M/S. ORIENT CRAFT LTD.,NEW DELHI vs. DCIT, NEW DELHI
Before: SHRI SATBEER SINGH GODARA, & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
These six cross appeals are filed by the Assessee (ITA Nos.-
3626/Del/2015, 3625/Del/2015) and the Revenue (3773/Del/2015,
ITA-3625-3526/Del/2015
ITA-3773-3774/Del/2015
ITA3202-3203/Del/2017
M/s Orient CraŌ Ltd.
Page 3 of 23
3774/Del/2015, 3202/Del/2017, 3203/Del/2017) against the different orders dated 09.03.2015, 10.03.2015 and 27.02.2017 respectively of the Ld. Commissioner of Income Tax (Appeals)-7, [hereinafter referred to as the Ld. CIT(A)] pertaining to Assessment Years (A.Y.) 2009-10, 2010-11 and 2011-12 and 2012-13 respectively. Since common issues are involved in these appeals, the same is being disposed of by way of this common order for the sake of convenient and brevity. The grounds in all the six appeals are reproduced as under:
ITA No.- 3625/Del/2015(A.Y. 2009-10) Assessee’s appeal
1. That the orders passed by lower authorities are bad in law and against the facts & circumstances of the case.
2 That both CIT(A) & AO have erred in law and on facts in treating, IPO expenses amounting to Rs. 1,68,30,430/- as capital expenditure arbitrarily and without any justification.It is contended that the ratio of the judgements in case of 225 ITR 792 and 225 ITR 798 are not applicable to the appellant's case.
3 The above grounds of appeal are independent and without prejudice to one and another.
ITA No.- 3626/Del/2015(A.Y. 2010-11) Assessee’s appeal
1 That the orders passed by lower authorities are bad in law and against the facts & circumstances of the case.
2 That both CIT(A) & AO have erred in law and on facts in not allowing deduction u/s 10B amounting to Rs. 1,99,23,462/- abitrarily and without any justification on the assumptions that it is not derived from industrial undertaking.
It is contended that the difference in foreign exchange is a first degree source of receipt being derived from the industrial undertaking.
3 The above grounds of appeal are independent and without prejudice to one and another.
ITA-3625-3526/Del/2015
ITA-3773-3774/Del/2015
ITA3202-3203/Del/2017
M/s Orient CraŌ Ltd.
Page 4 of 23
4 Your appellant craves, leave, to add, alter, amend, and / or forego any of the grounds of appeal at the time of hearing.
ITA No.- 3773/Del/2015(A.Y 2009-10) Revenue’s appeal
“ 1. n the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 8,00,25,058/- made by the AO on account of disallowance of product development expenses which was treated as deferred revenue expenditure and in ignoring the fact that the benefit in terms of creating market and goodwill for the assessee in the international market is available to the assessee over a period of three years for expenditures made for the product development expenses..
On the facts in the circumstances of the case, the ld CIT(A) has erred in law and on the in deleting the disallowance of Rs. 2,99,31,782/- out of the total disallowance of Rs. 2,99,97,647/- made by AO u/s 14A r.w.s. 8D(2) (ii) by ignoring the mandatory provisions of sub-rule 8D r.w.s.14A of the Income tax Act, 1961. 3. On the facts and in the circumstances of the case, Id CIT(A) has erred in deleting the addition of Rs.66,41,71,241/- made by the AO where the loss on account of deficit on settlement of forward contracts(Net) was rightly taken as speculation loss under the provisions of section 43(5) of the Income tax Act, 1961 without appreciating the facts of the case.” ITA No.- 3774/Del/2015(A.Y. 2010-11) Revenue’s appeal “1. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting the addition of Rs. 7,53,40,902/- made by the AO on account of disallowance of product development expenses which was treated as deferred revenue expenditure and in ignoring the fact that the benefit in terms of creating market and goodwill for the assessee in the international market is available to the assessee over a period of three years for expenditures made for product development expenses.. 2. On the facts and in the circumstances of the case, the Id CIT(A) has erred in law and on the facts in deleting the disallowance of Rs. 2,88,04,641/- out of the total disallowance of Rs. 2,88,70,506/- made by AO u/s 14A r.w.r. 8D(2)(ii) by ignoring the mandatory provisions of sub-rule 8D r.w.s.14A of the Income tax Act, 1961. 3. On the facts and in the circumstances of the case, Id CIT(A) has erred in deleting the addition of Rs.11,28,57,724/- made by the AO where the loss on account of deficit on settlement of forward contracts(Net) was rightly taken as speculation loss under the provisions of section 43(5) of the Income tax Act, 1961. ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017
M/s Orient CraŌ Ltd.
Page 5 of 23
The appellant craves to be allowed to add any fresh ground(s) of appeal and/or delete or amend any of the ground(s) of appeal.”
ITA No.- 3202/Del/2017(A.Y. 2011-12) Revenue’s appeal
“ (i) That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of product development expenses Rs.
8,27,46,723/- made by the AO by ignoring the decision of the Hon'ble
Supreme Court in the case of Madras Industrial Investment Corporation Ltd.
Vs CIT 225 ITR 802 and the Department's appeal against the decision of ITAT in assessee's own case for A.Y.'s 07-08 & 08-09 are pending before the Hon'ble
High Court.
(ii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in rejecting the mandatory procedure adopted by the AO in making the disallowance of expenses u/s 14A of the Income Tax Act, 1961, as no separate accounts for interest bearing funds and interest free funds and their utilisation is kept. As per instruction No. 5/2014 dated 11.02.2014, expenditure can be disallowed even when taxpayer in a particular year has not earned any exempt income.
