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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI SHAMIM YAHYA & SHRI PAWAN SINGH
PER SHAMIM YAHYA, ACCOUNTANT MEMBER
These are cross-appeals by the assessee and Revenue arising out of the order of learned CIT(A) dated 26.03.2014 pertaining to assessment year 2009- 10.
2 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014
ITA No. 4754/Mum/2014 (Revenue’s appeal)
In this appeal, Revenue is aggrieved by the following relief granted by the learned CIT(A) :-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest expenditure of Rs.1,67,27,608/- made under Rule 8D(ii), without appreciating the fact that the A.O has rightly computed the disallowance as per provisions of section 14A r.w.r 8D of the I.T. Act.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to restrict the addition to Rs.16,98,745/- as against the disallowance of Rs.1,84,26,413/- made by the A.O for the purpose of computing book profit as per the provisions of section 115JB of the I.T. Act.”
ITA No. 4679/Mum/2014 (Assessee’s appeal)
In this appeal, assessee is challenging that following relief is not granted by the learned CIT(A) :-
“6. The appellant submits that the learned Assessing Officer be directed :
(i) to allow the depreciation of a sum of Rs.2,97,23,700/-; (ii) (a) to delete the disallowance of Rs.16,98,745/- under Section 14A; (b) without prejudice to what is stated in para (a) above, restrict the disallowance to Rs.3,29,550/-, (c) without prejudice to what is stated in para (a), (b) & (c) above, restrict the disallowance to Rs.6,14,518/-. (iii) to delete the disallowance of Rs.2,94,609/- under Section 80-IB of the Act; (iv) to delete the disallowance of Rs.52,77,156/- under Section 37(1) of the Act; and to modify the assessment in accordance with the provisions of the Act.”
3 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 4. Apropos issue of allowance of depreciation of Rs. 2,97,23,700/-. The brief facts of the case are that the Assessing Officer noticed that the assessee had entered into arrangement during March, 2007 with M/s. K.P.I Ltd for sale of capital assets pertaining to its rigid PVC film unit at Malanpur, UP, however, the arrangement did not materialize and pursuant to a settlement reached between the parties during January, 2009, assessee forfeited unadjusted advance received of Rs.19,81,58,000/- in respect of the proposed sale and the same was adjusted against the value of the assets held for disposal in the books of account. It was also noticed from the records that the assessee had neither offered the amount of Rs.19,81,58,000/- for taxation nor reduced the amount from the block of assets for income tax purposes and thus had claimed depreciation under Section 32 of the Income Tax Act, 1961 (in short ‘the Act’) on it. The Assessing Officer, therefore, issued a show cause notice to the assessee and asked assessee to explain as to why the amount of Rs.19,81,58,000/- be not reduced from the Written Down Value (WDV) of the assets as per Section 51 of the Act. The assessee replied stating that the receipt of Rs.19,81,58,000/- is a capital receipt which is not chargeable under Section 45 of the Act since there was no transfer of assets and the amount also cannot be reduced from the value of assets as provisions of Section 51 are not applicable. It was also submitted that there was no correlation between the amount retained and the assets remaining with the assessee company and in absence of such correlation, it was not possible to reduce the cost of acquisition of assets under Section 51 of the Act and there was no possibility of reduction of amount retained from the cost of acquisition under Section 43(6) of the Act. The Assessing Officer considered and examined assessee’s reply and held that Section 51 of the Act came into play on cancellation of contracts and negotiations and forfeiture of advance received has to be treated as a
4 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 capital receipt in the hands of the assessee and the same has to be reduced from the cost of acquisition by applying Section 51 of the Act.
Against the above, assessee appealed before the learned CIT(A). The learned CIT(A) noted the assessee’s submissions. He summarised the assessee’s submissions as under :-
“6.3.1 Crux of assessee’s arguments is that provisions of section 51 of I.T. Act, 1961 do not apply to the facts of the case and written down value of assets cannot be reduced by the forfeited amount of Rs.19,81,58,000/- since section 51 applies to the computation of capital gains and not to section 43(6) of I.T. Act, 1961 and section 43(6) also does not provide for the adjustment of forfeited advance received from cancellation of sale of capital asset.
6.3.2 Be that as it may, the transactions made by the assessee and treatment given by the assessee in its books of account as summarized by the assessee’s CA’s letter and statement of facts is highlighted here :-
(w) To summarise the appellant submits The amount retained (i.e. Rs.198.158 Million) is in the nature of capital receipts and cannot be reduced from the cost of acquisition of the capital assets under section 51 of the Act, as there is no transfer of capital assets. The aforesaid amount cannot be reduced from the written down value of the block of assets as section 43(6) of the Act does not stipulate such a reduction. The sale consideration of 3 machines at book value to KPIL has been reduced from the Block of assets. The sale consideration on sale of other machines/other assets to other parties has been reduced from Block of assets.
The appellant therefore submits that the Assessing Officer be directed to allow depreciation of Rs.2,97,23,700/-.”
5 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 Thereafter, the learned CIT(A) elaborately discussed the facts of the case as under :-
“6.3.3 Thus, assessee received total sum of Rs.229.200 million out of contracted amount of Rs.258.755 millions and agreed to deliver three main equipments in lieu of the receipt of amount of Rs.229.200 millions subject to payment of all taxes and duties, namely, sales tax, octroi, value added tax, etc by the purchaser as per the settlement at a book value of Rs.25.923 millions and the balance amount of Rs.198.158 millions was claimed to be retained by the assessee. It also appears that assessee sold the major part of the balance equipments to the purchaser for Rs.2,59,22,878/- and others for Rs.57,00,000/-, Rs.66,81,591/- and Rs.2,31,671/- in subsequent years and offered these amounts for taxation by reducing the written down values in subsequent assessment years. Thus, assessee received the entire contracted amount of Rs.258.755 millions from the purchaser of the equipment, that is, KPIL as per the terms of original agreement plus additional amount of Rs.57,00,000/-, Rs.66,81,591/- and Rs.2,31,671/- for some of the balance equipments even though late after lapse of certain period of time. Moreover, assessee also operated the contracted equipment on behalf of the purchaser for a fee as per the Toll Manufacturing Agreement (TMA) with the purchaser, allowed the use of its intangible assets to the purchaser of the equipments upto 31/9/2008 and also claimed depreciation under section 32 of I.T. Act, 1961 for AY 2008-09 and 2009-10. Therefore, assessee realised the contracted amount of Rs.229.200 millions out of total of Rs.258.755 from the purchaser KPIL for the supply of lesser quantity of equipment than contracted for and also realised additional amounts of Rs.57,00,000/-, Rs.66,81,591/- and Rs.2,31,671/-. Assessee offered the sale proceeds of Rs.2,59,22,878/-, Rs.57,00,000/-, Rs.66,81,591/- and Rs.2,31,671/- for taxation by offering these amounts for taxation by reducing the written down values but did not offer the amount of Rs.198.158 millions, representing the difference between the receipt of Rs.229.200 millions and the book value of Rs.25.923 millions arrived at by the assessee with the purchasers in respect of three equipments. It is assessee’s contention that the entire transaction of receipt of Rs.229.200 millions was not that of sale but forfeiture of contracted amount and was not liable to taxation even to the extent of not reducing the written down value of assets in the block of Plant and Machinery under the I.T. Act, 1961.”
6 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 The learned CIT(A) found that the Assessing Officer has mentioned about the invocation of Section 51 of the Act in the order and that he has tried to reduce the written down value of the block of assets of plant and machinery by Rs.198.158 millions under Section 43(6) of the Act. Hence, he found that the issue for consideration in substance is not regarding the invocation of Section 51 of the Act, but the issue is whether the receipt of Rs.249.200 million were received in respect of sale and transfer of contracted plant and machinery described as equipment in the said agreement for sale of plant. Thereafter, the learned CIT(A) held as under :-
“6.3.5 Conduct of the assessee during the entire period right from the date of agreement till the sale of the last plant and machinery out of the contracted list of plant and machinery to the purchaser, KPIL and the subsequent transactions by the assessee with KPIL, the purchasers of the plant and machinery at a book value Rs.25.923 millions and running of the plant and machinery for and on behalf of KPIL, the purchaser clearly indicates that the assessee had entered into arranged transactions with the purchaser, KPIL for the supply of plant and machinery and its subsequent conduct in running the contracted plant and machinery for 17 months for a fee/toll and then agreeing to sell three items of plant and machinery at a Book Value of Rs.2,59,22,878/- subject to payment of all taxes and duties like sales tax, octroi, VAT etc., as per the applicable law, is indicative of the intention of the assessee in avoiding and evading applicable sales tax, octroi and VAT by showing lesser figure of Book Value in invoice/bills. Moreover, there is no reason for KPIL, the purchaser of the plant and machinery to relegate on his commitment to buy the plant and machinery by not paying the balance amount of Rs. 29.555 millions after paying Rs. 229.200 millions and also paying the fees/toll to the assessee for running plant and machinery for 17 months to the assessee. Thus, assessee as well as KPIL, the purchaser of the plant and machinery have jointly agreed to such terms of conditions which will look and sound legal and legitimate, but will benefit both the seller, that is the assessee and the purchaser, that is,KPIL. Moreover, the issue of sales bill for three items of plant and machinery at Book Value of Rs 25.923 millions and the accounting treatment by the assessee of treating Book Value
7 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 of Rs 25.923 millions as sale value in respect of three items of plant and machinery and balance value of Rs 198.158 millions (229.200 - 25.923) as forfeited amount are doubtful and debatable transactions. It is not only probable but possible that the purchaser might have adopted the full value of payment of Rs. 229.200 millions as cost of acquisition in its books of account even though the assessee has taken exactly reverse stand by stating that only Rs. 25.923 millions should be treated as sales receipts and the balance amount of Rs. 198.158 millions as forfeited amount by entering into and wording the agreements in a manner to avoid and evade payment of legitimate income tax dues. Simultaneously, assessee has also decided to show only Book Value of Rs. 25.923 millions as sales value in respect of three items of plant and machinery to assist the purchaser of plant, KPIL to avoid and evade payment of sales tax, octroi and VAT on its purchase of plant and machinery by showing lesser Bill/Invoice value of Rs. 25.923 millions in respect of plant and machinery for sales tax, octroi and VAT purposes. This is further confirmed by the fact that assessee was a major shareholder holding 26% equity shares totalling Rs. 7.94 crores in Klockner Supreme Pentoplast Ltd. which had set up a PVC Film manufacturing plant at Malanpur, UP during financial years 1993-94 to 1995-96 as per details available from the prospectus of the company offering shares and convertible debentures to the public in 1993.
6.3.6 Therefore, it is held that the total receipts of Rs. 229.200 millions which is inclusive of Rs. 25.923 million represents sales receipts/proceeds in respect of sale of the equipments by the assessee irrespective of the wording of the agreement treating only Book Value of Rs. 25.923 millions as its sales value and squarely fall within the definition of moneys payable within its meaning under section 43(6) of I.T. Act, 1961 and reduction of opening written down value of block of assets of plant and machinery not only by Rs. 198.158 millions was fully justified under section 43(6) of I.T. Act, 1961 by the Assessing Officer is fully justified even though the Assessing Officer has committed a mistake in mentioning section 51 of I.T. Act, 1961 instead of section 43(6) of I.T. Act, 1961. Main objection of the assessee that section 51 does not apply to the facts of the case is accepted in principle subject to the directions given in balance part of the order that provisions of section 43(6) are applicable and reduction of written down value by Rs. 198.158 and consequently Rs. 25.923 is fully justified. In nutshell, Assessing Officer's action in reducing the written down value of the block of assets of plant and
8 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 machinery by Rs. 198.158 millions is upheld. Assessing Officer is also directed to check and verify whether written down value (WDV) was reduced by Rs.2,59,22,878/-, Rs.57,00,000/- and Rs. 66,81,591/- in current assessment year, that is AY 2009-10 and by Rs. 2,31,671/- in assessment year 2010-11 or not and if not done take appropriate action as per law. Assessing Officer is also directed to check and verify the opening written down value for AY 2010- 11 and other assessment years and take appropriate action under law to withdraw excess depreciation u/s. 32 of I.T. Act, 1961 claimed and allowed to the assessee.”
Against the above order, assessee is in appeal before us. We have heard both the counsel and perused the records. We note that the learned counsel for the assessee submitted that the learned CIT(A) has held that the Assessing Officer has wrongly invoked the provisions of Section 51 of the Act. He submitted that against the said order of learned CIT(A), Revenue is not in appeal before ITAT. The learned counsel for the assessee further submitted that the learned CIT(A) has upheld the Assessing Officer’s action of reducing the depreciation claimed by relying upon Section 43(6) of the Act. In this regard, he submitted that the aforesaid observation of the learned CIT(A) is erroneous inasmuch as the amount forfeited was not received as per the subsequent Asset Purchase transaction. The learned counsel for the assessee claimed that the order of learned CIT(A) should be set-aside as there is no provision in the agreement that the impugned amount of forfeiture was in no way connected with the actual subsequent sale of plant. The learned DR, on the other hand, submitted that the learned CIT(A)’s order is correct inasmuch as assessee has forfeited the amount of advance received in connection with the earlier agreement for asset sale, wherein the impugned assets were also subject matter of sale. He further submitted that the advance amount has changed its character from capital receipt to revenue receipt. He submitted that in this view of the matter, assessee has wrongly credited the forfeiture
9 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 amount in the Capital Reserve. In this regard, he further placed reliance on the decision of the Hon'ble Apex Court in the case of CIT vs T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344 (SC). In this regard, he also referred to the decision of the Hon'ble Madras High Court in the case of CIT vs Ramaniyam Homes (P.) Ltd., 384 ITR 530 (Madras). The learned DR submitted that the assessee has wrongly credited the Capital Reserve, rather, it should be taxed under Section 28(iv) of the Act. The learned DR further submitted that what the learned CIT(A) has done is also correct inasmuch as the amount which has been shown as forfeiture of advance is a colourable device as per the learned CIT(A)’s finding and it is, in fact, an amount which can very well be said to be an amount received on account of sale of asset/amount going to reduce the cost of other assets purchased. In rejoinder, the learned counsel for the assessee submitted that by asking for taxing the sum under Section 28(iv) of the Act, the learned DR is making out a new case which is not permissible. He further submitted that it is only by Finance Act, 2014 w.e.f. 01.04.2015 that Section 56(2)(ix) of the Act has been inserted. Hence, he claimed that prior to the said amendment, forfeiture of advance would not have constituted an income. He further submitted that from the annual account of KPIL (the purchaser) it is seen that they have treated the amount forfeited as extraordinary item of loss. Hence, it is wrong on the part of the learned CIT(A) to claim that this amount has been taken by KPIL as cost of acquisition. In rebuttal, the learned DR submitted that under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963 he is objecting to the learned CIT(A)’s observation that Section 51 of the Act is not applicable.
In this regard, we note that the assessee company had entered into the arrangement during March 2007 with M/s. Kloecklear Pentaplast India Pvt. Ltd.
10 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 (KPIL) for proposed sale of certain capital assets pertaining to its Rigid PVC film unit at Malanpur (M.P) at a total consideration of Rs.25,87,55,000/-. Assessee received an advance of Rs.22,92,00,000/-. However, ultimately the arrangement did not materialize and pursuant to a reported settlement reached between the parties during January 2009, the assessee company forfeited unadjusted advance received of Rs.19,81,58,000/- in respect of the said proposed sale and the same has been adjusted against the value of the assets held for disposal in the books of accounts. However, the assessee company has not offered the subjected amount for tax nor has it reduced the amount from the value of block of assets for Income Tax purposes. The assessee is of the opinion that the said amount is not liable to tax and the same is also not liable to be reduced from the block of assets.”
It is to be noted that assessee sold some of the assets later on as under :-
F.Y. A.Y. Sale to KPIL Others SIL units Total 2008-09 2009-10 25,922,878 5,700,000 6,681,591 38,304,469 +51,19,122 2009-10 2010-11 231,671 231,671
Thus, the assessee sold the major part of the balance equipment to the same purchaser for Rs.2,59,22,878/- in the same year and others for Rs.57,00,000/-, Rs.66,81,591/- and Rs.2,31,671/- in subsequent years and offered these amounts for taxation by reducing the written down values in subsequent assessment years. Thus, the total advance received in connection with the sale was retained by the assessee by way of subsequent sale of same asset and the so-called cancellation which enabled the assessee to forfeit the amount of
11 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 Rs.19,81,58,000/-. Thus, the assessee received almost the entire amount agreed from the purchaser of the equipment in terms of the earlier agreement by way of forfeiture plus addition amount as mentioned above for some of the balance equipment sold after some time. It is also to be noted that assessee also operated the contracted equipment on behalf of the purchaser for a fee as per the Toll Manufacturing Agreement with the purchaser and allowed the use of its intangible assets to the purchaser of the equipment. In the above background, assessee’s claim that the sum of Rs.19,81,58,000/- (Rs.229.200 million) was forfeited by it as KPIL did not honour its commitment has been found by the authorities below to be totally unacceptable. The authorities below are correct in holding that there is no reason that after paying advance of Rs. 22,92,00,000/-, KPIL will jeopardise the said sum and forego Rs.19,81,58,000/- for not paying balance amount of Rs.2,95,55,000/-. It is simply beyond preponderance of probability that an entity will forego Rs.19,81,58,000/- worth of assets for failure to pay a sum of Rs.2,95,55,000/-. It is also to be noted that even after so-called forfeiture of the said amount of Rs.19,81,58,000/- by the assessee, the said KPIL was also paying toll fee to the assessee for running the plant and machinery for 17 months. This makes it amply clear that the finding of learned CIT(A) that the assessee as well as KPIL, the purchaser, have jointly agreed such terms and conditions which will look sound, legal and legitimate apparently, but will benefit both seller and the purchaser, is a colourable device is quite correct. These transactions have been rightly treated by the learned CIT(A) to be dubious transactions. The purchaser has treated the forfeited sum of Rs.229.200 million as extraordinary loss, i.e. instead of claiming depreciation for the purchase, it has claimed the entire amount in one go. Assessee has also decided to show only sale book value of Rs. 25.923 million and has thus avoided any payment of sales tax,
12 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 octroi, VAT, etc. It has further transferred the entire amount of forfeiture in Capital Reserve shirking its liability to pay any tax thereupon.
Be that as it may, now the issue is treatment of Rs.229.200 million (Rs.19,81,58,000/-) which has been claimed by the assessee to have been forfeited from KPIL. The Assessing Officer has sought to reduce the aforesaid sum of Rs.19,81,58,000/- from the WDV of the assets as per Section 51 of the Act. Assessee has submitted that there was no correlation of the amount forfeited and the cost of assets assessee sold. Similarly, it was also submitted to the Assessing Officer that the said amount cannot be reduced from the cost of acquisition under Section 43(6) of the Act. The Assessing Officer has held the sum to be falling under Section 51 of the Act but the learned CIT(A) found that, strictly speaking, Section 51 of the Act would not apply and provisions of Section 43(6) of the Act would apply. But in substance he upheld the action of the Assessing Officer in reducing the WDV of the assets of the assessee and confirmed the reduction in the claim of depreciation.
Now, assessee is claiming that the learned CIT(A) had held that Section 51 of the Act is not applicable and the Revenue has not appealed against the same. Further, assessee claims that Section 43(6) of the Act is not applicable as the amount forfeited does not fall under the realm of Section 43(6) of the Act. On the other hand, the learned DR submits that in substance the learned CIT(A) has upheld Assessing Officer’s action of disallowance of depreciation. He further submitted that he is very much entitled under Rule 27 of the ITAT Rules to object to the learned CIT(A)’s observation that Section 51 of the Act is not strictly applicable. Before proceeding further, we may refer to the provisions of Section 51 and 43(6) of the Act, which read as under :-
13 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014
“51. Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition :
Provided that where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.”
“43(6) “written down value" means—
(a) in the case of assets acquired in the previous year, the actual cost to the assessee;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force:
Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi);
(c) in the case of any block of assets,—
14 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,—
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;
(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and
(C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced—
(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and
(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value;
(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).”
15 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 It is fundamental principle that the provisions of the Act have to be construed in a harmonious manner. Considered from this perspective, no contradiction can be attributed in the action of the Revenue authorities. Whereas the Assessing Officer has held that Section 51 of the Act applies to the issue in case, which provides for deduction of the amount such as in present case received by the assessee from the cost of the asset, the learned CIT(A) has accepted the treatment given by the Assessing Officer but on a different plank that the system adopted by the assessee is a colourable device and hence the amount shall go to reduce the WDV under Section 43(6) of the Act.
In our considered opinion, it is the substance which prevails over the form. In this case, the issue before us is the Assessing Officer’s action of denying the assessee depreciation on its assets for the value received by it in the form of forfeiture of amount in an earlier agreement for sale of asset. A plain reading of Sections 51 and 43(6) of the Act in a harmonious manner, and keeping in mind learned CIT(A)’s finding that assessee has indulged in dubious transaction of claiming forfeiture, it would show that the amount involved has been correctly reduced from the value of assets of the assessee. It is settled law that revenue authorities are not supposed to put on blinkers. It is also settled that quoting a wrong section would not be fatal in making a correct disallowance. The assessee has retained a large amount of receipt under the original agreement partly by way of forfeiture and also received partly by way of subsequent sale of part assets. Hence, there is no reason why assessee’s claim of depreciation to the extent of entire amount of receipt should not be reduced.
16 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 11. Another limb in this case is whether the sum involved, i.e. the forfeited amount, is liable to be taxed under the touchstone of the decision in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra). In our considered opinion, the facts of the case clearly indicate that the aforesaid sum is taxable as revenue receipt on the touchstone of the aforesaid decision of the Hon’ble Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra). However, as pointed by the learned counsel for the assessee, it was nobody’s case that the sum involved is a revenue receipt, hence, at this stage, the learned DR cannot take out a totally new issue.
In this regard, we note that the above decision of Hon'ble Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) was a decision rendered by three Hon'ble Lordship’s Bench.
It is settled law that Hon'ble Apex Court’s decisions are law of the land. In ACIT vs Saurashtra Kutch Stock Exchange Ltd., 305 ITR 227 (SC), the Hon'ble Apex Court has expounded that not following an Apex Court decision whether cited or not can result in a mistake apparent from record in the order.
In The Oriental Insurance Company vs Meena Variyal & Ors., (2007) 5 SCC 428, Hon’ble Supreme Court in para 23 observed that an obiter dictum of this court is binding in absence of direct pronouncement on that question elsewhere by the court. Hence, the learned counsel for the assessee submission that the sum forfeited cannot be taxed prior to introduction of Section 56(2)(ix) of the Act is not sustainable.
17 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 15. In the case of Kapurchand Shrimal vs CIT, 131 ITR 451 (SC), the Hon'ble Apex Court held that it is the duty of the appellate authority to correct the errors in the order of the authorities below, and remit the matter to them with or without direction unless prohibited by law. Considered from the above perspective, the learned DR’s plea for taxing the whole amount of forfeiture does merit consideration. However, we also find that if the impugned amount was to be reduced from the cost of assessee’s assets, there would be corresponding reduction in assessee’s depreciation claim over a few years. Hence, the overall impact would be tax neutral. Hence, we do not find any infirmity in the order of the learned CIT(A) sustaining the disallowance of depreciation by the Assessing Officer.
Apropos the issue of disallowance under Section 14A of the Act. The brief facts of the case are that the Assessing Officer noticed from the records that assessee had earned dividend of Rs.3,07,25,905/- on investments in shares and units of mutual funds on total investments of Rs.33.74 crores which included an investment of Rs.33.37 crores in shares of companies and balance amount of Rs. 37 lakhs in units of mutual funds and shares of other companies and cooperative banks. Assessing Officer also noticed that assessee had heavy borrowing as on 31/3/2009 and had paid interest totalling Rs.55,78,38,233/- which was claimed as a deduction while computing the business income. The Assessing Officer after perusing assessee’s submissions held that the contention of the assessee that the investments had come out of surplus fund was not acceptable in view of heavy borrowings and assessee’s failure to establish the nexus between own funds and investments and, therefore, invoked provisions of Section 14A of the Act and Rule 8D of the Income Tax
18 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 Rules, 1962 (in short ‘the Rules’) and worked out the disallowance under Rule 8D of the Rules at Rs.1,84,26,413/-.
Upon assessee’s appeal, the learned CIT(A) found that assessee has sufficient own funds. Hence, he directed for disallowance of interest for making the impugned investment for earning the exempt income. The learned CIT(A) has given the following finding :-
“7.2.2 ...................................... Facts of the assessee’s case clearly show that whenever investments in shares of SPL were made during financial years 1992-93, 1993-94, 1998-99 and 2002-03 by the assessee company, assessee company had more than sufficient own funds in the form of share capital and free reserves and the quantum of cash profits during the financial year exceeded the amount of investments made by the assessee during the year. Thus, prima facie, assessee had more than sufficient quantum of own funds in the form of share capital and free reserves to fund investments in shares of SPL from time to time during the relevant four financial years and by and large, the funds for investments appear to have come out own funds which did not bear and carry any interest. Moreover, the borrowings made from time to time were monitored by the banks and the terms and conditions of these banks also stipulated user of borrowed funds for productive purposes like manufacturing and trading and purchase of business assets like fixed assets and other current assets for running and carrying on its main business activity of manufacturing plastic goods. Thus, either way, it shows that interest free own funds and not borrowed funds were utilized for making investments from time to time during relevant four financial years for making investments in shares in shares of SPL totalling Rs.33.37 crores and, therefore, the disallowance of any interest under section 14A of I.T. Act, 1961 read with rule 8D of I.T. Rules, 1962 is not justified in facts of the case and in law.”
However, as regards disallowance under Rule 8D(iii) of the Income Tax Rules, 1962, he referred to the assessee’s activity of investment and held as under :-
19 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014
“7.2.2 ........................... It appears from the facts of the case that assessee has derived dividend income not only from one company SPL, but also from other companies and mutual funds which were made from time to time to maximize returns on investments. For example, assessee has also derived dividends totalling Rs.37,500/- from three companies and has earned Rs.17,50,005/- as dividends on investments in units of Unit Trust of India made and liquidated during the year from time to time. All these activities require administrative support in addition to funds and since these investments were made from time to time to utilize surplus funds and maximize returns on investments a reasonable amount of administrative expenses needs to be disallowed. Keeping in view the facts of the case it is held that it will be reasonable if a sum of Rs.15,36,295/- @ 5% of dividend income of Rs.3,07,25,905/- can be treated as expenses incurred under rule 8D(iii) of I.T. Rules, 1962 taking into account all types of expenses like salary, office, demat, brokerage, bank charges, etc. Even otherwise the disallowance under rule 8D(iii) of I.T. Rules, 1962 worked out by the Assessing Officer also comes to Rs. 16,98,745/- which is more or less near to Rs.15,36,295/-.”
Against the above order, both the assessee and the Revenue are in cross-appeal before us.
We have heard both the counsel and perused the records. As regards disallowance on account of interest, we find that the learned CIT(A) has given the finding that assessee’s own funds are sufficient to cover investment earning interest free income. The Assessing Officer has not disputed this claim of the assessee. He has held that the assessee has not been able to bring one- to-one nexus between the available interest free funds the investment earning exempt income. In this regard, we note that Hon'ble Jurisdictional High Court in the case of CIT vs HDFC Bank Ltd., 366 ITR 505 (Bom.) and CIT vs Reliance Utilities & Power Ltd., 313 ITR 340 (Bom.) had expounded that if interest free funds are sufficient to cover the impugned investment, no disallowance on
20 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 account of diversion of interest needs to be done and the assessee is not required to show any one-to-one nexus. In this view of the matter, in our considered opinion, there is no infirmity in the order of learned CIT(A) wherein he has directed that disallowance under Rule 8D(ii) of the Rules be deleted.
As regards the disallowance under Rule 8D(iii) of the Rules, the learned counsel for the assessee submits that assessee has raised ground before the learned CIT(A) that the disallowance on this account should not be done in absence of any satisfaction by the Assessing Officer. He submitted that the learned CIT(A) had not adjudicated this aspect. In this regard, it is the claim of the assessee that it will accept 0.5% disallowance sustained by the learned CIT(A) if it’s claim for the strategic investment and some of the investment not yielded any exempt income is considered and proportionate reduction is done.
In this regard, we note that the assessee’s plea of relief on account of strategic investment is no longer sustainable in view of the Hon'ble Court’s decision in the case of Maxopp Investment Ltd. vs CIT, 402 ITR 640 (SC).
As regards the claim to consider only those investments which yield exempt income, the same is acceptable on the touchstone of the Special Bench decision in the case of ACIT vs Vireet Investments (P.) Ltd., 58 ITR(T) 313 (Delhi –Trib.)(SB)
However, since the assessee has not accepted the learned CIT(A)’s order and the learned CIT(A) has not adjudicated the issue of lack of satisfaction, we remit this aspect of the issue to the file of the learned CIT(A). The learned CIT(A) is directed to pass a speaking order on this issue raised by the assessee.
21 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014
Apropos the issue of disallowance under Section 80IB of the Act of Rs.2,94,609/-. Brief facts of the case are that assessee had credited a sum of Rs.12,52,425/- representing sale proceeds of packing materials to the unit wise profit and loss account for the Silvassa Unit for which claim under Section 80IB of the Act was made. The Assessing Officer excluded the amount of Rs.12,52,425/- from the profits of the Silvassa Unit and computed the deduction allowable under Section 80IB of the Act. Upon assessee’s appeal, learned CIT(A) upheld the Assessing Officer’s action by holding as under :-
“8.2 I have considered the facts of the case and the submissions made by the assessee. Submissions of the assessee are examined and it is observed from the case records that assessee was engaged in the business of manufacture of PVC Film at Silvassa and not in the business of manufacture of packing materials at Silvassa and waste packing materials were generated during the packing of manufactured goods and have nothing to do with the business of manufacturing PVC Film. Moreover, the income from sale proceeds of packing materials do not have any first degree nexus with the business of industrial undertaking at Silvassa and in view of the decision of Supreme Court in the case of Liberty India Ltd. 317/ITR/218, deduction u/s. 80IB of I.T. Act, 1961 is not allowable in respect of the income from sale proceeds of packing materials. In nutshell, assessee’s appeal for allowing deduction u/s 80IB of I.T. Act, 1961 on this income is rejected and Assessing Officer’s stand on this issue is upheld. Therefore, these grounds of appeal are dismissed.”
Against the above order, assessee is in appeal before us. Upon hearing both the counsel and perusing the records, we note that it is assessee’s claim that this issue is covered in favour of the assessee by ITAT decision in assessee’s own case for assessment years 2006-07, 2007-08 and 2008-09.
22 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 26. The Tribunal by referring to Hon'ble Apex Court decision in the case of CIT vs Meghalaya Steel Ltd., 383 ITR 217 (SC) has concluded as under :-
“9.10. We have gone through the order of the lower authorities as well as judgment placed before us. It is noted that aforesaid amount has been received by the assessee on account of sale of packing material which has been credited in the cost of purchase of packing material. Thus, effectively it is net cost of purchase of packing material which has been claimed as item of expenses in computing profit derived from the industrial undertaking. On this issue, our attention has brought upon the recent judgment of Hon’ble Supreme Court in the case of CIT v. Meghalaya Steel Ltd. (supra) wherein it was inter alia observed as under:
It only remains to consider one further argument by Shri Radhakrishnan. He has argued that as the subsidies that are received by the respondent, would be income from other sources referable to Section 56 of the Income Tax Act, any deduction that is to be made, can only be made from income from other sources and not from profits and gains of business, which is a separate and distinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head “income from other sources”, which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii)(b) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head “profits and gains of business or profession”. If cash assistance received or receivable against exports schemes are included as being income under the head “profits and gains of business or profession”, it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head “profits and gains of business or profession”, and not under the head “income from other sources”.
23 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80- IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods and Liberty India to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove.”
9.11. From the perusal of the above, it may be noted that Hon’ble Supreme Court has clarified this issue after considering its earlier judgments in the case of Sterling Foods as well as Liberty India. Thus, from the judgment of Hon’ble Supreme Court it becomes clear that items of receipts which go to reduce the cost should not be dealt with separately. But, it should be credited to the respective head of cost, and profits of the industrial undertaking should be computed accordingly. Under these circumstances, it would not be legally permissible to deny the benefit of deduction u/s 80IB on such receipts. Thus, respectfully following the aforesaid judgment of Hon’ble Supreme Court, we direct the AO to grant the benefit of deduction u/s 80IB on the sale proceeds of packing material amounting to Rs.3,85,621/-. Thus, ground no.5 is partly allowed.”
Following the above precedent, we set-aside the order of learned CIT(A) and decide the issue in favour of assessee.
Apropos the issue of disallowance of expenses of Rs.52,77,156/-. The brief facts of the case are that the Assessing Officer noticed from the records that assessee had incurred share buyback expenses of Rs.52,77,156/- on lead management fees and other charges and advertisement for the purpose of buying back the shares of the company from the public. The Assessing Officer examined the matter and held that the expenses were incurred in relation to reduction of share capital base of the company and was therefore relatable to the capital of the company and disallowed the expenses of Rs.52,77,156/- and
24 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 added it back to the total income. Upon assessee’s appeal, the learned CIT(A) summarised assessee’s submissions as under :-
“10.3.1 Crux of assessee’s submissions are that the expenditure is revenue in nature, buy back of shares is akin to issue of bonus shares and buy back of shares is akin to dividend and any expenditure incurred to distribute dividends is revenue in nature and expenditure on buy back was incurred on grounds of commercial expediency and exposes on buy back should be matched with the revenues of the current year. Assessee has relied on various decisions as mentioned in preceding paras in support of its submissions.”
Thereafter, the learned CIT(A) held as under :-
“10.3.2 First of all assessee has itself admitted that the expenditure on buy back was akin to expenses incurred for the issue of bonus shares and was towards reduction of capital to benefit remaining share holders with the only difference that in buy back scheme the share capital is reduced whereas in scheme of issue of bonus shares the share capital goes up. The expenses are also not similar to expenses on holding AGM expenses which is a legal requirement under companies act and is an annual feature whereas the issue of buy back of shares is a onetime event resulting in reduction of share capital of the company as per the decision taken by the board of directors of the company. Prima facie the expenditure is not revenue in nature and is clearly capital in nature. Dividend as defined in section 2(22)(e)(iv) of I.T. Act, 1961 is for the purposes of taxing the receipts as dividends in the hands of the recipient and not in the hands of the company which is reducing its capital and incurring expenses on buy back of shares to reduce its share capital base. Moreover, there was no business expediency to reduce the capital except to increase the value of share holding of the management which continued to hold on to its shares to have effective control over the management of the company and the earning of the current year’s revenues also do not have anything to do with the reduction of share capital base of the company. In nutshell, expenditure of Rs.52,77,156/- was incurred on reduction of capital of the company and it is clearly capital in nature and therefore action of the
25 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 Assessing Officer in disallowing the same is upheld and assessee’s on this grounds of appeal is dismissed.”
Against the above order, assessee is in appeal before us. We have heard both the counsel and perused the records. The submissions of the assessee in this regard is that the sum involved is allowable under Section 37(1) of the Act and reliance is placed on the following case laws :-
a) CIT vs Selan Exploration Technologies Ltd., (2010) 188 Taxman 0001 (Del) b) Navi Mumbai SEZ (P.) Ltd. vs ACIT, [2015] 152 ITD 828 (Mumbai Trib.) c) John Fowler (India) Pvt. Ltd. vs ITO in ITA No. 4691/Mum/2005 order dated 08.12.2010
Upon careful consideration, we find that the Hon'ble Delhi High Court in the case of Selan Exploration Technologies Ltd. (supra) has held as under :-
“Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2003-04 - Assessee-company paid certain amount to one 'M' on account of consultancy charges and claimed deduction of same as business expenditure - Assessing Officer disallowed that amount on ground that 'M' was non-executive director of assessee-company and payment was made just to avoid tax liability and for non-business purpose - On appeal, Tribunal, on basis of material on record, came to conclusion that payment was, in fact, made to 'M' for obtaining consultancy services in field of review of annual accounts, audit review and review of internal controls, etc., and even applicable tax on it at source was deducted and paid by company - Tribunal, therefore, allowed assessee's claim - Whether since it was a pure finding of fact arrived at by Tribunal that consultancy charges were paid by assessee to M against actual services rendered, no question of law arose in that regard - Held, yes
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2003-04 - Assessee-company claimed deduction of certain amount paid to one 'H' for advisory services for regulatory compliance in relation to buyback of shares by it - Assessing
26 The Supreme Industries Ltd. ITA Nos. 4673 & 4754/Mum/2014 Officer held that expenses were related to capital of assessee and, therefore, were of capital nature - On appeal, Tribunal held that assessee had not acquired benefit or addition of an enduring nature, because after buyback benefit of addition of an enduring nature would not arise and capital employed had, in fact, gone down and, therefore, expenses were of revenue nature - Whether Tribunal was justified in holding so - Held, yes”
From the above decision, we note that assessee’s plea is cogent and the same is covered in favour of assessee. Respectfully following the precedent as above, we set-aside the orders of the authorities below and decide the issue in favour of the assessee.
In the result, Revenue’s appeal is dismissed and assessee’s appeal is partly allowed.
Order pronounced in the open court on 20th December, 2019.
Sd/- Sd/- (PAWAN SINGH) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Date : 20th December, 2019 *SSL* Copy to : 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “E” Bench, Mumbai 6) Guard file By Order
Dy./Asstt. Registrar I.T.A.T, Mumbai