ACIT- CIRCLE-6(2)(1), MUMBAI vs. CG POWER & INDUSTRIAL SOLUTION LTD. (FORMERLY KNOWN AS CROMPTON GREAVES LTD.), MUMBAI

The assessee is in appeal in respect of the following issues

The revenue is in appeal in respect of the following issues

The facts relating to the case are stated in brief. The assessee is engaged in the business of manufacture and sale of Transformers, switch gears, circuit breakers, network protection and control gear, HT and LT motors, drives, lighting, fans, pumps and other consumer appliances. The assessing officer completed the assessment by making various additions. The Learned CIT(A) granted partial relief to the assessee. Hence both the parties are in appeal before the Tribunal in respect of issues decided against each of them by learned CIT (A).

The common issue relates to disallowance made under section 14A of the Act. During the year under consideration, the assessee had earned tax free dividend income of 9.27 crores. However, the assessee did not make any disallowance under section 14A of the Act towards expenses incurred in earning the exempt income. The assessee contended before the assessing officer that it did not incur any expenditure in earning exempt income and hence no disallowance is called for. The AO did not agree with the contentions of the assessee. For the reasons discussed by him in the assessment order, the AO held that disallowance is required to be made u/s 14A read with Rule 8D of IT rules. Accordingly he computed disallowance of 5.47 crores, which consisted of interest disallowance of Rs. 3.09 crores under

Before the learned CIT (A), the assessee submitted that the own funds available with it exceeds the amount of investments and hence interest disallowance is not called for. The learned CIT (A) accepted the contentions of the assessee and accordingly deleted the interest disallowance. With regard to expenditure disallowance, the learned CIT (A) directed the AO to exclude investments, which did not yield exempt income, for the purpose of computing average value of investments. In this regard, the Ld CIT(A) followed the decision rendered by the Special bench of ITAT in the case of Vireet Investments P Ltd (165 ITD 27). As a result the expenditure disallowance u/r 8D(2)(iii) came to be reduced to ₹ 1.25 crores. Both the parties are aggrieved by the decision so rendered by learned CIT (A).

We heard the parties and perused the record. The Ld CIT(A) has noticed that the own funds available with the assessee was ₹ 1731.17 crores, while the value of investments held by the assessee stood at ₹ 688.05 crores. Since the amount of own funds has exceeded the value of investments, the presumption is that the assessee has made investments out of its own funds, as per the decision rendered by Honourable jurisdictional Bombay High Court in the case of HDFC bank Ltd (366 ITR 505). Accordingly there is no requirement of making any disallowance out of interest expenditure under rule 8D (2) (ii) of IT rules. Since this decision has been rendered byLd CIT(A) following the binding decision of jurisdictional High Court, we uphold the same.

With regard to disallowance out of expenditure u/r 8D(2)(iii) of IT Rules, it is the contention of the assessee that the assessing officer did not record dissatisfaction with regard to the claim of the assessee that it did not incur

However we noticed that the facts are different in this year. We notice from the assessment order that the assessing officer has discussed in detail with regard to the contentions of the assessee that it did not incur any expenditure in earning exempt income. Though the AO has not specifically stated that he was not satisfied with the contentions of the assessee, yet his dissatisfaction is discernible from the discussions made by him in the assessment order. Hence the AO has proceeded to make disallowance under rule 8D of IT rules. Accordingly, we are of the view that the dissatisfaction of the AO is discernible from the discussions made by him in the assessment order. Accordingly we reject this contention of the assessee.

The assessee, in its written argument, has submitted that some of the dividend income received by it is taxable and the AO has not excluded the same. We noticed that the Learned CIT (A) has directed the AO to consider only those investments which have yielded exempt income for the purpose of computing average value of investments. Accordingly, if any income is taxable (not exempt), it will not enter computation of average value of investments. Hence this grievance of the assessee would automatically be addressed while computing average value of investments as per directions given by learned CIT(A) as per the decision rendered by the special bench in the case of Vireet Investments.

