M/S. KANSAI NEROLAC PAINTS LTD ( ERSTWHILE KNOWN AS GOODLASS NEROLAC PAINTS LTD),MUMBAI vs. THE DCIT RG 6(3),

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “I” MUMBAI BEFORE SHRI C.N. PRASAD (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA No. 212/Mum/2008 Assessment Year: 2004-05 Kansai Nerolac Paints Ltd. DCIT, Range 6(3) (Erstwhile known as Room No. 576, Vs. Goodlass Nerolac Paints Ltd.) Aayakar Bhavan, M.K. Nerolac House, G.K. Marg, Marg, Lower Parel, Mumbai-400020. Mumbai-400013. PAN No. AAACG1376N (Appellant) (Respondent) ITA No. 4175/Mum/2010 Assessment Year: 2005-06 & ITA No. 9184/Mum/2010 Assessment Year: 2006-07 Kansai Nerolac Paints Ltd. Addl. CIT, Range 6(2) (Erstwhile known as Aayakar Bhavan, M.K. Vs. Goodlass Nerolac Paints Ltd.) Marg, Nerolac House, G.K. Marg, Mumbai-400020. Lower Parel, Mumbai-400013. PAN No. AAACG1376N (Appellant) (Respondent) Assessee by : Mrs. Arati Vissanji, AR Revenue by : Ms. Pooja Swaroop, DR Date of Hearing : 02/02/2018 Date of pronouncement: 19/03/2018

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ORDER PER N.K. PRADHAN, AM The captioned appeals filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-XXVI, Mumbai [in short ‘CIT(A’)]and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience. ITA No. 212/Mum/2008 Assessment Year: 2004-05 2. The 1st ground of appeal The CIT(A) erred in not granting depreciation of Rs.1,22,102/- and Rs.44,625/- being expenses on insurance pertaining to the Kavesar unit. 2.1 Briefly stated, the facts of the case are that the Assessing Officer (AO) found during the course of assessment that the assessee had discontinued its pigment operation at Kavesar (Thane) from 01.04.1999. However, the assessee continued to claim the expenses of such discontinued factory expenses in the year under consideration. The AO followed the order of his predecessor-in-office for the AY 2000-01 and disallowed the claim of expenditure of Rs.11,98,226/- and depreciation of Rs.1,22,102/- in relation to Kavesar Factory. 2.2 In appeal, the Ld. CIT(A) followed the order of his predecessor-in- office for the AY 2003-04 and directed the AO to allow the expenses in

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respect of power & fuel, electricity, rent, rate and taxes and watch and ward and restrict the disallowance to other expenses and depreciation. 2.3 Before us, the Ld. counsel of the assessee submits that the issue has been decided in favour of the assessee by the order of the ITAT for the AY 2002-03 and AY 2003-04. 2.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 2.5 We have heard the rival submissions and perused the relevant materials on record. We find that the ITAT ‘K’ Bench, Mumbai in assessee’s own case for AY 2003-04 (ITA No. 1525/Mum/2007) has followed the following order of the Tribunal for AY 2002-03: “It is observed that a similar issue has been decided by the Tribunal in assessee’s own case for the earlier years i.e. assessment year 2000-01 and 2001-02 by its order dated 22nd December, 2010 and 28th March, 2012 passed in ITA No. 6491/Mum/2004 and 2519/Mum/2005 respectively whereby a similar disallowance sustained by the Ld. CIT(Appeals) on account of depreciation and other expenses of Kavesar Factory was deleted by the Tribunal accepting the alternative contention of the assessee that the expenses incurred to protect the business assets should be allowed as deduction as held by Hon’ble Bombay High Court in the case of Hindustan Chemical Works Ltd. 124 ITR 561. It was also held by the Tribunal that the assets of Kavesar Unit having already entered the block of assets of the assessee, depreciation thereon could not be disallowed on the ground of non- user as the use of block of assets was to be considered and not the use of individual assets. Respectfully following the orders of the coordinate bench of this Tribunal on a similar issue in assessee’s own case for assessment year

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2000-01 and 2001-02, we delete the disallowance partly sustained by the Ld. CIT(A) on account of various expenses and depreciation in relation to Kavesar unit and allow ground No. 1 of the assessee’s appeal.” Facts being identical, we follow the above decisions of the Co- ordinate Bench and allow the 1st ground of appeal. 3. The 2nd ground of appeal The CIT(A) erred in disallowing the expenditure of Rs.3,80,718/- on purchase of application software. 3.1 The AO disallowed the claim of expenditure of Rs.3,80,718/- made by the assessee on account of purchase of computer software treating it as capital assets and thereby allowed depreciation @ 30% (half year) amounting to Rs.1,14,215/-. 3.2 In appeal, the Ld. CIT(A) followed the order of his predecessor-in- office for the AY 2003-04 and upheld the above disallowance made by the AO. 3.3 Before us, the Ld. counsel of the assessee relies on the decision in CIT v. Amway India Enterprises (2012) 346 ITR 341 (Delhi) and CIT v. Asahi India Safety Glass Ltd. (2012) 346 ITR 329(Delhi). 3.4 On the other hand, the Ld. DR relies on the order of the Ld. CIT(A). 3.5 We have heard the rival submissions and perused the relevant materials on record. In Amway India Enterprises (supra), it has been held that the purchase of software is a revenue expenditure.

