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Facts
The revenue appealed against the CIT(A)'s order deleting additions made by the AO for AY 2013-14. The additions concerned Rs. 2,24,93,337/- under Section 145A for excise duty not included in closing stock valuation and Rs. 8,44,353/- under Section 14A for expenses related to exempted dividend income from mutual funds.
Held
The tribunal upheld the CIT(A)'s decision to delete both additions. For Section 145A, it relied on a previous ITAT decision in the assessee's own case, confirming no impact on net profit. For Section 14A, it found that since the opening and closing balances of investments were Nil, the average value of investment under Rule 8D should be Nil, thus rendering the disallowance by the AO unjustified.
Key Issues
1. Whether the CIT(A) erred in deleting the addition under Section 145A concerning excise duty in closing stock valuation. 2. Whether the CIT(A) erred in deleting the disallowance under Section 14A for expenses incurred to earn exempted income, particularly regarding the application of Rule 8D.
Sections Cited
145A, 14A, 143(3), 143(2), 142(1), Rule 8D, Rule 34 of ITAT Rules, 1963
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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: MS. SUCHITRA RAGHUNATH KAMBLE & SHRI B.M. BIYANI
आदेश/ O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by appeal-order dated 09.02.2024 passed by learned Commissioner of Income-Tax (Appeals)-Ahmedabad-13 [“CIT(A)”] which in turn arises out of assessment-order dated 01.12.2016 passed by learned DCIT-1(1), Indore [“AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2013-14, the revenue has filed this appeal on following grounds:
“1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 2,24,93,337/- in respect of excise duty paid on raw material, stores and spares and fuel and oil u/s 145A without appreciating the facts and evidences mentioned in the assessment-order by the AO.
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Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in law in deleting the addition of Rs. 8,44,353/- on account of disallowance made under section 144 made by AO without appreciating the facts and evidences mentioned in the assessment order by the ΛΟ”. 2. The background facts leading to this appeal are such that the assessee-company is engaged in the business of tyres and allied products.
For AY 2013-14, the assessee filed original return declaring a loss of Rs.
2,00,38,539/- followed by a revised return declaring a total income of Rs.
76,63,220/-. The case was selected for scrutiny and notices u/s 143(2)/142(1) were issued from time to time which were complied by assessee. Finally, the AO completed assessment vide order u/s 143(3) after making certain additions/disallowances. Aggrieved, the assessee carried matter in first-appeal before CIT(A) and succeeded partly. Now, the revenue has come in next appeal assailing the order of CIT(A) on the grounds mentioned in the beginning. We accordingly proceed to adjudicate those grounds one by one.
Ground No. 1:
In this ground, the revenue claims that CIT(A) has erred in deleting the addition of Rs. 2,24,93,337/- made by AO on account of adjustment u/s 145A.
Ld. AR for assessee carried us to Para 5 of assessment-order and submitted that the AO has made this addition u/s 145A on the footing that Page 2 of 8 the component of excise duty. However, the Ld. AO has overlooked the fact that the assessee is following “exclusive method” of accounting and the section 145A prescribes “inclusive method”. Ld. AR submitted that whatever method is applied, there would be no impact on the net profit of assessee and this identical issue is already settled by ITAT, Indore in assessee’s own for AY 2012-13 order dated case being 30.01.2023. The CIT(A) has re-produced this order of ITAT on Page No. 10 to 12 of impugned order and following the same deleted the addition made by Ld. AO. Hence, the order passed by CIT(A) deleting the addition made by AO is in order and does not require any interference from ITAT. Ld. DR for revenue agreed to the submission of Ld. AR. Faced with this situation, we uphold the impugned order passed by CIT(A). Accordingly, the ground raised by revenue is dismissed being devoid of any merit.
Ground No. 2:
In this ground, the revenue claims that CIT(A) has erred in deleting the disallowance of Rs. 8,44,353/- u/s 14A made by AO on account of expenses incurred for earning exempted income.
Ld. AR for assessee firstly carried us to Para 6 of assessment-order wherein the AO has noted that the assessee earned exempted income of Rs. 26.05 lakhs by way of dividend from mutual funds. Thereafter, the AO has also noted thus:
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Bridgestone India Private Limited AY 2013-14 "The assessee has made investments in mutual fund during the entire preceding year from 27.04.2012 to 05.03.2013. However, opening & closing balances are shown at Nil since the units of mutual funds were redeemed in short span of time and well before the financial year end." But, ultimately in Para 6.9 of assessment-order, the AO has made following working under Rule 8D(2)(ii)/(iii) and made disallowance of Rs. 8,44,353/- u/s 14A:
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Then, Ld. AR carried us to the order passed by CIT(A) deleting the disallowance made by AO, reading as under:
“10.4. Decision.
10.4.1 I have considered the submissions of the appellant and perused the materials available on records. The appellant has requested to delete the impugned disallowance made u/s 14A of the Act at Rs.8,44,353/- being aggregate of disallowance made under Rule 8D(2)(ii) at Rs.5,95,764/- and under Rule 8D(2)(iii) at Rs.2,48,598/-. The appellant has made elaborate submissions, as above, and the same have been considered carefully.
10.4.2 From the impugned assessment order, it is observed that the Ld. A.O has made the disallowance u/s 14A of the Act as per formula/method stipulated in Rule 8D of Income Tax Rules. The impugned assessment order also reveals that the Ld. Assessing Officer has held that the expenses directly relatable to earn exempt income under Rule 8(2)(i) is Nil and therefore, there is no dispute between the Ld.AO and the appellant on this issue.
10.4.3 The impugned assessment order also reveals that the Ld. AO has computed the disallowance under Rule 8D(2)(ii) out of interest expenses at Rs.5,95,764/- and under Rule 8D(2)(iii) at Rs.2,48,589/-. In this respect it is important to analyse the Rule 8D of Income Tax Rules, as stood in assessment year consideration, which stipulated as under.
"(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any Page 5 of 8
B A X --- C
Where
A = amount of expenditure by way of interest other than the amount of interest included in clause (1) incurred during the previous year,
B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year,
(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year"
From the above, it is evident that the Rule 8D(2)(ii) prescribes that the disallowance out of interest need to be made considering the "average value of investment, income from which does not or shall not form part of total income, as appearing in the balance sheet, on the first day and the last of the previous year". Similarly, the Rule 8D(iii) prescribes disallowance which is an amount equal to 0.5% of the "average vale of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first and the last day of the previous year. Therefore, both in Rule 8D(2)(ii) and 8D(2)(iii), the average value of investment needs to be computed considering the value of said investments, as appearing in the balance sheet on the first and last day of the previous year. The legislature has provided a formula for computation of disallowance under Rule 8D and hence, the same has to be strictly adhered to and it would not be open to modify the same. From perusal of said formula provided in Rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Rules, it is observed that therein the "Average value of investment” needs to be computed as per value of investment as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. The usages of words first day and the last day of the previous year is a conscious will of the legislature and the same can neither be ignored not altered and therefore, I am of the considered opinion that average value of investment should be considered after considering the value of such investment as appearing in the balance sheet of the appellant on the first day and the last day of the previous year. In the present case, the Ld. AO has Page 6 of 8
Bridgestone India Private Limited AY 2013-14 given a factual finding in the impugned assessment order that "The assessee has made investments in mutual fund during the entire preceding year from 27.04.2012 to 05.03.2013. However, opening & closing balances are shown at Nil since the units of mutual funds were redeemed in short span of time and well before the financial year end." If the opening & closing balances of investments under consideration were Nil, then as per Rule 8D, the average value of such investment would also be Nil. However, having held that the opening and closing balances c investments under considerations were Nil, the Ld. AO has not adhered to the method prescribed under Rule 8D of computation of average value of investment and has computed the same considering the number of days for which such investment were held during the year, which is not as per method prescribed under the Rule 8D as applicable for the assessment year under consideration. In view of the facts and circumstances of the case and after considering the provisions of Rule 8D, I am the considered opinion that the Ld. AO was not justified in computing the "average value of investment" at Rs. 4,97,17,808/-, since the actual working of "average value of investment" as per Rule 8D, works out at Rs. Nil. If the average value investment is Rs. Nil, then as per method of computation of disallowance prescribed under Rule 8D(2)(ii) and 8D(2)(iii), the disallowance would also be Nil. Hence, it is held that the Ld. AO was not justified in making disallowance under Rule 8D(2)(ii) at Rs. 5,95,764/- and under Rule 8D(2) (iii) at Rs.2,48,589/-, aggregating to Rs.8,44,353/-. Therefore, the impugned disallowance made at Rs.8,44,353/- is DELETED. Accordingly, the Ground Nos. 17 and 18 raised in appeal are ALLOWED”
Ld. AR next submitted that AO has made a correct observation that the opening balance and closing balance of investment in mutual funds (i.e.
as on first day of previous year and as on last day of previous year) were Rs.
“Nil”. Ld. AR corroborated this observation from the Balance-Sheet of assessee filed in Paper-Book. But thereafter, the AO has made working of “average value of investments” as per self-devised formulae of weightage average on the basis of number of days for which investment in mutual fund was held by assessee. Ld. AR submitted that the formulae adopted by AO is not prescribed in Rule 8D(2)(ii)/(iii) and that is why the CIT(A) has rejected AO’s working of disallowance. Ld. AR submitted that the CIT(A) has taken into account the exact formulae prescribed in Rule 8D(2)(ii)/(iii) and Page 7 of 8 investment in mutual funds as on the first day and last day of the previous year was Rs. Nil. Therefore, the order of CIT(A) must be upheld. Ld. DR for revenue could not dispute the submission made by Ld. AR. Faced with this situation, we uphold the order of CIT(A). The ground raised by revenue is meritless and dismissed.
Resultantly, this appeal is dismissed.
Order pronounced in open court / by putting up on notice board as per Rule 34 of ITAT Rules, 1963 on 28/02/2025
Sd/- Sd/- (SUCHITRA RAGHUNATH KAMBLE) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore िदनांक/Dated : 28/02/2025 Dev/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Indore Bench, Indore
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