Accordingly, in principle, we are of the view that the decision rendered by Learned CIT(A) on this issue does not call for any interference. However,

We shall take up the appeal filed by the assessee. The assessee is contesting the decision of Ld CIT(A) with regard to disallowance made under section 35(2AB) of the Act. The assessee had claimed deduction of Rs.23.40 crores, being capital expenditure incurred on scientific research, under section 35(2AB) of the Act. The details of the deduction were given as under in the tax audit report :- Expenses Amount of incurred deduction Eligible for 100% 12,91,86,101 12,91,86,101 deduction Eligible for 150% Refer enclosure 8C 6,99,30,889 10,48,96,333 deduction Total 19,91,16,989 23,40,82,434

The Assessing Officer noticed that the assessee has claimed capital expenditure of Rs. 12.91 crores as deduction @ 100% only and not @ 150% u/s 35(2AB) of the Act. Accordingly, he took the view that the above said capital expenditure was not approved by the DSIR and hence the assessee has claimed deduction @ 100% instead of 150%. Since the nature of expenditure is Capital in nature, the Assessing Officer held that the same is not allowable as deduction. Accordingly, he disallowed the capital

Before the learned CIT(A), the assessee contended that Rs.12.91 crores was actually claimed as deduction under section 35(1)(iv) of the Act, which allows 100% deduction of capital expenditure (other than expenditure incurred on acquisition of land, whether the land is acquired as such or as part of any property). The assessee further gave break-up of above said capital expenditure of Rs. 12.91 crores as under:- Building for approved in-house R & D - 609.10 lakhs Plant & Machinery for unapproved R & D - 46.08 lakhs ---------------- 655.18 lakhs Capital expenditure for approved R & D 636.68 lakhs ------------------ 1291.86 lakhs ============

In respect of capital expenses of Rs.636.68 lakhs incurred on approved R & D, the Ld CIT(A) noticed that the above said expenses have not been certified by DSIR. Accordingly he held that the additional deduction of 50% in the form of weighted deduction will not be available on it.

The assessee also put up an additional claim before Ld CIT(A). It was explained that the eligible revenue expenditure incurred by the assessee was Rs. 30.92 crores, whereas the assessee had claimed deduction on the amount of Rs. 22.22 crores only. Accordingly the assessee claimed before the learned CIT(A) that the weighted deduction of 150% should be allowed on the balance amount of Rs. 8.70 crores also. It was submitted the assessee has inadvertently omitted to claim weighted deduction @ 150% on the above said amount of Rs. 8.70 crores.

The learned CIT(A) considered the additional claim and also examined the deduction allowed by the AO u/s 35(2AB) of the Act. He took the view that the deduction u/s 35(2AB) of the Act could be allowed only if the expenditure had been certified by DSIR, i.e., if the amount of expenditure certified by DSIR was lower than the amount claimed by the assessee, then the claim should be restricted to the amount certified by DSIR for allowing weighted deduction. He noticed that the AO has allowed the claim of the assessee without examining the approval, if any, granted by DSIR. Since the learned CIT(A) has taken the view that the amount not certified by DSIR is not eligible for weighted deduction, he examined the entire claim made by the assessee and also enhanced the disallowance made by the assessing officer. The decision taken by Ld CIT(A) on this issue are summarized below:- (A) Revenue expenses allowed 699.31 lakhs by the Assessing Officer (-) certified by DSIR 671.05 ---------------- 28.26 lakhs ---------------- Weighted deduction of 50% denied on Account of non-approval 14.13 lakhs

The Ld A.R submitted that the Ld CIT(A) has not only sustained the disallowance, but also enhanced the same only for the reason that the scientific research expenditure certified by DSIR was less than that claimed by the assessee or not certified. He submitted that the Ld CIT(A) has not properly interpreted the provisions of sec.35(2AB) of the Act. He submitted that the above said section, at the relevant point of time, requires only “approval of the in-house research and development facility of the assessee” and does not require certification of expenses. He submitted that the mandatory condition of approval of scientific research expenses was introduced in the subsequent years only. He further submitted that an identical disallowance made by the tax authorities on identical reasoning has been deleted by the co-ordinate bench in the assessee’s own case in Asst. Year 2009-10 in ITA No.5390/Mum/2017, vide its order dated 27-09-2019.

We heard Ld D.R on this issue and perused the record. We notice that an identical issue has been examined by the co-ordinate bench in the assessee’s own case in AY 2009-10 and it has decided in favour of the

The next issue urged by the assessee relates to disallowance of part of the claim made under section 80IC of the Act. The assessee is having manufacturing unit at Baddi, Himachal Pradesh and the same is eligible for deduction under section 80IC of the Act. The assessee claimed a deduction of Rs. 24.20 crores under section 80IC of the Act. The Assessing Officer noticed that the assessee has declared net profit of 29.62% in its Baddi unit, while overall net profit ratio of the company was 16.47% only. Accordingly, he took the view that the assessee has over stated profits in Baddi unit by making improper allocation of common expenses. Accordingly he restricted profit of Baddi unit for the purpose of section 80IC of the Act by computing the net profit applying the rate of 16.47% i.e. overall profit ratio. Accordingly, the AO computed the profit of Baddi undertaking eligible for deduction under section 80IC of the Act at Rs.13.45 crores. Accordingly he disallowed the balance amount of claim of Rs.10.74 crores.

The learned CIT(A) noticed that the Baddi unit is manufacturing fans, while assessee is also engaged in manufacturing of various other industrial machineries. Accordingly he held that the like could like only. Accordingly

The Learned AR submitted that the learned CIT(A) was not justified in directing the Assessing Officer to reduce proportionate corporate office expenses and revenue expenses of research and development unit from the net profit declared at the Baddi unit. He submitted that the above said expenses are common expenses incurred at the head office level without any specific reference to the Baddi unit. Accordingly he submitted that the learned CIT(A) was not justified in giving direction as stated above.

The Learned DR, on the contrary, submitted that the assessee has not allocated corporate office expenses and revenue expenses of research and development unit to the Baddi unit in order to arrive at the profit of that unit. In this process, the assessee has claimed higher amount of deduction under section 80IC of the Act. He submitted that, even though the Ld A.R claims that the above said expenses are not relatable to the Baddi unit, yet the fact remains that the above said claim of the assessee has not been examined by the tax authorities. Accordingly, he submitted that this issue

We have heard the rival contentions on this issue and perused the record. Before us learned AR has placed reliance on the decision rendered by Hon'ble Bombay High Court in the case of Zandu Pharmaceuticals Works Ltd. Vs. CIT (ITA No. 8 of 2007) and also decision rendered by Hon'ble Delhi High Court Control & Switchgear Co. Ltd. Vs. DCIT (2012) 66 DTR 161. We have perused both decisions and we noticed that the ratio of the above said decisions is that if any common expenses incurred by the assessee are not specifically attributable to the undertaking which is eligible for deduction under section 80IB, 80IC etc., then common expenses need not be allocated. The corollary is that, if part of common expenses could be attributable to the eligible unit, then the profit of eligible unit should be computed after deducting relevant common expenses. We noticed that the learned CIT(A) has given direction to the Assessing Officer to reduce proportionate amount of corporate office expenses and revenue expenses of research and development unit while computing eligible amount of deduction for Baddi unit under section 80IC of the Act i.e. the learned CIT(A) has not examined as to whether corporate office expenses and revenue expenses of research and development unit are related to the Baddi undertaking and whether any part of those expenses could be allocated to those units. Non-examination of the expenses on the above said angle would be contrary to the decision rendered by Hon'ble Bombay High Court in the case of Zhandu Pharmaceuticals Works Ltd. (supra). Accordingly, we are of the view that this issue also requires examination at the end of the Assessing Officer for the purpose of ascertaining the amount that could be allocated to the Baddi undertaking and for computing correct amount of net profit eligible for deduction u/s 80IC of the Act. Accordingly, we modify the order passed by the learned CIT(A) and direct the Assessing Officer to examine this issue afresh in the

The next issue contested by the assessee relates to the rejection of claim to increase the value of opening stock. The facts relating to this issue are that the closing stock value of the immediately preceding assessment year 2009-10, i.e., the value of closing stock as on 31.3.2009 was increased by the AO by an amount of Rs.32.94 crores by adding unutilized value of CENVAT/MODVAT. Since the closing stock as on 31.3.2009 would become opening stock as on 1.4.2009 (in AY 2010-11), the assessee claimed that the opening stock of FY 2009-10 relevant for AY 2010-11 should be increased by Rs.32.94 crores.

The Ld CIT(A) noticed that the AO did not make any addition to the closing stock as on 31.3.2010, i.e., the unutilized value of CENVAT/MODVAT was not added by the AO in AY 2010-11. He took the view that both the opening stock and closing stock should be valued under the same method in order to arrive at correct amount of profit of a year. In this regard, he took support of the decision rendered by Hon’ble Bombay High Court in the case of CIT vs. Mahalaxmi Glass Works P Ltd (318 ITR 116). Since the AO has not made any addition to the closing stock as on 31.3.2010 with unutilized amount of CENVAT/MODVAT, the Ld CIT(A) held that there was no requirement of changing the opening stock value. Accordingly, he rejected the said claim of the assessee.

We heard the parties on this issue and produced the record. We notice that the principle laid down in the case of Mahalaxmi Glass Works P Ltd (supra) by Hon’ble Bombay High Court was that, when the AO seeks to disturb the value of closing stock by following a particular method, then the same kind of valuation method should be followed for valuing opening stock also. In our view, this decision will not apply to the facts of the present case.

There should not be any dispute that the closing stock value of immediately preceding year would automatically become opening stock value of the current year. The Hon’ble Bombay High Court, in the above said case, did not state that the closing stock value of immediately preceding year cannot be taken as opening stock of the current year. The High Court has only stated that, when the AO disturbs the value of closing stock declared by the assessee, then the same method of valuation should be adopted for opening stock also. In the instant case, the issue is whether the closing stock value determined in the immediately preceding year should be taken as opening stock value of current year or not. In our view, if the closing stock value of the immediately preceding year is changed, then the cascading effect is that the opening stock value of the current year should also undergo identical change. Accordingly, we are of the view that there is merit in the claim of the assessee for increasing the value of opening stock by the same amount that was added to the value of closing stock of the immediately preceding year.

However, it is not clear as to whether the assessee has accepted the decision of AO in adding the amount of unutilized CENVAT/MODVAT to the value of closing stock as on 31.3.2009. If the assessee has accepted the addition, then the claim of the assessee to change the value of opening stock is admissible. However, if the assessee has contested the addition in appeal forums, then the same will have impact on the claim of the assessee, i.e., if the addition so made by the AO to the value of closing stock as on 31.3.2009 has been deleted in the appellate forum, then there is no requirement of changing the value of opening stock. Since relevant facts are not available, we restore this issue to the file of AO, who shall verify as to whether the assessee has accepted the addition made in AY 2009-10 and if not accepted, the AO should find out the decision taken in the appellate forums. The

The next issue contested by the assessee relates to the claim of the assessee to reduce the amount of “mark to market loss in valuation of foreign exchange forward contracts” that was disallowed in AY 2009-10.

The assessee had revalued the foreign exchange forward contracts outstanding as on 31.3.2009, which resulted in loss of Rs.24.18 crores. The assessee made Provision for the above said loss in the profit and loss account ending on 31.3.2009 and claimed it as expenditure. The above said provision amount was reversed in the books of accounts of the immediately succeeding year, i.e., the above said amount was credited to the Profit and Loss account for the year ending 31.3.2010, i.e., the same was offered as income in AY 2010-11. Since the AO has disallowed the above said provision for loss of Rs.24.18 crores in AY 2009-10, the assessee claimed before Ld CIT(A) that the amount of Rs.24.18 crores, which was offered in AY 2010-11 should be reduced from the total income. The Ld CIT(A), however, rejected the same.

At the time of hearing, the Ld A.R submitted that the disallowance made by AO in AY 2009-10 has been deleted in the appellate forum, i.e., the claim for deduction of provision for loss of Rs.24.18 crores has been allowed as deduction in AY 2009-10. Accordingly, he submitted that this ground of the assessee has become infructuous.

We heard Ld D.R on this issue. Having regard to the submissions made on the factual aspects of this issue, we dismiss this ground of the assessee as infructuous.

The assessee has filed an additional ground of Appeal claiming that the amount of Education Cess paid by it should be allowed as deduction. However, this claim of the assessee is not admissible in view of the amendment made by the Finance Act, 2022. Accordingly, we reject this claim of the assessee.

We shall now take up the appeal filed by the revenue. The first issue relates to the disallowance made u/s 14A of the Act. This ground of the revenue has been adjudicated in the preceding paragraphs along with the ground raised by the assessee on the very same addition.

The next issue urged by the revenue relates to the direction of the Ld CIT(A) to assess rental income from letting of CG house under the head “Income from house property” and “income from service charges” under the head “Income from other sources”. The assessee has also raised an additional ground supporting the order of Ld CIT(A).

We heard the parties on this issue and perused the record. We notice that the assessee has been offering the above said income, i.e., rental income and service charges as its business income in all the years. In AY 2008-09, the AO, however, had assessed both the above said income under the head “Income from house property”. When the matter reached Tribunal, the ITAT directed the AO to assess rental income under the head ‘Income from house property’ and service charges income under the head ‘Income from other sources’. Accordingly, taking the cue from the orders passed in AY 2008-09, the assessee raised an additional ground before Ld CIT(A) in this year praying for assessment of above said income as per the decision rendered by ITAT in AY 2008-09. The Ld CIT(A) accepted the said contentions of the assessee. The Ld CIT(A) further directed the AO to disallow repair expenses relatable to CG building, apparently for the reason that the assessee would be getting

However, we notice that the decision has been rendered by Ld CIT(A) following the decision rendered by the Tribunal in AY 2008-09. The revenue could not bring any material before us in order to compel us to deviate from the decision rendered by the co-ordinate bench in the assessee’s own case in AY 2008-09. Accordingly, we do not find any infirmity in the order passed by Ld CIT(A) on this issue.

In the result, the appeal filed by the assessee is treated as allowed and the appeal of the revenue is dismissed.