(iii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 11,62,27,976/- made by the AO on account of deficit on settlement of forward contracts (Net) which is a speculation loss under the provisions of section 43(5) of the Income Tax Act, 1961 without appreciating the facts of the case.
(iv) That the appellant craves leave to add or amend any ground of appeal before the appeal is heard or disposed off.
ITA no.- 3203/Del/2017 (A.Y. 2012-13) Revenue’s appeal
“ (1) That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of product development expenses Rs.
10,82,51,151/- made by the AO by ignoring the decision of the Hon'ble
Supreme Court in the case of Madras Industrial Investment Corporation Ltd.
Vs CIT 225 ITR 802 and the Department's appeal against the decision of ITAT in assessee's own case for A.Y.'s 07-08 & 08-09 are pending before the Hon'ble
High Court.
(ii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in rejecting the mandatory procedure adopted by the AO in making the disallowance of expenses u/s 14A of the Income Tax Act, 1961, as no separate accounts for interest bearing funds and interest free funds and their utilisation is kept. As per instruction No. 5/2014 dated 11.02.2014, expenditure can be disallowed even when taxpayer in a particular year has not earned any exempt income.
ITA-3625-3526/Del/2015
ITA-3773-3774/Del/2015
ITA3202-3203/Del/2017
M/s Orient CraŌ Ltd.
Page 6 of 23
(iii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 19,47,53,128/- made by the AO on account of deficit on settlement of forward contracts (Net) which is a speculation loss under the provisions of section 43(5) of the Income Tax Act, 1961 without appreciating the facts of the case.
(iv) That the appellant craves leave to add or amend any ground of appeal before the appeal is heard or disposed off.
There are three issues raised by the Revenue and two issues raised by the assessee, which are recurring in all the years from A.Y. 2009–10 to A.Y. 2012–13. 3. For Assessment Year 2009–10, Ground No. 1 of the assessee is that the IPO expenses have been treated as capital expenditure. The contention of the Ld. Counsel for the assessee is that the IPO was not brought but aborted, therefore, the expenses made on raising the IPO is a revenue expenditure which has been claimed u/s 37(1) of the Act. It is a say of the Ld. AR that no asset was created and the assessee did not get any enduring benefit. The assessee has relied upon the decision of ITAT Mumbai Bench, in the case of Go Airlines (India) Ltd. vs. Deputy Commissioner of Income reported in [2021] 126 taxmann.com 152. 4. For Assessment Year 2010-11, the ground raised by the assessee is that the claim of expense u/s 10B has been wrongly disallowed. The Counsel for ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017
M/s Orient CraŌ Ltd.
Page 7 of 23
the assessee states that the assessee is a 100% export-oriented unit, and the income was shown as business income. Therefore, the same deserves to be upheld. The assessee has relied upon the order dated 06.10.2015 of the Hon’ble High Court of Delhi in the case of PCIT vs. Universal Precision
Screws in ITA No. 392/2015. 5. The Revenue, in Ground No. 1 for Assessment Year 2009–10 to AY 2012-
13, has taken a ground that the Ld. CIT(A) has wrongly deleted the addition on account of product development expenses. The Ld. Counsel of the assessee submitted that this is a legacy issue wherein the Delhi High Court has ruled in favour of the assessee in Assessment Year 2007–08. 6. Ground No. 2 for Assessment Year 2009–10 to AY 2012-13, relates to the disallowance under section 14A. The Ld. Counsel for the assessee submitted that the disallowance under section 14A has to be limited only to the extent of the exempt income and relied on the decision of Hon’ble Delhi
High Court in the case of Joint Investment (P) Ltd. v. CIT (2015) 372 ITR
694 (Del).
7. Ground No. 3 for Assessment Year 2009–10 to AY 2012-13, relates to the disallowance on account of deficit on settlement of forward contracts.
ITA-3625-3526/Del/2015
ITA-3773-3774/Del/2015
ITA3202-3203/Del/2017
M/s Orient CraŌ Ltd.
Page 8 of 23
The ld AR stated that the ITAT in assessee’s own case in AY 2013-14 in ITA
No. 3310, 5037/Del/2019 has decided the issue in favour of the assessee.
India Ltd. reported in 450 ITR 316 and Bechtel India Pvt. Ltd. vs ACIT in ITA No. 930/2017. 8. On various issues at dispute for various years, the Ld. DR filed written submissions, which are reproduced as under:
“ITA No.- 3625, 3626/Del/2015 (2009-10 and 2010-11)
“ In the above case, it is humbly submitted that the following submission may kindly be considered with regard to treating IPO expenses as capital expenditure and deduction u/s 10B disallowed for difference in foreign exchange and excess provision written back:
1. Treating IPO expenses as capital expenditure (disputed by Assessce):
Following contentions of AO may kindly be considered with regard to treating IPO expenses of Rs. 1,68,30,430/- as capital expenditure:
The expenses incurred for bringing an IPO are the expenses which have been incurred for enhancement of capital.
Section 37 of the Act, under which the deduction has been claimed by the assessee, deals with the expenses which are recurring in nature and not being capital expenditure.
Assessee's claim that the IPO was subsequently withdrawn, thereby making the said expenditure as revenue in nature is not tenable.
Above addition was confirmed by the Ld. CIT(A), relying on the decisions of Hon'ble Apex Court in the following cases:
M/s Punjab State Industrial Development Corporation Ltd. Vs CIT (1997) 225
ITR 792
It was held that the fee paid to the