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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
Per Rajesh Kumar, Accountant Member:
The above titled appeals have been preferred by the assessee against the common order dated 19.05.2016 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment years 2003-04 & 2004-05.
We shall first take up the and the grounds raised
by the Revenue are as under:
1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the depreciation of Rs.53,28,000/- being the sale of shares of its associated concern without appreciating the fact that the loss was speculation loss as per explanation to section 73 and the same cannot be allowed is business expenses.
2 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. 2(a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the depreciation of Rs. 6,37,034/- on the compensation paid by the assessee to the land owner for the purpose of mining without appreciating the fact that such payment does not fall under the definition on intangible assets as defined u/s 32(1)(ii).
2(b) On the facts and circumstances of the case and in law, the L d. CIT(A) erred that relying the ratio laid down in the case of ONGC Videsh Ltd. 37 SOT 97. Without appreciating the fact that the facts of present case is entirely different that the facts in the case on ONGC Videsh Ltd.
3(a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 70,50,772/- being Royalty paid in financial year 2001-02 and therefore the same was allowable deduction in Assessment Year 2002-03 u/s. 43B and not in A. Y. 2003-04 which is under consideration.
3(b) On the facts and circumstances of the case and in law, the L d. Cl T(A) erred in deleting the disallowance of Rs. 70,50,772/- being the royalty paid stating that it was the advance payment made in March, 2002 and allowable in the year i.e. A. Y. 2003-04 in which it was debited in the books of accounts.
4. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the invisible loss in the raw material without appreciating the fact that there was a gain in the raw material in earlier assessment years and the assessee could not bring any evidence on record to substantiate the loss in the raw material.”
The issue raised in ground No.1 is against allowing the loss of Rs.53,28,000/- being loss on sale of shares of its associated concern whereas as per the AO the said loss was speculation loss in terms of explanation to section 73 and should not be allowed.
The facts in brief are that in the assessment proceedings the AO observed from the perusal of P & L account that assessee has debited a loss of Rs.53,28,000/- on sale of shares of associated concern M/s. Ramganjmandi Investments Ltd. According to the AO the said losses resulted from the sale of shares to associate concern in which no outside party
3 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. was involved which suggests that it was a managed affair and a colourable devise. Accordingly, a show cause notice was issued to the assessee. According to the AO, the said losses were not allowable for the reasons as stated in para 2.03 of the assessment order which states that the loss has resulted from accommodation entries and therefore not genuine. It is a capital loss and could not be charged to the P & L account and the loss is otherwise a speculation loss as per section 73 of the Act which was not permissible to be set off against the other income and accordingly added to the income of the assessee.
In the appellate proceedings, the Ld. CIT(A) allowed the loss by relying on the decision in the case of CIT vs. Colgate Palmolive (India) Ltd. (2015) 370 ITR 728 (Bom.) wherein the Hon’ble Bombay High Court has held that loss on sale of shares of wholly owned subsidiary is business loss and not capital loss and thus allowed the appeal after considering the reply of the assessee.
The Ld. D.R. vehemently submitted before us that Ld. CIT(A) has wrongly allowed the loss which is not genuine and is of capital in nature and also speculative in nature which is not permissible to be set off against the normal business loss by observing and holding as under: “I have gone through assessee's submission and AO's findings. From a perusal of the written submission and the documents enclosed, it is seen that the subsidiary company's net worth has been calculated by the C.A./Auditor based on the debit balances against the investment made by it. The financial statements show that there was a regular and clear connection with the assessee's business in as far as there was regular financial activity among the principal and subsidiary and accordingly, the transaction of the loss on 4 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. investment is also covered by the case law cited by the appellant. The investment was nothing but a measure of commercial expediency to further business objectives and accordingly based on the valuation with which the A.O did not find any fault, the loss was rightly claimed by the appellant company on sale of investment. Reference can also be made to the judgment of the Hon'ble Supreme Court in the case of Patnaik & Co. Ltd. v. CIT [1986] 161 ITR 365/27 Taxman 287 where the Hon'ble Apex court held that- In the present case, there was nothing to show that there was any reason for the assessee to hold on the investment in the loan indefinitely. There was no enduring advantage. Thus, the investment did not bring in an asset of a capital nature and the loss suffered by the asse.ssee was a revenue loss and not a capital loss. Further, the Bombay High Court court, in the case of CIT v. Investa Industrial Corpn. Ltd. f1979J 119 ITR 380, had also taken a similar view. Under the circumstances, the assessee's claim of debiting the loss is upheld and the disallowance made by the A.O is directed to be deleted. This Ground of Appeal is allowed.”
The Ld. D.R. while relying on the order of the AO submitted that the said loss has resulted from the transactions which were non genuine as the party involved in these transactions were only as an associate concern of the assessee and therefore the whole deal was shrouded with doubts. The Ld. D.R. prayed before the Bench that AO has passed the order by disallowing the loss after examining the issue in depth and the same needs to be affirmed.
The Ld. A.R. on the other hand submitted that in A.Y. 2004-05 the same issue was involved and order of CIT(A) allowing the loss under identical facts was not challenged by the department in appeal and thus it attained finality. Following the same, the loss should be allowed in the present appeal also. The Ld. A.R. reiterated the submissions as made before Ld. CIT(A) which has been incorporated from page No.9 to 11 of the appellate order. The Ld. A.R. also submitted that explanation to section 73 of the Act is not applicable in the present case as the shares were not held as stock in trade
5 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. and the assessee is not in the business of trading in shares. This is a case where the shares of the subsidiary company was sold and loss was incurred and therefore it can not be termed as speculative loss. The Ld. A.R. relied on the decision of Hon’ble Calcutta High Court in the case of Standipack (P.) Ltd. vs. CIT (2012) 27 taxmann.com 150 (Cal.) wherein it has been held that where the assessee is not in the business of sale and purchase of shares, the loss resulting therefrom is not a speculation loss. Finally, the Ld. A.R. submitted that in view of the ratio laid down in the above decision, the order of Ld. CIT(A) is correct and should be affirmed on this issue.
We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has charged to the P & L account loss on sale of shares of an associated concern to the tune of Rs.53,28,000/-. The AO disallowed the same on the ground that the same is capital in nature and also speculative in terms of explanation to section 73 of the Act and also not genuine. The Ld. CIT(A) treated the same as normal business loss by relying on the decision of Hon’ble Supreme Court in the case of Patnaik & Co. Ltd. v. CIT (supra) and also CIT vs. Investa Industrial Corporation Ltd. (1979) 119 ITR 380 (Bom.-HC). We find merit in the arguments of the Ld. A.R. that the said is not a speculative loss in terms of explanation to section 73 of the Act as the assessee is not engaged in the sale and purchase of shares of other companies which is a prerequisite for application of explanation to section 73 of the Act. The case of the assessee is squarely covered by the decision of 6 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. Hon’ble Calcutta High Court in the case of Standipack (P.) Ltd. vs. CIT (supra) wherein it has been held that only the loss resulting from the activity of sale and purchase of shares of other companies which is a part of the business of the assessee could be treated as speculation loss. In other words, the condition for attracting the said provision is that a part of the business of the company must relate to purchase and sale of shares but it is not the case we are dealing with. We, therefore, do not find any infirmity in the order of Ld. CIT(A) and accordingly the same is affirmed by dismissing the ground No.1 raised by the Revenue.
The ground No.2 is against the deletion of disallowance on account of depreciation of Rs.6,37,034/- by Ld. CIT(A) as made by the AO on the compensation paid by the assessee to land owners for acquiring the mining rights in the land.
The facts in brief are that the assessee had paid compensation for acquiring mining rights to the land owner on which it claimed depreciation of Rs.6,37,034/-. The said depreciation was claimed on the WDV as appearing on the first day of the financial year and the Revenue has allowed depreciation on the said compensation in the earlier years. By making payment of compensation the assessee did not acquire any ownership in the land but only mining rights were acquired by the assessee. In the past the assessee claimed the entire compensation as revenue expenditure which was disallowed by the department and thereafter assessee started claiming deprecation on the same treating the same as 7 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. intangible asset. The AO during the course of assessment proceedings noticed the same and called upon the assessee to justify the same. According to the AO the mining rights constitute a tangible asset which is similar to taking a building on lease and concluded that except ownership rights all rights including possessory rights are vested in the company and hence under these circumstances it is very much a tangible asset and finally disallowed the claim of the assessee.
In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee by holding that the compensation paid for use of mining rights is a capital expenditure and same falls under the definition of intangible assets and thus directed the AO to allow the depreciation on the same.
The Ld. D.R. submitted before the Bench that the assessee has made payments to the land owners in the form of lease of land in order to carry out mining activities which is akin to a building taken on lease and therefore the Ld. D.R. also argued that the payment made by the assessee to acquire mining rights is not specified under the head intangible assets and hence not eligible for depreciation. Therefore, reliance by the Ld. CIT(A) in the case of ONGC Videsh Ltd. vs. DCIT 37 SOT 97 (Delhi) is wrong and the order of CIT(A) should be reversed.
The Ld. A.R., on the other hand, argued that the compensation paid by the assessee to acquire mining rights has not resulted in the acquisition of any fixed assets as the 8 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. assessee has not acquired any ownership in the said land but a limited mining rights were acquired for carrying on mining activities for which the compensation was paid to the land owners. The Ld. A.R. submitted that in the earlier years the entire such payment on account of compensation for acquiring mining rights in the land were claimed as revenue expenditure but the same was disallowed by the department and thereafter the assessee started claiming depreciation on the same. The Ld. A.R. contended that this depreciation has been claimed on the opening WDV which is coming from the earlier years. The Ld. A.R. relied on the decision of Hon’ble Delhi High Court in the case of Areva T AND D India Ltd. vs. DCIT & CIT vs. Jai Parabolic Spring Ltd. (2012) 345 ITR 421 (Delhi). The Ld. A.R. submitted that the principle of ejusdem generis provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind. The Ld. Counsel contended that the expression “Business or commercial rights of similar nature” specified in section 32(1)(ii) of the Act, such as rights need not answer the description of “know-how, patents, trade marks, licenses or franchises” but must be of similar nature as the specified assets. In the above decision it has been clearly held that business or commercial rights of similar nature have been additionally used and the legislature did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets, which it is neither feasible nor possible to exhaustively enumerate and thus can not be restricted only to 9 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. the six categories of assets as mentioned therein. The Ld. A.R. finally submitted that in view of the ratio laid down by Hon’ble Delhi High Court the payment of compensation for acquiring mining rights in the land is clearly intangible assets and the order of Ld. CIT(A) needs to be affirmed on this issue.
We have heard the rival submissions of both the parties and perused the material on record including the decision cited by the Ld. A.R. We find that in this case the assessee has paid compensation for acquiring mining rights in the land which was in the earlier years written off as revenue expenditure but the Revenue disallowed the same as capital in nature and thereafter assessee capitalized the same and started claiming depreciation thereon. During the year the assessee claimed depreciation of Rs.6,37,034/- which was disallowed by the AO and added to the income of the assessee on the ground that the same is not an intangible asset and is akin to leasing of property. Having heard both the sides and perusing the decision of Hon’ble Delhi High Court in the case of Areva T AND D India Ltd. vs. DCIT & CIT vs. Jai Parabolic Spring Ltd. (supra) we are of the considered view that expression “Business or commercial rights of similar nature” specified in section 32(1)(ii) of the Act, includes other intangible assets also which is not mentioned as it is not possible to specify each and every item in the said list. The meaning of intangible assets therefore can not be confined to six categories of intangible assets as has been mentioned in section 32(1)(ii) of the Act. Accordingly, we hold that payment made by the assessee in the form of compensation
10 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. for acquiring mining rights in the land is intangible assets and accordingly we uphold the order of Ld. CIT(A) on this issue by dismissing the ground of Revenue.
The issue raised in ground No.3 is against the deletion of addition of Rs.70,50,772/- by Ld. CIT(A) being royalty paid in financial year 2001-02. The facts in brief are that during the assessment proceedings, the AO noted that assessee has paid lease rental advance in March 2002 for the next financial year commencing from 01.04.2002 to 31.03.2003 which was wrongly observed and mentioned by the AO that no royalty shown as advance and the AO noticed during the assessment proceedings that the following amounts were charged to the P & L account which were paid in the month of March 2002 on various dates. The AO observed that it was not possible to verify the advance royalty paid from the records and had it been advanced it could have been shown as advance royalty paid and duly mentioned as advance paid. The Ld. CIT(A) allowed the appeal of the assessee by giving a detailed finding that Rs.70,50,772/- was paid in the month of March as advance rent for the next financial year and was claimed accordingly in the next year. The Ld. CIT(A) also relied on the decision of ITAT Chandigarh Special Bench in the case of DCIT vs. Glaxo Smithkline Consumer 107 ITD 343 Chandigarh Special Bench and on the decision of a Hon’ble High Court of Andhra Pradesh in the case of Gopi Krishna Granites India Ltd. vs. DCIT 118 taxman 880 (AP) and finally held that the payment made as advance of royalty in March 2002 was allowable against the liability of royalty in assessment year
The Ld. D.R. argued before the Bench that royalty payable in assessment year 2003-04 to the tune of Rs.70,50,772/- was not allowable under section 43B as the same should have been claimed in A.Y. 2002-03 when it was actually paid as these payments are allowable on the basis of payment and relied on the order of AO in support of his contention.
The Ld. A.R., on the other hand, submitted that AO has misunderstood the facts of the case by mentioning the advance rent as royalty which has been clarified by Ld. CIT(A) by recording a finding of fact. The Ld. A.R. submitted that this is the general practice followed by the assessee which is followed in all the other years and thus submitted that the same should be allowed in the current year also.
We have heard the rival submissions of both the parties and perused the material on record. A perusal of the order of appellate authority reveals that the assessee paid advance in the March 2002 in respect of the next financial year which was duly adjusted and claimed by the assessee in the assessment year 2003-04. The issue has been discussed at length by the Ld. CIT(A) and only thereafter allowed the appeal of the assessee. We, therefore, do not find any infirmity in the order of the Ld. CIT(A) as the same is reasoned one and accordingly
The issue raised in ground No.4 is as regards the deletion of invisible loss in the raw material by Ld. CIT(A) without appreciating the fact that there was invisible gain in the earlier year.
The facts in brief are that assessee claimed invisible loss of 82858 kg which is approximately 0.97% of the raw material consumed. In the earlier year the assessee had shown invisible gain of 21144 kg which was (-)0.29% of the raw material consumed. Accordingly, the AO called upon the assessee to explain the invisible loss incurred during the year which was duly replied by the assessee by submitting that the said loss/gain is beyond the control of the assessee and is attributable to several factors such as moisture in cotton, quality of raw material and the quality of trash in the cotton. The AO did not accept the contentions of the assessee and disallowed the same on the reasoning that in the earlier year the assessee had visible gain and added a sum of Rs.74,57,220/- to the income of the assessee.
The Ld. CIT(A) allowed the appeal of the assessee by observing and noting that the AO has failed to bring any evidence on record that assessee has suppressed the stock or made sales out of books of accounts and has not disapproved the basis of loss as put forwarded by the assessee. The Ld. CIT(A) also noted that merely on the basis that assessee has 13 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. made some invisible gain in the earlier year the current year loss could not be disallowed and no adverse inference can be withdrawn. Therefore, the Ld. CIT(A) deleted the addition of Rs.74,57,220/-.
The Ld. D.R. vehemently submitted before us that Ld. CIT(A) has grossly erred by directing the AO to delete the disallowance without giving any concrete findings supporting his decision. The Ld. D.R. submitted that the assessee who has charged the invisible loss of Rs.74,57,220/- in the P & L account and it is for the assessee to prove the genuineness of the same that the previous year the assessee registered an invisible profit to the extent of 21144 kg as against the invisible waste of 82858 (0.97%) during the year. The Ld. D.R. contended that there is enormous difference between the invisible gain in the earlier year vis-à-vis the loss invisible during the year and therefore, the AO has rightly made the disallowance. In view of these facts, the Ld. D.R. prayed that the order of Ld. CIT(A) be set aside and that of AO be restored.
On the other hand, per contra, the Ld. A.R. filed before us a chart of material consumed for production and yield ratio in which a comparison has been prepared for three years. The Ld. A.R. submitted that the percentage of yarn manufactured to raw material consumed was 74.32%, 76.01% and 77.89% for A.Y. 2001-02, 2002-03 and 2003-04 respectively. Similarly, the percentage of waste generation to raw material was 25.98%, 23.02%, 20.05% and percentage of invisible
14 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. wastage on raw material was (-)0.29%, 0.17%, 2.06%. The Ld. A.R. submitted that the ultimate yield/productivity in relation to raw material has increased. The Ld. A.R. also contended that in the earlier years such type of wastage was allowed by the Department as it is incidental in the process of manufacturing as there can be several factors which are beyond the control of the assessee such as moisture in the cotton which gets dried in the manufacturing process, quality of raw material and micro dust etc., generation of fly, quality of cotton and trash present in the cotton. The Ld. A.R. contended that the AO has rejected the claim of the assessee as invisible wastage even without rejecting the books of accounts which is against the provision of the Act. The Ld. A.R. contended that the AO has first to bring out the defects and deficiencies in the claim to make it not acceptable and only after rejecting the books of accounts based upon the said defects and deficiencies the said claim of loss could have been disallowed but nothing has been done and AO straightway proceeded to disallow the claim. Finally, the Ld. A.R. submitted that in view of these facts the order of Ld. CIT(A) be affirmed by dismissing the ground raised by the Revenue.
Having heard the rival submissions of both the parties and perusing the material on record we find that assessee is engaged in the business of mining and textile manufacturing. We note that the percentage of yield and invisible wastage depend on several factors as has been mentioned hereinabove such as quality of cotton, fly generated during manufacturing process, moisture contents in the cotton etc. and the 15 & 5381/M/2016 M/s. Associate Stone Industries (Kotah)Ltd. percentage of invisible waste cannot be standardized as the inputs in the textile division depends on the various factors. The first appellate authority has considered all the aspect connected with this issue and only thereafter reached a finding that the AO has not brought anything on record to disprove the claim of the assessee. Similarly, the AO has not pointed out any defects and deficiencies in the books of account and simply relying on the percentage of invisible gain in the earlier year disallowed the invisible waste during the year which is not correct and can not be sustained. In view of these facts, we are inclined to uphold the order of Ld. CIT(A) by dismissing the ground raised by the Revenue.
In the result, appeal of the Revenue is dismissed.
ITA No.5381/M/2016 (A.Y. 2004-05) 27. Since the issues involved in the present appeal are identical to ones as decided by us in therefore, our decision in the above appeal would, mutatis mutandis, apply to this appeal as well.
In the result, both the appeals of the Revenue are dismissed. Order pronounced in the open court on 28.05.2018.