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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA & SHRI T.R.SENTHIL KUMARAND
आदेश/O R D E R
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER
All appeals relate to the same assessee and pertain to different assessment years. While cross appeals by the assessee and Revenue have been filed for Asst.Year 2006-07 & Asst.Year 2009-10, the appeal for Asst.Year 2007-08 has been filedby theRevenue. All appeals have been filed against separate orders passed by the ld.Commissioner of Income Tax (Appeals) [hereinafter referred to as “CIT(A)”] dated 27.1.2016 and 9.3.2015 respectively u/s 250(6) of the Income Tax Act, 1961 [hereinafter referred to as "the Act" for short].
It was common ground that certain common issues were arising in the appeals .Therefore all the appeals were taken up together for hearing. We shall first deal with the cross-appeals pertaining to the Asst.Year 2006-07 and our decision rendered therein on common issues will apply mutatis mutandis to the other appeals.
Assessee’s Appeal : Asst.Year 2006-07
At the outset Ld.Counsel for the assessee pointed out that the present appeal had come up in the second round before the ITAT. Giving a brief background of the appeals, Ld.counsel for the assessee began by pointing out that the assessee company was engaged in the business of manufacturing of chemicals comprising of dyes, specialty chemicals, agrochemicals, bulk drugs and commodity chemicals. That the assessment framed for the impugned
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 3 year u/s 143(3) r.w.s 144C of the Act on 22/10/10 had travelled in appeal to the ITAT via the Dispute Resolution Panel(DRP) route,who vide their order dated29/10/12 in ITA No.3118/Ahd/2010 set aside the following issues to the AO for reconsideration: i) Transfer Pricing Adjustment a) commission received from Associate Enterprise(AE) of Rs.2,71,82,980, and b) on account of sale of goods to AE’S/subsidiaries including quantity discount given Rs.1,74,69,516/-;
ii) disallowance under section 14A of the Act r.w.r 8D of the Income Tax Rules,1962(hereinafter referred to as “Rules”)
iii) claim of prior period expenses of Rs.1,11,31,209/-
That in compliance with the directions given by the Tribunal, the issues were examined afresh and the AO thereafter made following additions: • Transfer pricing upward adjustment of Rs.1,21,60,877/- on account of receipt of commission from Associate Enterprise (“AE”); • Adjustment to Arm’s Length Price (“ALP”) on account of sales goods to subsidiaries of Rs.1,74,69,516/- ; • disallowance under section 14A of the Act of Rs.50,84,881/-; disallowance of prior period expenses of Rs.47,87,776/-
The matter was carried in appeal before the Ld.CIT(A) who in turn deleted the TP adjustment of Rs.1,21,60,877/- relating to commission paid to AE’s, TP adjustment of Rs.74,59,611/- on sales made to AE’s on account of quantity discount and disallowance of expenses u/s 14A to the extent of Rs.49,09,881/- restricting the
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 4 disallowance to Rs.1,75,000/- and Confirmed TP adjustment on sales of Rs.1,00,09,905/-& prior period expenses of Rs,47,87,776/-. Aggrieved by the same, both the assessee and the Revenue have come up in appeal before us.
Taking up first the assessee’s appeal in ITA No.823/Ahd/2016 (Asst.Year 2006-07),
Ground no.1 raised by the assessee reads as under: “1. The ld.CIT(A) erred in law and on facts in justifying upward adjustment of Rs.1,00,09,905/- sustained by TPO. The ld.CIT(A) erred in confirming adjustment made by TPO in absence of additional evidence admitted on record to suggest that CA made faulty comparison of different products. The ld.CIT(A) ought to have directed TPO to admit the additional evidence set aside by Hon’ble ITAT for verification.”
Drawing our attention to the facts of the case, from para-6 of the Ld.CIT(A)’s order, the ld.counsel for the assessee pointed out that the TPO during original Transfer Pricing proceedings, in the first round, had adjusted Arms Length Price (ALP) of sale of goods by the assessee to its AEs resulting in addition of Rs.1,74,69,516/- on account of the following :–
(i) addition on account of mistake in TP study with regard to product code 111108 of Rs.1,00,09,905/- , and (ii) adjustment for quantity discount ,for difference in price charged to AE’s and non-AE’s of Rs.74,59,611/-; both totalling to Rs.1,74,69,516/-.
The ld.counsel for the assessee pointed out that the ld.CIT(A) had upheld the adjustment amounting to Rs.1,00,09,905/- while he
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 5 had deleted the other adjustment, and accordingly, the assessee is in appeal against adjustment upheld by the ld.CIT(A).
With regard to the same, the ld.counsel for the assessee contended that in the first round it had been demonstrated to the ITAT that the TP study report adopted the CUP method for comparison of sale of goods made to AE and while doing so had made comparison of identical goods sold to non-AE’s to justify ALP. But while doing so, he contended it was pointed out to the ITAT, that a mistake had crept in and in one of the cases relating to item with product code-111108, the comparison had been done with an item of different product code i.e. 110308; that before the Tribunal, report from the Chartered Accountant (CA) stating that sale of the said products had been so erroneously compared, was filed, and accordingly, ITAT had sent the matter back to the TPO to determine the ALP afresh. The ld.counsel for the assessee pointed out that in the second round both the authorities below, i.e. TPO/ AO and the Ld.CIT(A), upheld the adjustment on the basis that the additional evidence submitted by the assessee pointing out error in comparison so made, being the certificate of the CA, had been rejected by the ITAT, and therefore, both the authorities below also refused to adjudicate the issue on the basis of said evidence.
In this regard, the ld.counsel for the assessee first drew our attention to finding of the ITAT in the first round before it, restoring the matter back to the TPO. Our attention was drawn to paper book (PB) page no.76 to 139 wherein the order of the ITAT dated 29.10.2012 passed in the first round of proceedings was placed. The ld.counsel for the assessee took us to page no.96 of the PB containing para-5.18 of the order wherein the facts were discussed
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pointing out that the assessee has sold certain products to AE and for the purpose of determining ALP of the transaction, had considered itself tested party and had adopted CUP as the Most Appropriate Party (MAP) for determining ALP of the transaction undertaken with its AE and had selected internal comparables ,i.e identical transactions undertaken with unrelated enterprises,for the purpose. Our attention was thereafter drawn to para-5.19 of the order wherein it was pointed out that the ITAT had noted that the assessee had filed summary of comparative data for sales made to AE’s and non AE’s and had also noted that the TPO had made maximum adjustment with respect to one product,i.e code no 110308. The order further notes the contentions of the assessee regarding mistake in the comparison done with regard to an item of product code – 110308 and furnished all additional evidences being certificate of CA Shri Ghanshyam Parekh & Co., certifying error so committed in the transfer pricing report; that considering the same, ITAT had restored the issue to the AO for d e novo consideration. Relevant para-5.19 is as under:
“5.19. On the other hand, from the side of the assessee, a summary of comparative data for the sales made to AE and non-AE have also been furnished by the assessee as well. These details are from pages 95 to 105. In some of the cases, the overall result after the adjustment was that there was no adjustment required. Right now, we are concentrating on one product, i.e. product code number ‘110308’. In the foregoing paragraph, we have noted that for this product the TPO had made the maximum adjustment. The calculation of the assessee in respect of this product is distinguishable because of the reason that the difference in price after adjustment as per assessee was only 383.4, however, as against that, the difference in price after adjustment as per TPO was 1081.1. Therefore, the assessee has calculated the scope of adjustment of Rs.35,49,901/-. In this connection, the assessee has sought permission for the production of additional evidence, as discussed supra. It was noted by the assessee on verification of sale transaction that there was a discrepancy, informed through a separate petition seeking permission of admission , quote “3. Re. Summary of comparative data for sales made to AE and non AEs’ for Financial Year 2005/06 submitted as part of audited accounts placed @ page 95 of the paper book reproduced as Annexure A of the order of
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Transfer Pricing Officer, the assessee submits that on verification of the sale transaction with AE / Non AE, discrepancy in the nature of sale of product code 111108 (product name Novatic Brown R Pure) to non AE parties was through oversight shown as sale of product code 110308 (product name Novatic Olive R Pure). A certificated dated 6th August 2011 of M/s.Ghanshyam Parekh & Co., Chartered Accountants with the sale Invoices in support of the above contention are annexed herewith for appreciation of the Hon'ble Bench.” unquote. The effect of this discrepancy has yet to be ascertained and the relevant supporting evidence is yet to be examined. The net result of the two difference as explained to us is that the TPO has worked out the price difference at Rs.1081.1, as against that the assessee had calculated the price difference at Rs.383.4. The assessee has sold to A.E. @ 664.47 , however the TPO has calculated the ALP at 1081.1. However, for the purpose of claims of adjustment , the assessee is to demonstrate satisfactorily the correct nature of the product, its marketing strategy and the risk involved for which the assessee is asking for certain adjustments. Due to this reason, we deem it proper to restore this part of the adjustment back to the stage of the AO for de novo consideration, needless to say after providing reasonable opportunity to the assessee.
The ld.counsel for the assessee, thereafter, drew our attention to page no.152 of the PB wherein certificate of CA was placed, which is reproduced hereunder:
“This is to certify that the we have verified the details of sales transactions entered into by Atul Limited with its subsidiaries and non-associate parties, during FY 2005-06, as shown in Annexure- 1 to Annexure - 4 attached herewith, and found them in order except the following variations: In Annexure - 1 sale of product code 111108 (product name Novatic Brown R Pure) to non-associate parties wrongly shown as sale of product code 110308 (product name - Novatic Olive R Pure). Detail of such sales invoices given in below table. Invoice Invoice Party Name Amount Quan Product Product No. date (Rs) t ity code/name code/name (kg) actually sold wrongly shown in Annexure - 1
6317 25-05-05 Dystar 1000 17,32,755 110308- 111108- TextileFarbe Novatic Novatic n GMBH Olive R Brown R Pure Pure
6481 30-06-05 1000 17,91,125 110308- 111108 - Dystar T4extileFarb
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en GMBH
6559 23-07-05 9300 15,58,563 Dystar No vatic Novatic Olive RPure TextileFarbe Brown R n GMBH Pure
6559 23-07-05 900 15,58,563 Dystar 110308- 111108- TextileFarbe Novatic Novatic n GMBH Olive R Brown R Pure Pure
6672 31 -08-05 1925 35,04,032 Dystar 110308-No 111108 - Textile vatic Olive Novatic GMBH R Pure Brown R Pure
6813 24-9-05 2900 52,75,467 Dystar 110308-No 111108- TextiJeFarbe vatic Olive Novatic n GMBH R Pure Brown RPure
6829 30-9-05 Dystar 1000 18,22,212 110.108- 111108- TextileFarbe Novatic Novatic nGMBH (Olive R Brown R Pure Pure
7073 09-11-05 900 15,76,294 Dystar 110308-No 111108- TextileFarbe vatic-Olive Novatic n GMBH R Pure Brown R Pure
7167 30-11-05 900 15,86,016 Dystar 110308- 111108- TexlileFarbe Novatic Novalic n GMBH Olive R Brown R Pure Pure
7200 16-12-05 300 5,29,741 Dystar 110308- 111108- TextileFarbe Novatic Novatic n GMBH Olive R Brown R Pure Pure
7201 16-12-05 Dystar 680 11,95,465 110308-N 111108- TextileFarbe ova lie Novaiie n GMBH Olive R Brown ; R Pure Pure
7225 26-12-05 925 16,32,036 Dyslar 110308- I 11108- TextileFarbe Novalic Novatic n GMBH Olive R Brown R Pure Pure
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 9
7296 30-12-05 Dystar 2000 35,14,600 110308- 111108- TexlileFarbe Novatic Novalie n GMUJJ Olive R Brown R Pure Pure
7428 31-01-06 2000 35,44,540 Dystar 110308- 111108 - TextileFarbe Novalic Novatic n GMBH Olive R Brown Pure RPure
7475 1 9-02-06 Dystar 400 7,09,550 110308- 111108- TextileFarbe Novatic Novatie n GMBH Olive R Brown R Pure Pure
7552 28-2-05 990 17,25,718 Dvstar 110308 - 111108- Japan Ltd Novatie Novatic Olive R Brown R Pure Pure
We have also gone through the statement furnished by the Atul Ltd. to the TPO wherein it is stated that it had sold product 110308 from Division CW at FOB price of Rs.664.47 to AE and Rs.1778.79 to Non-AE. We hereby slate that the said statement is factually incorrect for the reason mentioned above viz. the product sold to AE and the product sold to Non-AE are different products and the price comparison is not possible.”
Thereafter he took us through page no.7 of the TPO’s order pointing out that he had upheld the adjustment by noting that Tribunal had rejected the admission of the said additional evidence. Our attention thereafter drawn to page no.11 of the CIT(A)’s order (para-6.4) confirming action of the TPO as under:
“6.4. I have considered the facts of the case and submissions as placed before me by the appellant. There are two broad issues involved in the aforesaid dispute. The first issue is with regards to adjustment of Rs.1,00,09,905/- made by TPO in case of sale of Novatic Brown R. Pure made by the appellant to its AE's. The appellant during the proceedings before Hon'ble IT AT placed a report from Chartered Accountant stating that the additions on account of sale of the aforesaid product were made on the basis of faulty comparable. The Hon'ble Tribunal vide para 3.1 of its order did not entertain such evidences as placed by the appellant. However, vide
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 10 para 5.19 of its order, the Hon'ble Tribunal directed AO to verify the same. In my opinion the addition as sustained by TPO O on the said issue is justified as the Hon'ble Tribunal has rejected taking on record of additional evidences. In absence of the additional evidences, there is n on record to suggest that the CA has made a faulty comparison of different product* Under the circumstances, I have no option but to confirm the assessment order on this ground. Therefore addition of Rs.1,00,09,905/- is confirmed.”
The ld.counsel for the assessee contended that despite clear direction of the ITAT to consider the issue de novo, noting the contention of the assessee that an error had been committed while comparing a product sold by it to its AE, the authorities below had failed to adjudicate the issue in accordance with the directions of the ITAT. The ld.counsel pointed out that certificate of the CA clearly listed all the details relating to impugned transaction in which error had been committed. He contended that the Revenue authorities could very well have enquired into the veracity of the details and adjudicated the issue.
The ld.DR however relied upon the orders of the Revenue authorities.
We have heard contentions of both the parties and have gone through the orders of the ITAT in the first round and order of the TPO/AO and the ld.CIT(A) passed in the second round. The issue relates to TP adjustment made of Rs1,00,09,905/- on account of sale of products by the assessee to its AE. The contention of the assessee before the ITAT in the first round was that in its TP report, the comparison done by the assessee with similar transaction with non-related parties had been erroneously done where the products were not the same. Additional evidence had been filed before the ITAT by way of certificate of a CA in this regard, and the ITAT had clearly directed the TPO to consider the issue de novo in the
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 11 restored-proceedings. There is no dispute vis-à-vis the above direction of the ITAT.Even the Ld.CIT(A) in his order reproduced above notes the fact that the ITAT had directed the AO/TPO to verify the contention of the assessee.
13.1 In view of the clear direction of the ITAT as above, the act of the authorities below in upholding the addition by merely not entertaining the additional evidences is contrary to the directions of the ITAT. The rejection of the additional evidence was only to the effect that on the basis of the CA certificate alone the claim of the assessee of the error is not established. And hence the direction of the Bench to verify the claim of the assessee. The contents of the certificate reproduced above reveal that the error made in the TP report was clearly mentioned in the certificate listing out all the relevant bills relating to which error had occurred. Therefore, clearly all details were there before the authorities below and the contentions of the assessee, therefore, could have been very well verified. But we find that Revenue authorities upheld the adjustment by simply stating that the additional evidence was not admitted by the ITAT. When the direction of the ITAT was to consider the issue de novo it was the duty of the Revenue authorities to have considered it in the light of the facts stated in the certificate of CA. It is not that the certificate was to be treated as gospel truth. In fact the details mentioned therein needed to be verified by the TPO because that was exactly the claim of the assessee. Clearly, the Revenue authorities have failed to act in accordance with directions of the ITAT.
13.2 Considering the fact that this is the second round of litigation before us, and the matter relates to an issue which is now sixteen
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 12 years old, pertaining to A.Y 2006-07, and noting more particularly the fact that the despite clear directions of the ITAT, the Revenue authorities have failed to act on the same, we are inclined to hold that the assessee, having submitted all the plausible evidences with respect to its claim of error in the TP report and the Revenue authorities having failed to examine the same, despite two opportunities before them, one by the TPO, the other by the Ld.CIT(A),the adjustment no longer is sustainable. The TP adjustment made on account of sales to AE’s of Rs.1,00,09,905/- is therefore directed to be deleted.
13.3 We may add that our finding as above shall not be treated as a precedent, considering the peculiar facts in which it has been so held. Ground No.1 of the appeal is allowed in the above terms.
Ground No.2 of the assessee’s appeal reads as under:
“The ld.CIT(A) has erred in law and on facts in confirming disallowance by AO of Rs.47,87,776/- prior period expenditure claimed by the appellant. The ld.CIT(A) ought to have allowed claim of prior period expenses crystallized during the year and correctly claimed by the appellant.”
The ground relates to disallowance made on account of prior period expenses claimed by the assessee. The facts relating to the issue, as brought out in para-7.1 and 7.2 of the CIT(A)’s order are that the assessee had claimed prior period expenses of Rs. 1,11,31,209/- and after netting off prior period income of Rs. 71,74,782/-,had claimed net expenses of Rs. 39,56,427/-.The AO denied the benefit of netting off and disallowed Rs.1,11,31,209/-as prior period expenses. The matter was carried by the assessee to the ITAT who vide para 9 Page no. 46 of the decision directed the AO to
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 13 examine the exact nature of liability, its crystallization and nature of prior period income. That in the second round before the AO asked the assessee to furnish details and evidences in respect of its claim of prior period expenses as well as prior period income. The AO on verification of the facts and submissions placed by the assessee found that it had incurred prior period expenses on items such as conversion charges, export commission and shown prior period income of Rs.63,43,433/- on same items as mentioned above. The AO therefore allowed relief to the tune of said prior period income of Rs.63,43,433/- and thus restricted the disallowance to Rs.47,87,776/-.
Before the ld.CIT(A), the assessee raised several contentions against the disallowance so upheld to the effect that all necessary details with regard to the said expenses had been furnished, and it had been demonstrated that the expenses had crystalised during the year itself; genuineness had not been doubted; that the assessee had been claiming such prior period expenses from year-to-year and for the sake of consistency no disallowance ought to have been made; that in any case the AO ought to have allowed adjustment of entire prior period income also shown by the assessee amounting to Rs.71,74,782/- as opposed to adjustment of income of Rs.63,43,433/- only by the AO. The ld.CIT(A) however rejected/dismissed all the contentions of the assessee, holding as under:
“7.4. I have considered the facts of the case and submissions placed by the appellant. Appellant for the year under consideration has claimed expenses amounting to Rs. 1,11,31,209/- pertaining to previous years. The appellant has further offered income of Rs. 71,74,782/- pertaining to previous years. There are two broad issues involved in the said dispute; first being crystallization of liabilities of
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 14
"prior period expenses" in the year under consideration. The second issue is with regards to giving netting off benefit of prior period income against prior period expenses.
7.4.1 The first issue is with regards to crystallization of liabilities on account of prior period expenses in the year under consideration. The Hon'ble Tribunal vide para 9 (Page No. 46 of the order) directed the assesse to substantiate the crystallization of liabilities in the year under consideration and further directed AO to examine the exact nature of liabilities with regards to prior period expenses. AO disallowed the claim after holding that the appellant was not able to substantiate the claim. The appellant before me has argued that the expenses related to previous year were constantly debited by the appellant to prior period expenses account and in many cases the bills were received by the company after the close of accounting year and therefore, the liability was finalized and crystallized during the F. Y. 2005-06. However, the appellant has not substantiated the said claim before AO or before me and thus disallowance of prior period expense is justified and confirmed.
7.4.2. The second issue is with regards to allowing netting off benefit of the prior period income amounting to Rs.71,74,782/- as against prior period expense. The Hon'ble Tribunal directed the appellant to demonstrate the nature of prior period income. The appellant during the assessment proceedings has demonstrated nature of period income only to the tune of Rs.63,43,433/- and accordingly the AO has provided only to that extent. The appellant before me has not substantiated anything about the nature of prior period income amounting to Rs.8,31,349/- and accordingly, the addition as sustained by the AO amounting to Rs.47,87,776/- (Rs.1,11,31,209/- - Rs.63,43,433/-) is confirmed and this ground of the appeal is partly allowed.
Before us, the ld.counsel for the assessee reiterated the contentions made before the lower authorities pointing out that specific directions of the ITAT in the first round was to verify the exact nature of expenses of prior period expenses so incurred by the assessee, whether they could be said to have crystallized durig the year and also to verify the exact nature of the prior period income,in the absence of any fact before the ITAT. In this regard, our attention was drawn to para-9 of the order placed at page no.120 of the PB as under:
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“9. We have heard both the sides. We have also perused the orders of the authorities below in the light of the compilation filed. It is worth to mention that the neither the Revenue Department nor the appellant, both have explained the facts in respect of the nature of the “prior period expenses”. We have carefully perused the relevant orders, but unable to understand the nature of the expenditure which were claimed to have been crystallized during the year under consideration. It is also worth to mention that the Revenue Department as also the assessee have not placed on record the details of the expenditure along with the evidences through which it could be demonstrated the year for which it pertained but it was not claimed. It is also worth to mention that the assessee has not demonstrated that why the impugned expenditure could not be claimed in the year for which it belonged to. The case laws which were cited by ld.AR, namely Jagatjit Industries Ltd.(supra) and Toyo Engg. Ltd. have been examined by us. In these cases, the assessee has demonstrated the past business practice and the consistent policy followed in the accounting practice by the assessee, therefore it was demonstrated that the expenditures were spilled over to next year. A case law can only be applied when the facts are found to be more or less akin to each other. However, we have noted that certain enquiry, said to be basic enquiry was not conducted at the assessment stage. The AO is therefore directed to first of all examine the exact nature of the liability and how it related to the business of the assessee. The next step should be to examine the evidence about the crystallization, that too crystallized during the year under consideration. What was that evidence on the basis of which the assessee had claimed that the said liability had in fact crystallized during the year under consideration. We have also noted that there was an alternate plea of assessee that the income which pertained to earlier years was received during the year amounting to Rs.71,74,782/-. Even in this regard, there is no explanation about the nature of the income. How an income of earlier year had also earned during the year under consideration was to be demonstrated by the assessee. There is no evidence on record about the source of such income and what will be the impact of its taxability during the year under consideration. How it was termed as an income of earlier years if it was earned during the year under consideration. Since all such information is not available on record, therefore the natural justice demands to restore this issue back to the stage of the AO to be decided in the light of the observations made hereinabove, after providing a reasonable opportunity of hearing to the assessee. In the result, both the grounds of the assessee may be treated as allowed for statistical purposes only.”
He thereafter pointed out that all evidences were placed before the lower authorities and in this regard our attention was drawn to PB Page no.167 being the submissions made before the AO in the second round vide letter dated 11.8.2014 stating that out of total prior period expenses of Rs.111.31 lakhs major expenses had accrued during the impugned order; that the assessee was
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 16 consistently following this method of claiming prior period expenses and in case the prior period expenses of the impugned order ought to be disallowed, then that of the subsequent year be allowed in this year. Our attention was further invited to PB page no.220 to 226 being submissions made before the AO dated 9.12.2014 giving details of all the prior period expenses and reiterated the contentions made in the earlier letter. The ld.counsel for the assessee further pointed out that during the impugned year, the assessee had huge turnover of Rs.200 crores; that the assessee was consistently claiming prior period expenses in every year and tax rate being the same in each year there is no major tax effect. He drew further our attention to relevant decision of Hon’ble Gujarat high Court in the case of Pr.CIT Vs. Adani Enterprise Ltd., in Tax Appeal No.566 of 2016 (Guj) wherein the Hon’ble High Court had upheld the finding of the ITAT regarding the allowance of claim of prior period expenses which Hon’ble High Court noted, had been allowed by the ITAT on two grounds; firstly that the assessee was charged uniformly for all years, and therefore, it would have no revenue implication, whether the expenditure was recognized in this assessment year or earlier year; and secondly the Revenue has recognized the prior period income and if so, it would be unfair not to recognize the expenditure also in the prior period. Our attention was drawn to relevant part of the order at para-2 and 3 as under:
“2. Main question is sum of Rs.67.88 lacs (rounded off) which the Assessing Officer and CIT(Appeals) disallowed treating the expenditure as a prior period expenditure. The Tribunal reversed the findings of the Revenue authorities primarily on two grounds. Firstly, that the assessee being a company was charged uniformly for all years and would therefore, have no revenue implication of whether the expenditure was recognised in this assessment year or earlier year. The second ground was
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 17 that in any case, the Revenue had recognised the prior period income. If that be so, according to the Tribunal, it would be unfair not to recognise the expenditure also of the prior period.
Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere. Firstly, the expenditure of Rs.67.881acs is a fraction of the total income of the assessee company declared at Rs.105.88 crores. Further, even the Revenue does not dispute that the company would be taxed at the same rate in the present assessment year or during earlier year. It is also not disputed that prior period income was declared by the assessee during the current year which is also accepted by the Revenue. No question of law therefore, arises.”
The ld.counsel for the assessee therefore contended that entire prior period expenses be allowed. On the other hand, the ld.DR relied upon the order of the authorities below.
We have heard rival contentions. The disallowance of prior period expenses to the tune of Rs. 47,87,776/- has been made since the assessee was unable to show that the said expenses crystallized during the year. We have noted that the assessee has consistently pleaded that it had been claiming prior period expenses consistently in every year, and so also prior period incomes; that its turnover was around Rs.200 crores or more and there is no revenue impact of this disallowance since the tax rate is the same in the impugned and preceding year. Moreover the assessee had also pleaded that if prior period expenses of the impugned year are disallowed then those of the succedding year be allowed. The Revenue has not controverted nor pointed out any infirmity in the facts or the pleadings made by the asseseee as above. We have also noted the fact that the assessee had filed all the details regarding the prior period expenses and had
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 18 also explained as to how the same has been crystalised during the year. Be that so, considering the fact that the assessee has been consistently debiting prior period expenses in all years, and also crediting prior period income and noting the huge turnover of the assessee, we agree that there is no revenue impact of the impugned disallowance of prior period expenses; that the exercise of making impugned disallowance would only be academic with the shifting of expenses from year to year. The decision of Hon’ble jurisdictional High Court in the case of Adani Enterprises (supra), squarely applies to the present case wherein it has been clearly held that where the disallowance of prior period expenses is a tax neutral exercise since the assessee incurs the same year to year with the tax rate also being the same in the years, there is no reason to make any such disallowance of prior period expenses. In view of the same, we are not inclined to uphold the disallowance of prior period expenses of Rs.47,87,776/- claimed by the assessee and direct the same to be deleted.
Ground No.2 of the appeal is allowed.
In the result, the appeal in Asst.Year 2006-07 is allowed.
ITA No.908/Ahd/2016 (Asst.Year 2006-07) Revenue’s appeal.
Ground No.1 reads as under:
The ld.CIT(A) has erred in law and on facts in upholding that the alleged receipt of commission from Atul Europe Ltd., of Rs.1,21,60,877/- is a notional income and not taxable under the Income-tax Act and thus, deleting the same.”
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 19 24. The facts relating to this ground are that during the course of original transfer pricing proceedings it was noted by the TPO from the audited financial statements of the Associated Enterprise(AE) of the assessee , Atul Europe Ltd., that it had paid commission of GBP 1,54,530/- to the assessee which was added by the TPO in absence of any benchmarking/TP study. The assessee claimed that instead of receipt of commission, it was required to pay such commission to its AE, however, as the said liability was not honored by the assessee, the said commission was reversed by its Associated Enterprise. During proceedings before the ITAT,in the first round, the assessee placed its statement of account in the books of AE, Atul Europe Ltd., as evidence and the ITAT set aside the matter to the AO for re- examination. Thereafter, the AO made a reference u/s 92CA of the Act for computation of Arm's length price and asked the assessee to substantiate its claim. In response the assessee reiterated that it was required to pay such commission to its AE and has not received the same and as the said liability was not honored by the assessee, the said commission was reversed by its Associated Enterprise. The assessee further produced the letter from its AE along with the statement of account in the books of Atul Europe Ltd, showing the commission recorded. The TPO however rejected the claim of the claim of the assessee which was then confirmed by the AO.
The ld.CIT(A) after considering all the facts and submissions made by the assessee in this regard, deleted the addition, agreeing with the contentions of the assessee that this was reversal of an expenditure on account of commission debited by the assessee in its books of accounts. The relevant finding of the ld.CIT(A) at para-5.2 to 5.2.2 of the order are as under:
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 20
“5.2. I have considered the facts of the case and submissions made by the appellant in this regard. Factually, the TPO during the original proceedings found that ATUL Europe Limited (AEL), one of the associated enterprises of the appellant has shown commissions payable to the appellant. However, the appellant neither recorded the said commission in its books of accounts nor reported the same in Form 3CEB. The appellant presented its ledger account in books of AEL during the proceedings before Hon'ble tribunal and the matter was set aside in order to verify the claim which was again reiterated before the TPO during the set aside proceedings. TPO while rejecting the claim of the appellant; rejected the admissibility of evidence as produced by the appellant.
5.2.1. Appellant during the course of hearing produced a statement of account from the books of the AEL which was placed at page no. 211 & 212 of the P/b which are third party evidence. In my opinion, AO ought not to have rejected the evidences as the same have itself been accepted by Hon'ble Tribunal vide Para 3.1 of its order. As apparent from the ledger account/statement of account as placed before me, it has been observed that Atul Europe Ltd. has recorded commission receivable from the appellant from April 2001 to March 2006 and the net amount recorded was GBP 1,54,,530/- (Rs.1,21,60,877). AEL has duly recorded commission as receivable by following the accounting standards of UK. At the same time, the appellant did not pass any accounting entry with respect to this commission for the simple reason that according to the appellant, such commission was not at all due and payable. For the year under consideration, it was finally decided that such commission is not at all required to be paid. Consequently, the said AEL has expensed off commission shown as income in earlier year. However, the appellant having not booked the original commission as expenditure did not pass any entry for write back of the non-payment of commission. In the books of the appellant, such commission was not at all accounted for. Even if accounted, over a period of time the same would have been revenue neutral as originally in earlier years it would have been shown as expenditure and for the year under consideration, the same would have been shown as income. For the year under consideration, AO has only added commission income only on the basis of accounting entry passed by the AEL which is not correct indication of commission income in the hands of the appellant. At original stage, the complete ledger accounts and certificate from AEL were not placed on record. However, the same were placed on record and therefore, Hon'ble ITAT had set aside the matter back to the file of the AO. AO, based on the finding of TPO, did not consider these evidences in their entirety. The basis of the addition is the ledger account of commission in the books of the AEL.
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 21
5.2.2. Now, the appellant has produced entire ledger account for all the years involved and a certificate from the said AEL to substantiate its stand that neither the commission was claimed as expenditure nor the same is shown as income. Under the circumstances, no addition on such ground can be sustained. The addition on account of commission is nothing but notional income which has not at all been earned by the appellant. There is no concept of taxing a notional income under the scheme of the Act and thus the addition on account of commission cannot be considered as income of the appellant. It has been further observed that there is no actual transaction of commission carried out between the appellant and AEL. The provisions of Chapter X of the Act cannot be invoked in absence of an actual international transaction as contemplated under the Act. There is no scope for a notional transaction to be treated as international transaction and accordingly even on that count also the addition in question would have to be deleted. In result the addition of Rs.1,21,60,877/- on account of alleged receipt of commission from AEL is directed to be deleted. The ground of the appeal is allowed.
Before us, the ld.DR relied on the order of the TPO/AO. He drew our attention to para 5.1 and 5.2 of the TPO’s order as under:
“5.1 During the course of original transfer pricing proceedings, it was noted by the TPO. from the audited financial statement of the associated enterprises, that the AE paid a commission of £ 1,54,530 to the assessee for which neither any bench marking was made by the assessee nor it was shown in the books of accounts as receipt of commission. The assessee claimed that instead of receipt of commission from the AE, it was required to pay commission from the AE, during the period from 2001 -2005. It was further submitted that since it was not able to pay the said commission to the associated enterprise, the same was written off in F.Y 2005-06 by the AE and charged to P&L A/c which was shown as commission paid by it to the assessee in its financial statements. Considering the above facts, it becomes clear that the assessee has not shown such commission in its books of accounts and upon detection of this fact by the departments-such a claim is being made. Further even if such claim is assumed to be correct, then the assessee has not provided any justification for non inclusion of such commission payment by it to the AE in the & in the form 3CEB reports submitted for relevant F.Ys. In addition the assessee has not given any justifiable reason for non production of the evidence earlier especially in light of the fact that the associated enterprise is a wholly owned subsidiary of the assessee.
5.2 Further it can be seen that the purported additional evidence produced by the assessee is a mere statement of account signed by
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 22 the General Manager of the AE on 29/07/2011. It is very surprising to note that the assessee could not produce even such statement of account earlier even though it pertains to its AE which is a wholly owned subsidiary of the assessee. The additional evidence is neither an extract of the ledger account from the books of the AE nor it is verified by independent auditor. Considering the above there is a big question mark on the documents produced by the assessee of even being evidence, leaving alone the question of its admissibility. Considering the above discussion, the evidence produced is rejected. As a result, the adjustment of Rs.1,21,60,877/- remains. ( 1,54,530 Pounds X 78.6959 = Rs. 1,21,60,877/-).”
Referring to the above, he pointed out that the assessee has not given any justifiable reasons for non-production of evidence earlier, and additional evidence now produced by the assessee was mere statement of account signed by the General Manager of AE. He pointed out that TPO had rightly rejected the evidences now produced by the assessee and confirmed adjustment of Rs.1,21,60,877/- on account of commission paid to its AE.
The ld.counsel for the assessee, on the other hand, drew our attention to the directions of the ITAT in the first round to the fact that the matter needed to be considered afresh in the light of the contentions made by the assessee ,that facts have not been correctly appreciated by the TPO; that the assessee had not in fact earned any commission income, but the same was really a reversal of commission expenses which it was required to pay to its AE. He drew our attention to PB page no.116 to 118 and more specifically to para 5.2.8 of the ITAT holding so. He thereafter pointed out that the assessee had submitted the statement of account of Atul Limited(PPSite) in support of its contentions showing commission receivable by Atul Ltd. (PP Site) from the assessee for various years and subsequently written off in the impugned year. Our attention was drawn to such evidences placed at PB Page NO.211 and 212
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 23 filed along with letter dated 29.9.2014 to the TPO. He thereafter contended that the ld.CIT(A) had rightly appreciated all the evidences placed before him and allowed the assessee’s claim.
We have heard both the parties and have perused the order of the authorities below. We do not find any infirmity in the order of the Ld.CIT(A) who after appreciating all the evidences before him recorded a finding of fact that no commission was earned by the assessee and that the entry in the books of Atul Ltd (AEL) only pertained to reversal of commission income booked by it in earlier years as earned from the assessee. The Ld.CIT(A) arrived at these findings from the ledger account of the assessee in the books of Atul Ltd (AEL) for earlier years and impugned year wherein all these entries were found recorded and also from a certificate of Atul Ltd (AEL) certifying these facts. The Revenue ,we find, does not contest the factum of these evidences . But has opposed considering them since they were not originally produced .We find that the Ld.CT(A) has rightly dealt with this aspect pointing out that taking note of these very evidences the ITAT had in the first round restored the matter to the AO to consider the issue in the light of the explanation of the assessee. The Ld.CIT(A) ,we agree ,has rightly held that these evidences therefore could not be rejected merely for the reason they were not produced earlier. No other infirmity being pointed out in the evidences ,we agree with the Ld.CI(A) that the assessee has duly substantiated his explanation that the alleged commission income recorded in the name of the assessee in the Books of Atul Ltd.(AEL) was in fact only a reversal of earlier commission expenses booked by it on account of the same no longer being required to be paid.
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 24 We therefore see no reason to interfere in the order of the Ld.CIT(A) deleting the adjustment on account of determination of ALP of commission allegedly paid by the AE to the assessee amounting to Rs.1,21,60,877/-.
Ground of appeal No.1 is dismissed.
Ground No.2 reads as under:
“2. The ld.CIT(A) has erred in law and on facts in granting relief in respect of the addition made to the tune of Rs.74,59,611/- being the adjustment on quantity discount claimed by holding that discount to the AEs is as per the commercial policy of the assessee company.”
The issue relates to TP adjustment made to the international transaction of purchase of goods from AE’s on account of quantity discount given to them by the assessee. As transpires from the orders of the authorities below, the ITAT had restored the issue back to TPO/AO in the first round, with the direction to adjudicate it after considering the commercial policy of the assessee-company in this regard. That in the second round the TPO after considering the facts, denied the benefit by holding that the assessee could not produce any agreement with its AE and hence was not eligible for claiming quantity discount on the sales made to its AE. The ld.CIT(A) however allowed the claim of the assessee noting that the assessee had placed before him its commercial policy in this regard along with comparative data of sales to its AE and non AE’s and he found that approach of the assessee in this regard as reasonable. He noted that the assessee had effectively demonstrated its commercial policy, substantiated it with its sales with AE and non- AE and considering the same, he held that rejection of the claim of
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 25
the assessee by the TPO therefore merely for the reason that there was no written agreement for the same, was not correct. The ld.CIT(A) further noted that the TPO in the original proceedings had allowed quantity discount on this very commercial policy with respect to four products in which the sales to AE was less than the non-AE’s. He therefore held that the AO, having accepted the commercial policy of the assessee, in this regard, was not right in holding that the assessee had no such commercial policy with regard to rest of the quantity discount given. The relevant part of the ld.CIT(A)’s order are as under:
“6.4.1 As far as second issue with regard to quantity discount amounting to Rs.74,59,611/- is concerned, TPO during the original proceedings had restricted the adjustment of such quantity discount with respect to 4 products wherein sales to AEs were less than sale to Non-AEs. The Hon'ble Tribunal vide para 5.19.2 (Page. No. 28 of the order) directed the appellant to place its commercial policy on record. The appellant was further directed to demonstrate the basis of applying such policy. The appellant has placed before me letter dated 21/04/2014 wherein the appellant has produced its commercial policy along with comparative data of sales to its AEs and non-AEs which has been placed at page no. 148 to 151 of the P/B. The appellant has further demonstrated that it provided volume discount and adjustment to arm's length price were carried out ranging from 0 to 20%. The appellant has further produced working of such adjustments to it Arm's Length Price. In my opinion, the approach adopted by the appellant is reasonable and further the appellant has effectively demonstrated its commercial policy substantiating it with its sales to AE's and A/on AE's. It has been observed that the TPO has rejected this adjustment of the appellant merely because there was not written agreement to this effect. As stated earlier, the appellant has not executed any written agreement for quantity discount but the same is duly documented in the form of a commercial policy which is the practice adopted by the appellant since long. I further find that TPO during the original proceedings had allowed the quantity discount based on this very commercial policy. However, he restricted the adjustment on account of quantity discount claimed by the appellant with respect to only 4 products in which sales to AEs were less than Non-AEs. If that be so, the action of AO in not granting quantity discount based on well accepted commercial policy is not correct. Commercially, it is well accepted that bulk purchasers are
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 26 generally given .some discount and the appellant has given such discount to AEs as per its commercial policy. Accordingly, the AO is directed to grant the benefit of Quantity Discount on such 4 products amounting to Rs.74,59,611/- and realign the ALP accordingly. So out of ,74,69,516/- challenged in this ground, addition of Rs.1,00,09,905/- is confirmed whereas addition of Rs.74,59,611/- is deleted. This ground is partly allowed.”
Before us, the ld.DR relied on the order of the TPO to the effect that no justification had been furnished by the assessee by way of agreement with its AE or non-AE. The ld.counsel for the assessee, on the other hand, relied on the order of the ld.CIT(A).
We have perused the orders of the authorities below, and we do not find any infirmity in the order of the ld.CIT(A). The ld.CIT(A) has noted to the effect that the assessee had demonstrated its commercial policy with regard to quantity discount to be given to both its AE and non-AE by submitting data in this regard before him. We have further find that the ld.CIT(A) had also noted that even the AO had accepted quantity discount given by the assessee in all except four cases on the basis of existing instances of commercial policy in this regard of the assessee; that noting so, he held, having accepted existing commercial policy of the assessee to grant quantity discount and the assessee having exhibited existence of such quantity discount vis-à-vis both of its AE and non-AE, therefore, the claim of the assessee of having paid quantity discount was substantiated and proved to be at ALP. The ld.DR was unable to point out any infirmity in the above finding of the ld.CIT(A). In view of the above, we uphold the order of ld.CIT(A) allowing the claim of the quantity discount amounting to Rs.74,59,611/- paid to its AE. This ground is rejected.
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 27 34. In the result, the appeal of the Revenue for A.Y 2006-07 is dismissed.
Revenue’s appeal in IT(TP)A No.1108/Ahd/2017 (Asst.Year 2007-08)
At the outset, it was pointed out that the present appeal was also in second round before us, as in Asst.Year 2006-07 dealt with by us hereinabove, following the directions of the ITAT on certain issues in the first round.
Ground No.(a) & (b) raised by the Revenue reads as under:
(a) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.1,37,33,547/- u/s.92CA(3) of the Act on account of “Transfer pricing”
(b) That the ld.CIT(A) has erred in law in directing the TPO to give volume (i.e. quantity discount on the basis of artificial segmentation of the customers into five categories with discount ranging from 0 to 20% without backed by any actual data)
It was common ground that the issue raised by the Revenue in this ground related to block discount given by the assessee to its AE pertaining to which adjustment had been made by the AO/TPO amounting to Rs.1,37,33,547/- which in turn was deleted by the ld.CIT(A) following his order in the preceding year i.e. Asst.Year 2006-07. It was admitted by both the parties that the issue was identical to that raised in ground no.2 of the Revenue’s appeal in ITA No.908/Ahd/2016 pertaining the Asst.Year 2006-07.
In view of the above, our decision rendered in Asst.Year 2006- 07 on the issue at para-33 of our order above will apply mutatis mutandis to the above grounds also, following which we uphold the
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 28 order of the ld.CIT(A) and dismiss the ground no.(a) and (b) raised by the Revenue.
Ground No.(c) reads as under:
“That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.52,95,097/- made on account of disallowance of “prior period expenses”
It was common ground that the issue raised in the above ground relating to disallowance of prior period expenses made by the AO and deleted by the ld.CIT(A) amounting to Rs.52,95,097/- identical to that raised by the assessee in its appeal in ITA No.823/Ahd/2016 in ground no.2.
It was pointed out that prior period expenses were directed by the ITAT in the first round to be examined afresh regarding their crystalisation in the impugned year and with regard to set off of prior period income if any accrued to the assessee during the year. It was identical to the direction given in Asst.Year 2006-07 also. The ld.counsel for the assessee contended that his argument with respect to the issue was the same that these expenses being booked year to year by the assessee, there was no revenue impact by disallowing the same as prior period expense, and considering the huge turnover of the assessee, the same needs to be allowed in the impugned year itself; that the issue is covered by the decision of Hon’ble Gujarat High Court in the case of Adani Enterprises (supra). In view of the above, since the issue is identical to that raised in the assessee’s appeal for Asst.Year 2006-07, dealt with us by in para-20 of our order, our decision rendered therein as well apply to the above ground also, following which we uphold order of the
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 29 ld.CIT(A) deleting the addition made on account of prior period expenses amounting to Rs.52,95,097/-. Ground (c) is dismissed.
Ground No.(d) reads as under:
“That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.45,77,383/- made under section 14A r.w.r. 8D of the Act.”
The issue, as is evident, relates to disallowance of expenses incurred in relation to earning of exempt income as per the provisions of section 14A of the Act.
The facts relating to the issue being that in the original proceedings, the AO found that the assessee had earned dividend of Rs.5,02,97,065/-, however, no disallowance under section 14A was made, and therefore, the AO made disallowance of Rs.2,44,30,000/- under section 14A of the Act 1961 read with Rule 8D of the Rules, 1962. On appeal, the Tribunal set aside the matter to the AO to be decided in line with the decision of Hon’ble Bombay High Court in the case of Godrej & Boycee Mfg. Co. Ltd. (supra) wherein it was held that method laid down under Rule 8D was applicable for Asst.Year 2008-09 and thus the AO was directed to re-work the disallowance by adopting reasonable method; that accordingly the AO in compliance of the direction of the Tribunal has given opportunity to the assessee to furnish details and evidences to prove that the investments in shares were made out of interest free funds and also requested the assessee to work out the disallowance under section 14A of the Act. In response thereto, the assessee furnished a report demonstrating availability of interest free funds and re-worked out disallowance of administrative expense of Rs.2,25,000/-. The AO however rejected the claim of the assessee and re-worked out the
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 30 disallowance as per Rule 8D of Rs.48,02,383/-. The ld.CIT(A) noted that impugned year being Asst.Year 2007-08, Rule 8D could not be applied as per decision of Bombay High Court judgment in the case of Godrej & Boycee Mfg. Co. Ltd. (supra). He further noted that the assessee had placed report of CA to claim administrative expenses which was on scientific basis and which the AO has not disputed. Therefore, the ld.CIT(A) held that Rule 8D was not applicable for the year and further restricted the disallowance to Rs.2,25,000/- as per the report of CA placed before him. The relevant part of the CIT(A) at para-5.5 of the order reads as under:
“5.5. The appellant at the outset, placed that the issue is covered by the decision in its own case for A. Y 2006-07, wherein the undersigned has held that Rule 8 of the Income Tax Rules, 1962 were applicable from A.Y 2008-09 as has been held by the Tribunal in the appellant case and Bombay High Court's decision in the case of Godrej & Boyce Mfg. vs DCIT reported in 328 ITR 81 (Bom). The report placed on record by CA to support its claim of administrative expenses was on a scientific basis and the A.O. has not disputed this. Respectfully following the order for A.Y 2006-07, it is held that the provisions of Rule 8D are not applicable for the year under consideration and the disallowance is restricted to Rs.2,25,000/- ie. as per the report of CA placed by the appellant. Thus Ground No. 7 is partly allowed.”
The ld.counsel for the assessee contended that in Asst.Year 2005-06 in the case of assessee itself the Tribunal had, in identical facts and circumstances, held that Rule 8D was not applicable in that year and restricted the disallowance to Rs.1,00,000/-. Our attention was drawn to para 21 and 21.1 of the order which reads as under:
“21. Therefore it is settled law that where sufficient own funds are available and the investments have been made out of mixed funds, no disallowance u/s. 14A is called for. In the facts of the present case, the assessee had canvassed the facts before the Ld. CIT(A) that it had own funds of 28,524.85 lacs and had generated cash of
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 31 4,770.83 lacs during the year. That in the past 10 years from 1995- 96 to 2004-05, the assessee was having sufficient own funds ranging from 20,593 lacs to 20,011 lacs which was more than sufficient for making the impugned investments of Rs. 6902 lacs . Since these facts have remained uncontroverted by the Ld. CIT(A) as also the fact that the investments have been made out of mixed funds, we have no hesitation in holding that no disallowance of interest u/s.14A was warranted in the impugned case.
21.1 As for disallowance of administrative expenses the assessee has contended that other than depositing cheques of dividend earned no other expense was incurred by the assessee. The counter of the Revenue to the same we find does not address this contention of the assessee and is purely presumptive, that considering the huge amount of administrative expenditure incurred some amount must relate to the earning of exempt income. But at the same time considering the quantum of investment made, some amount of expenses must have been incurred in relation to maintaining the same and earning income therefrom. Considering the entire facts and circumstances therefore the disallowance of expenses with respect to administrative expenses is restricted to Rs. l,00,000/-The balance disallowance of Rs.13,00,410/- is directed to be deleted.”
The ld.DR on the other hand relied on the order of the AO.
We have heard both the parties. The impugned year before us is Asst.Year 2007-08, and admittedly Rule 8D cannot be applied for working out the disallowance under section 14A as held by the Hon’ble Bombay High Court in the case of Godrej & Boycee Mfg. Co. Ltd. (supra). Therefore, the action of the AO in applying rule 8D to work out the disallowance is not in accordance with law, we hold. Further, we have considered decision of the ITAT in the preceding year i.e. in Asst.Year 2005-06 in the assessee’s own case, wherein the ITAT had estimated the disallowance at Rs.1,00,000/- to be reasonable in the absence of applicability of Rule 8D. In the case before us, it is an admitted case of the assessee itself before the lower authorities that disallowance, if any, at best can be to the extent of Rs.2,25,000/- and a working to this effect was also
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 32 admittedly filed before the ld.CIT(A). The ld.CIT(A) has given finding that the disallowance has been worked out on a scientific basis by the CA who has submitted a report in this context. The ld.DR was unable to controvert the above fact. In view of the same, we see no reason to interfere in the order of the ld.CIT(A) restricting the disallowance under section 14A to Rs.2,25,000/-. Ground No.(d) is dismissed.
In the result, the appeal of Revenue for A.Y.2007-08 is dismissed.
We shall now take cross-appeals of the assessee for the Asst.Year 2009-10.
We shall first take appeal of the assessee in ITA(TP) 1108/Ahd/2017 for A.Y.2009-10.
At the outset, it was pointed out that sole issue involved in the present appeal relates to reduction of claim in depreciation by Rs.85,11,361/- by the AO, which was confirmed by the ld.CIT(A); that it is against the same order of the ld.CIT(A) that the assessee has come up in appeal raising the following grounds: “Ld. CIT (A) erred in law and on facts in confirming action of AO in reducing the claim of depreciation by Rs. 85,11,361/- after allowing the enhanced depreciation from A Y 2001/02 to 2008/09 due to depreciation foisted upon the appellant in A Y 2001/02 though not claimed. Ld. CIT (A) confirmed said disallowance on the basis of the decision of the Hon'ble ITAT for A.Y. 2006/07, 2007/08 & 2008/09. Ld. CIT (A) ought to have deleted disallowance appreciating that foisting of depreciation not claimed is not permissible under law. It be so held now.”
The ld.counsel for the assessee fairly admitted that the issue stands covered against it by the order of the ITAT in the case of
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 33 assessee for Asst.Year 2005-06. Thereafter, drawing our attention to the facts relating to the issue, the ld.counsel for the assessee pointed out from orders of the authorities below that in Asst.Year 2001-02, depreciation though not claimed by the assessee, had been thrust upon it by the AO and in subsequent years, therefore, the assessee’s claim of depreciation accordingly was revised and reduced and the difference added back to the income of the assessee in all the years, and it was on account of this re-working and adjustment of depreciation that the addition of Rs.85,11,361/- had resulted in the impugned year. The ld.counsel for the assessee pointed out that the ld.CIT(A) upheld the addition noting that ITAT in Asst.Year 2006-07, 2008-08 and 2009-10 had held against the assessee on the same issue. Before us, the order of the ITAT for Asst.Year 2005-06 was also placed pointing out from para-9 to 13 thereby identical issue had been decided against the assessee.
In view of the above, since admittedly identical issue has consistently been decided against the assessee in the preceding year i.e. Asst.Year 2005-06 to 2007-08, order passed by the ld.CIT(A) upholding the addition, we hold, calls for no interference. Addition therefore of Rs.85,11,361/- on account of excess depreciation claimed is accordingly upheld. This ground of appeal is rejected.
In the result, appeal of the assessee for Asst.Year 2009-10 is dismissed.
We shall now take up the appeal of the Revenue in ITA No.1732/Ahd/2015 for Asst.Year 2009-10.
The ld.DR at the outset stated that the grievance of the Revenue in the present appeal on various issues raised was
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 34 primarily that the ld.CIT(A) had set aside the issue to the AO for re- adjudication in accordance with the direction of the ITAT in the preceding years which power of setting aside, the ld.CIT(A) did not have under section 251 of the Act. He thereafter proceeded to argue each of the grounds raised in the appeal. Ground No.1 raised by the Revenue reads as under:
(1) The CIT(A) has erred in directing to allow prior period expenses after compliance of direction of Hon'ble ITAT in the assessee's case for A.Y.2006-07 whereas the Hon'ble ITAT had set aside the issue with a direction to examine/verify specific facts. The Id. CIT(A) has not appreciated that the facts of the year under consideration and the facts of A.Y.2006-07 may differ.” 57. As is evident from the above ground, issue relates to disallowance of prior period expenses.
The contentions of the ld.DR was that the ld.CIT(A) had restored the matter back to the AO to adjudicate afresh after verifying of all the facts, details and after considering allowability of expenses on the basis of ratio and direction given by the ITAT in the case of the assessee for Asst.Year 2006-07. He drew our attention to page no.42 & 43 of the CIT(A)’s order containing direction as under: “It is therefore Hon’ble ITAT Ahmedabad upheld my predecessor’s view that on this ground, the AO should verify various facts, details and consider the allowability of prior period expenses on the basis of ratio and direction given by Hon’ble ITAT, Ahmedabad in the case of appellant for A.Y.06- 07. Respectfully following this ratio, the AO is directed to allow prior period expenses after compliance of direction of Hon’ble ITAT as given is appellant’s case for A.Y.06-07. This ground is allowed for statistical purpose.”
The ld.DR contended that the ld.CIT(A) had no power of restoration.
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 35 The ld.counsel for the assessee, on the other hand stated that the issue was identical to that raised by the assessee in Asst.Year 2006- 07 which has been dealt by us above.
We have heard both the parties and we have noted that the ld.CIT(A) had restored the matter to the AO to adjudicate it afresh. We agree with the ld.DR that the ld.CIT(A) has no such power, but we have noted that restoration was in view of the order of the ITAT in Asst.Year 2006-07 in the first round before it. In Asst.Year 2006-07, the AO had complied with the directions of the ITAT and confirmed the additions to certain extent on this issue and matter had ultimately come up before us in ground no.2 raised by the assessee in its appeal in ITA No.823/Ahd/2016 for Asst.Year 2006-07. We have also noted that identical issue has been adjudicated by us in Asst.Year 2006-07 at para-20 above wherein we have allowed the claim of the assessee to prior period expenses. We therefore direct the AO to apply the said decision taken in Asst.Year 2006-07 to the issue. Ground No.1 is adjudicated as above.
Ground No.2 reads as under: (2) The CIT(A) has erred in directing to follow the order of the Hon'ble ITAT in the case of the assessee for A.Y.2006-07 and compute disallowance u/s 14A r.w.r. 8D whereas the Hon'ble ITAT had set aside the issue with a direction to examine/verify specific facts. The Id. CIT(A) has not appreciated that the facts of the year under consideration and the facts of A. Y.2006-07 may differ.
Issue relates to disallowance under section 14A of the Act read with Rule 8D of IT Rules. The contention of the Revenue again is that the ld.CIT(A) had restored the matter to the AO which power he did not possess. Our attention was drawn to para-46 of the order of the ld.CIT(A) which reads as under:
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 36 “I am inclined with appellant. On the same issue with similar facts, my predecessor Id.CIT(A) in the case of appellant for AY 2008-09 following the Hon'ble ITAT decision in the case of appellant for AY 2006-07 (order dtd.13.7.2012 in ITA No.3118/Ahd/2010) directed the AO to modify the asstt.order of AY 2008-09 in the light of the decision of the Tribunal on this issue. Hon'ble ITAT, Ahmedabad 'D' bench vide order dated 11.10.2013 in ITA No.8/Ahd/2013 and ITA No.385/Ahd/2013 for AY 2008-09 against the appellant appeal, upheld the order of Id.CIT(A) and restored back the matter to A.O. to readjudicate the issue in view of directions given in Hon'ble ITAT's order for AY 2006-07 in the case of appellant. Respectfully following these orders of Hon'ble ITAT, the AO is directed to recompute the disallowances u/s.80IA of the Act in respect of all three units. New power plant, Captive power plant and Cogeneration plant on the ratio and direction of Hon’ble ITAT order in the case of appellant for Asst.Year 2001-02 as well as for Asst.Year 2006-07. All these grounds are treated as allowed for statistical purpose.”
The ld.counsel for the assessee, on the other hand contended this issue already stands adjudicated in the case of assessee for Asst.Year 2005-06 wherein disallowance was restricted to Rs.1,00,000/- and also in Asst.Year 2007-08 in the Department’s appeal in IT(TP)A No.1108/Ahd/2017 before us.
We have heard both the parties and we agree with the ld.DR that the ld.CIT(A)has no power to restore the issue to the file of the AO, but noting that this issues already stands adjudicated in Asst.Year 2007-08 in the case of the assessee at para-48, and admittedly, facts are identical in this year also, We direct the AO to apply the decision of the ITAT in the said year to the present case also. Ground No.2 is adjudicated as above.
Ground No.3 reads as under:
“(3) The Id. CIT(A) has erred in directing to recomputed the disallowance Of Rs.21,42,48,271/- u/s 80IA of the Act in respect of all three units on the ratio and direction of Hon 'ble ITAT order in the case of the assessee for A.Y.2001-02 as well as for A.Y.2006-07 whereas the Hon'ble ITAT had set aside the issue with a direction to
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 37
examine/verify specific facts. The Id. CIT(A) has not appreciated the fact that the facts of the year under consideration and the facts of A.Y.2006-07 may differ.”
The issue relates to disallowance of deduction under section 80IA of Rs.21,42,48,271/- on the new power plant of the assessee.
The ld.counsel for the assessee reiterated that the ld.CIT(A) has no power in restoring the issue to the file of the AO. Our attention was drawn to para-46 of the order of the ld.CIT(A) which reads as under: “I am inclined with appellant. On the same issue with similar facts, my predecessor Id.CIT(A) in the case of appellant for AY 2008-09 following the Hon'ble ITAT decision in the case of appellant for AY 2006-07 (order dtd.13.7.2012 in ITA No.3118/Ahd/2010) directed the AO to modify the asstt.order of AY 2008-09 in the light of the decision of the Tribunal on this issue. Hon'ble ITAT, Ahmedabad 'D' bench vide order dated 11.10.2013 in ITA No.8/Ahd/2013 and ITA No.385/Ahd/2013 for AY 2008-09 against the appellant appeal, upheld the order of Id.CIT(A) and restored back the matter to A.O. to readjudicate the issue in view of directions given in Hon'ble ITAT's order for AY 2006-07 in the case of appellant. Respectfully following these orders of Hon'ble ITAT, the AO is directed to recompute the disallowances u/s.80IA of the Act in respect of all three units. New power plant, Captive power plant and Cogeneration plant on the ratio and direction of Hon’ble ITAT order in the case of appellant for Asst.Year 2001-02 as well as for Asst.Year 2006-07. All these grounds are treated as allowed for statistical purpose.”
The ld.counsel for the assessee fairly admitted that the issue was decided against the assessee in its own case for Asst.Year 2005-06 in ITA No.1681/Ahd/2011.
In view of the above, we allow this ground of appeal raised by the Revenue and uphold the disallowance of Rs.85,11,361/- relating to the claim of deduction under section 80IA of the Act.
Ground No.4 reads as under:
ITA No.823/Ahd/2016 and 4 Others In the case of Atul Ltd. Vs. DCIT 38 (4) The Id. CIT(A) has erred in directing the AO not to enhance book profit u/s 115JB of the Act by the amount disallowed u/s 14A r.w. Rule 8D following the ratio of Reliance Petro Products Pvt. Ltd. for A. Y.2008-09 in the case of the assessee.
The issue relates to adjustment to book profits of the assessee on account of disallowance made under section 14A of the Act. The ld.counsel for the assessee at the outset stated that this issue has been decided in favour of the assessee by the Special Bench of the ITAT in the case of ACIT Vs. Vireet Investment Pvt. Ltd., 165 ITD 27 (SB). The ld.DR was unable to controvert the above.
In view of the above, the order of the ld.CIT(A) allowing the assessee’s claim of no adjustment to be made to the book profits on account of disallowance of interest under section 14A of the Act is upheld. Ground No.4 is dismissed.
In the result, appeal of the Revenue is partly allowed for statistical purpose. 73. In the combined result;
i) Appeals for Asst.Year 2006-07 of the assessee in ITA No.823/Ahd/2016 is allowed; that of the Revenue in ITA No.1197/Ahd/2015 is dismissed;
ii) Appeal for Asst.Year 2007-08 of the Revenue in ITA No.908/Ahd/2016 is dismissed ;
iii) Appeal for Asst.Year 2009-10 of the assessee in IT(TP)A.No.1108/Ahd/2017 is dismissed; and that of the Revenue in ITA No.1732/Ahd/2015 is partly allowed for statistical purpose. Order pronounced in the Court on 12th July, 2022 at Ahmedabad. Sd/- Sd/- (T.R.SENTHIL KUMAR) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad, dated 12/07/2022