M/S KHODAY BREWERIES LTD ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1)(1), BANGALORE

PER PRADIP KUMAR KEDIA: AM

(B)/2017 2 2. The substantive grounds of appeal raised by assessee are two fold; i) Disallowance carried out by the AO u/s 14A of the Act against the exempt income earned by the assessee. ii) The addition on account of negative value of opening stock.

3. The first issue deals with disallowance of Rs.17,933/- made u/s 14A of the Act, r.w.s. 80D of the Rules.

3.1 We have heard rival submissions on the issue. As pointed out on behalf of the assessee, the assessee has claimed that no exempt income has been earned during the year. Howver, the CIT(A) has sustained the disallowance to the extent of Rs. 17933/- as computed as per Rule 8D(2)(iii)of the Act. In view of ‘Nil’ Exempt income, no additional disallowance is permissible in view of the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Corrtech Energy P. Ltd. 372 ITR 97 (Guj.). In another judgment in the case of CIT vs. Vision Finstock Ltd. Tax Appeal No. 486 of 2017 dated 31.07.2017 the Hon’ble Gujarat High Court has once again expressed the similar view and held that disallowance of expenditure in terms of Section 14A r.w. Rule 8D cannot exceed the exempt income itself. It is noticed that SLP(Civil) [Diary No. 13152/2018] filed by the Revenue against the judgment of the Hon’ble Gujarat High Court in Vision Finstock Ltd. (supra) has been dismissed on merits by the Hon’ble Supreme Court vide order dated 07.05.2018. The reference is also made to the decision of Hon’ble Supreme Court of India in CIT vs. Chettinad Logistics (P.) Ltd. (2018) 95 taxmann.com 250 (SC). Thus, in the light of judicial precedents noted above, no additional disallowance is called for under s.14A of the Act in excess of exempt income.

3.2 Ground No.1 of the assessee’s appeal is accordingly allowed. (B)/2017 3 4. Ground no.2 concerns negative value of opening stock.

4.1 In the course of hearing, the learned counsel for the assessee referred to a quantitative statement of ‘brewery division’ of the assessee company for assessment year 2012-13 in question and pointed out that the aggregate of opening stock amounting to Rs.2,02,696/- with regard to empty glass bottles, sugar and maize flake was admittedly shown in the negative. The AO has alleged lack of explanation in this regard and added the same to the total income of the assessee for the assessment year in question. The CIT(A)also endorsed the aforesaid action of the AO in first appeal.

4.2 It is contended on behalf of the assessee that the opening stock in negative springs from incidence happened in the earlier years and therefore, any profit in relation to such opening stock can possibly arise only in the earlier years and the addition made during the year in relation to negative opening stock is wholly unjustified.

4.3 We find merit in such plea. The opening stock in negative apparently belies the accounting practices. However, such negative opening stock, if reduced from other positive stocks has actually increased the profits of the year. Therefore, no loss has occurred to the revenue per se in so far as the profit of the assessment year 2012-13 is concerned. Such negative opening stock would purportedly be a cause of concern for true and fair picture towards business profits of the earlier years. Thus, it will be for the AO to do so in accordance with law, if considered necessary or expedient. We refrain from making any further comment in this regard. Pertinent to note, such observations should not be regarded as any finding or direction from the Tribunal. The addition on account of negative opening stock is not permissible in the assessment year 2012-13 in question in the absence of any cause of action.

ITA No.2487(B)/2017 4 4.4 Ground no.2 of the assessee’s appeal is allowed.