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In Asahi India Safety Glass Ltd. (supra) it is held that the extent of expenditure cannot be a decisive factor in determining its nature and treatment in books of account not conclusive. The Hon’ble High Court held that the software expenses were not to create new asset or a new source of income but to upgrade the system and thus the software expenditure is revenue expenditure. Facts being identical, we follow the ratio laid down in the above decisions and hold that the expenditure incurred by the assessee towards the purchase of application software is revenue in nature. Thus the 2nd ground of appeal is allowed. 4. The 3rd ground of appeal The CIT(A) erred in not grating deduction of Rs.14,70,263/- claimed u/s 35D. 4.1 The AO found that the assessee had made a claim of Rs.14,70,263/- u/s 35D being 1/10th of the expenses in relation to rights issue of shares. The AO followed the order of the CIT(A) and disallowed the above sum of Rs.14,70,263/- u/s 35D. 4.2 In appeal, the Ld. CIT(A) followed the order of his predecessor-in- office for the AY 2003-04 and confirmed the disallowance made by the AO. 4.3 Before us, the Ld. counsel of the assessee submits that the above issue has been decided in favour of the assessee by the order of the Tribunal for the AY 2003-04.

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4.4 On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A). 4.5 We have heard the rival submissions and perused the relevant materials on record. We find that the ITAT ‘K’ Bench Mumbai, in assessee’s own case for the AY 2003-04 (ITA No. 1525/Mum/2007) held: “We have heard the arguments of both the sides on this issue and also perused the relevant material on record. It is observed that the issue relating to assessee's claim for deduction under section 35D came up for consideration before the Tribunal in assessment year 1999-2000 and the same was decided, by the Tribunal in favour of the assesses by its order dated 21-09-20O6 passed in ITA No. 1330/Mum/2003 holding that the assessee was entitled to deduction under section. 35D. The issue, however, was restored by the Tribunal to the file of the AO for the purpose of quantifying the amount of deduction. As submitted by the Ld. counsel for the assessee, the AO has already quantified the amount eligible for deduction under section 35D in assessment year 1999-2000 as per the direction of the Tribunal. We, therefore, direct the AO to allow the deduction claimed by the assessee under section 35D for the year under consideration keeping in view the expenses eligible for such deduction as quantified by him in assessment year 1999- 2000. Ground No. 2 of the assessee's appeal is accordingly treated as allowed.” Facts being identical, we follow the above order of the Co-ordinate Bench and allow the 3rd ground of appeal.

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5.2 In appeal, the Ld. CIT(A) enhanced the disallowance u/s 14A by allocating other expenditure of Rs.5.21 lacs and depreciation on H.O. assets to the exempt income. 5.3 Before us, the Ld. counsel of the assessee submits that the appellant had sufficient own funds and therefore, the disallowance of interest is not justified. Reliance is placed by her on the decision in Reliance Utilities 313 ITR 340 (Bom), HDFC Bank 366 ITR 505 (Bom). The Ld. counsel further refers to the order of the ITAT in assessee’s own case for the AY 1999-2000 to AY 2003-04. 5.4 On the other hand, the Ld. DR relies on the order of the Ld. CIT(A). 5.5 We have heard the rival submissions and perused the relevant materials on record. We are concerned here with the assessment year 2004-05. In M/s Godrej Agrovet Ltd. v. ACIT (ITA No. 1629/Mum/2009) for the assessment year 2005-06, the ITAT ‘G’ Bench Mumbai restricted the disallowance u/s 14A to 2% of the total exempt income on the reason that Rule 8D of the Income Tax Rules 1962 is applicable only prospectively from AY 2008-09 as held by the Hon’ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. DCIT (2010) 194 Taxman 203 (Bom). The above decision of the ITAT has been confirmed by the Hon’ble Bombay High Court vide order dated 08.01.2013 in CIT v. M/s Godrej Agrovet Ltd. (ITA No. 934 of 2011). As we are dealing with the assessment year 2004-05, following the above decisions, we direct the AO to restrict the disallowance u/s 14A to 2% of the total exempt income of the assessee, in place of the

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disallowance made by the AO and the enhancement done by the Ld. CIT(A). Thus the 4th & 5th grounds of appeal are partly allowed. 6. The 6th ground of appeal The Ld. CIT(A) erred in a. sustaining the additions for unutilised Modvat Credit of Rs.3,93,57,123/- to the closing stock. b. disregarding the fact that excise duty paid through purchases (on which modvat credit is available) is not debited to the profit and loss account. c. not following the decision of honourable Supreme Court in the case of Indo-Nippon Chemicals Co. Ltd. (261 ITR 275). 6.1 During the course of assessment proceedings, the assessee submitted before the AO that the unutilized MODVAT credit is Rs.3,93,57,213/- as on 31.03.2004 vis-a-vis the unutilized MODVAT credit of Rs.3,58,57,580/- as on 01.04.2003. The differential unutilized MODVAT credit is Rs.34,99,633/-. The purchases are accounted for net of MODVAT credit by the company and therefore, MODVAT credit is not included in the closing stock. If the purchases are accounted gross (i.e. inclusive of MODVAT credit) as prescribed u/s 145A, the MODVAT credit will be included in the closing stock. However, in both the methods, the profit will remain the same. The AO was not convinced with the above explanation of the assessee and made an addition of Rs.3,93,57,123/- as unutilized MODVAT credit to the closing stock.

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6.2 In appeal, the Ld. CIT(A) agreed with the reasons given by the AO and following the decision in Melmould Corporation v. CIT 202 ITR 789 (Bom) confirmed the disallowance of Rs.3,93,57,213/- made by the AO. 6.3 Before us, the Ld. counsel of the assessee submits that the appellant follows exclusive method of accounting for MODVAT. Reliance is placed by her on the decision in Indo Nippon Chemical Co. Ltd. 261 ITR 275 (SC), Mahavir Alluminium Ltd. 297 ITR 77 (Del), Mahalaxmi Glass Works Pvt. Ltd. 318 ITR 116 (Bom) and DCIT v. Hitech Plast Containers (I) Ltd. 2009 31 SOT 112 (Mum). The Ld. counsel further drew our attention to a recent decision dated 07.07.2017 by the Hon’ble Bombay High Court in CIT v. M/s Diamond Dye Chem Ltd. (ITA No. 146 of 2015). 6.4 On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A). 6.5 We have heard the rival submissions and perused the relevant materials on record. There is no dispute that the purchases made by the assessee are accounted for net of MODVAT credit. In M/s Diamond Dye Chem Ltd. (supra), the Hon’ble Bombay High Court held: “5. We have considered the submissions. It is not disputed that the assessee was liable to excise duty. The assessee got credit in the excise duty already paid on the raw materials purchased by it and utilized in the manufacturing of excisable goods. The assessee was adopting the exclusive method i.e. valuing the raw-materials on the purchase price minus (-) the Modvat credit. The same would be permissible. The Apex Court in the case of Indo Nippon Chemicals Co. Ltd. (supra) while affirming the order of High

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Court, has observed that the income was not generated to the extent of Modvat credit or unconsumed raw-material. Merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid raw-materials, that would not amount to income which was liable to be taxed under the Act. It is also held that whichever method of accounting is adopted, the net result would be the same. 6. Considering the above, the amount of the un-utilized Cenvat credit could not have been directly added to the closing stock.” 6.5.1 Facts being identical, we follow the above decision of the Hon’ble Bombay High Court and delete the addition of Rs.3,93,57,123/- made by the AO. Thus the 6th ground of appeal is allowed. 7. The 7th ground of appeal The CIT(A) erred in disallowing lease rentals to the extent of Rs.13,53,519/- not debited to Profit & Loss Account. Alternatively, without prejudice the CIT(A) ought to have allowed depreciation. 7.1 The assessee had paid lease rentals in respect of finance lease transactions and claimed Rs.13,53,519/- as deduction in the computation of income. The AO disallowed the above sum of Rs.13,53,519/- being capital portion of the lease rentals. 7.2 In appeal, The Ld. CIT(A) agreed with the reasons given by the AO and confirmed the above disallowance. 7.3 Before us, the Ld. counsel of the assessee submits that the assessee had taken certain motor car on finance lease. It is not the

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owner of the leased cars, it has not claimed depreciation u/s 32 in respect of the said cars as per the Direct Tax Circular No. 2/2001 dated 09.02.2001 issued by the CBDT. The aforesaid Circular states that the owner of the asset is entitled to the depreciation if the same is used in the business. It further states that the accounting standard will have no implication for the allowance of depreciation of assets under the provisions of the Act. Thus it will also not have any implication on the allowability of lease rentals paid. Therefore, the principal amount of lease rentals of Rs.13,53,519/- which is not debited to P&L account should be allowed as deduction u/s 37(1) of the Act. 7.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 7.5 We have heard the rival submissions and perused the relevant materials on record. It is found that the assessee is not the owner of the leased cars. It has not claimed depreciation u/s 32 in respect of the said cars. In the facts of the case, there is merit in the contentions of the Ld. counsel that the principal amount of lease rentals of Rs.13,53,519/- be allowed as a deduction u/s 37(1) of the Act. Therefore, we delete the addition of Rs.13,53,519/- made by the AO. Thus the 7th ground of appeal is allowed. 8. The 8th ground of appeal The CIT(A) erred in disallowing professional fees of Rs.6,29,003/- by treating it as capital expenditure. Without prejudice to the aforesaid the CIT(A) has erred in not allowing depreciation thereon.

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8.1 The assessee had incurred an expenditure of Rs.6,29,003/- towards professional fees. The AO disallowed it on the basis that these expenditures were incurred in relation to a capital asset of an enduring nature. 8.2 In appeal, the Ld. CIT(A) upheld the disallowance made by the AO on the reason that these were capital expenditure. 8.3 Before us, the Ld. counsel of the assessee submits that the said expenditures include (i) Rs.1,35,000/- as consultancy fee to interior designer for changing flooring changing illuminating system and altering existing seating arrangement, (ii) Rs.1,05,600/- as consultancy fee for redesigning of Skimmer Pit (one of the part of ETP system) to restore its performance, (iii) Rs.3,88,403/- as Security Fees paid to Urban Development Head – Gurgaon in connection with reviewing of plans for setting up manufacturing plants. 8.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 8.5 We have heard the rival submissions and perused the relevant materials on record. We find that the aforesaid expenses do not create any new fixed asset or enhance the production capacity of the business. These expenses are for repairs and renovation of existing assets, hence should be allowed as deduction. Considering the nature of expenses, we delete the disallowance of Rs.6,29,003/- made by the AO. Thus the 8th ground of appeal is allowed.

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9.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 9.5 We have heard the rival submissions and perused the relevant materials on record. In CIT v. Ravindranathan Nair (K) [2007] 165 TAXMAN 282 (SC), it is held: “21. At the outset, we may state that, in the present case, we are dealing with the law as it stood during assessment year 1993-94. At that time section 80HHC(3) of the Income-tax Act constituted a Code by itself. Subsequent amendments have imposed restrictions/qualifications by which the said provision has ceased to be a Code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under section 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of section 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in Business Profits, had to be deducted from Business Profits computed in terms of sections 28 to 44D of the Income-tax Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from Business Profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc., formed part of gross total income being Business Profits. But for the purposes of working out the

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formula and in order to avoid distortion of arriving export profits clause (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the Income-tax Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula—CIT v. Lakshmi Machine Works 2007 (6) Scale 168/ 290 ITR 667 (SC).” 9.5.1 Facts being identical, we follow the ratio laid down in the above decision of the Hon’ble Supreme Court and the order of the Co-ordinate Bench of the Tribunal for the assessment years mentioned at para 9.3 hereinbefore. Thus the 9th ground of appeal is dismissed.

ITA No. 4175/Mum/2010 Assessment Year: 2005-06

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12.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 12.5 We have heard the rival submissions and perused the relevant materials on record. We find that the assessee had filed before the AO the relevant details on account of bad debts written off. We refer here to para 9.1 and 9.2 of the assessment order dated 31.12.2008 passed by the AO. In TRF Ltd. (supra), the Hon’ble Supreme Court has held at para 4: “This position in is well-settled. After 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debts account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter remitted to the Assessing Officer for de novo consideration of the above- mentioned aspect only and that too only to the extent of the write off.” 12.5.1 Facts being identical, we follow the above decision and delete the disallowance of Rs.29,65,202/- made by the AO. Thus the 5th ground of appeal is allowed. 13. In the result, the appeal for the AY 2005-06 is partly allowed.

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ITA No. 9184/Mum/2010 Assessment Year: 2006-07 14. We find that the grounds of appeal i.e. 1st, 2nd, 3rd, 4th and 5th for AY 2006-07 are identical to the grounds of appeal i.e. 1st, 2nd, 3rd, (4th & 5th) and 6th for AY 2004-05. Facts being identical, our decisions for AY 2004-05 apply mutatis mutandis to AY 2006-07 in respect of the above grounds of appeal. 15. In the result, the appeal for the AY 2006-07 is partly allowed. 16. To sum up, the appeals for the AY 2004-05, AY 2005-06 and AY 2006-07 are partly allowed. Order pronounced in the open court on 19/03/2018. Sd/- Sd/- (C.N. PRASAD) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 19/03/2018 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai