assessee has been following above said method of writing of loose tools is followed by the assessee for the past 20 years. The same was not accepted for the first time only in AY 2008-09. However, the ITAT has accepted the method followed by the assessee and deleted the disallowance. He submitted that the furnishing of details was not an issue before the Tribunal in AY 2008-09.
6.3 We notice that the co-ordinate bench of ITAT has deleted an identical disallowance made in AY 2008-09 with the following observation:-
14. Having heard both the parties and having considered their rival contentions, we find that the Revenue has not disputed the incurring of expenditure by the assessee in purchase of the tools. The only reason for the disallowance is that it is not revenue in nature but is of capital in nature. It is also not disputed that the assessee is following the said method of accounting for the past 14 years and no disallowance has been made in the previous years. As rightly pointed out by the learned counsel for the assessee, the Revenue effect would be very minimal whether the expenditure is treated as revenue in nature or treated as capital in nature and depreciation allowed thereon. Therefore, taking the totality of the facts into consideration, we hold that revenue ought to have allowed the revenue expenditure claimed by the assessee. The ground of appeal is accordingly allowed.
6.4 We notice that the Ld CIT(A) has followed the decision rendered by the Tribunal in AY 2008-09 and hence we do not find any reason to interfere with the decision rendered by him on this issue.”
5.1 As seen from para 6.2 of the above order of the Tribunal, the Tribunal made specific observation as follows: “The ld. D.R. submitted that the assessee had furnished purchase and consumption of details of loose tools, etc. before the AO in the assessment year 2008-09.”
5.2 This is finding of fact recorded by Tribunal in assessment year 2010-11 in its order in revenue’s appeal in and this finding has reached finality and it was made clear before us Bharat Fritz Werner Ltd., Bangalore Page 6 of 9 that there was no appeal pending on this issue before any higher forum and hence, drawing conclusion from this finding of the Tribunal that the assessee has produced the CD containing the details of the materials received including inventory materials, date, time and delivery of the loose tools. Being so, the allegation made by ld. AO that assessee has not produced these details have no legs to stand. Accordingly, the claim of the assessee on expenditure incurred on loose tools to be allowed and it is also admitted fact that the assessee is following same method of accounting from year to year consistently and in this assessment year also there cannot be any disallowance of expenditure relating to loose tools. This ground no.2 in assessee’s appeal is allowed.
Next ground in this appeal is with regard to disallowance of interest on loans advanced to sister concerns. 6.1 The ld. A.R. submitted that the Assessing Officer disallowed interest at the rate of 10.5% by holding that the assessee is paying interest on the loan borrowed by it but has not been charging any interest on the loans advanced to its sister concerns. The disallowance made by the Assessing Officer came to be upheld by the ld. CIT(A) which was subsequently reversed by this Tribunal. On appeal by the Revenue to the High Court, the Hon’ble High Court remanded the matter for fresh adjudication. The assessee thereafter filed a review petition wherein the High Court modified the order passed in the appeal confining the scope of remand only to the extent of verifying whether the assessee had sufficient own funds. 6.2 In this regard, he submitted that from the annual report of the assessee it can be demonstrated that the Assessee had sufficient own funds (pages 36 and 39 of the annual report). Thus, the asses see has sufficient own funds and therefore, the pre sumption is that the loans Bharat Fritz Werner Ltd., Bangalore Page 7 of 9 given to sister concerns is out of such surplus funds. The requirement of the Hon'ble High Court order is therefore satisfied.
The ld. D.R. relied on the order of the lower authorities. 8. We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that the assessee is having own funds in the form of share capital and reserves & surplus as on 31.3.2007 and 31.3.2008 as follows: