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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI N. K. SAINI & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
These appeals have been filed by the Revenue against the orders dated 6/4/2009 & 6/1/2010 passed by CIT(A)-XXI, New Delhi & CIT(A)-VII, New Delhi. The Revenue filed appeals for A.Y. 2001-02 & 2002-03.
The grounds of appeal are as under:-
(A.Y 2001-02 “1. On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the addition made on account of disallowance of Rs.1,00,000/- pertaining to the expenditure incurred in earning the dividend income which is exempt from tax.
2. On the facts and in the circumstances of the case, Ld.CIT(A) erred directing the A.O to grant leave relief to the assessee after verifying the computation of capital gain of Rs.2,08,210/- in respect of sale of unit of VECUS-II (1990) in spite of the fact the A.O has provided for indexation in his order.
On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the addition of Rs.48,35,989/- on account of valuation of closing stock in spite of the fact that the accounting standard-2 issued by ICAI itself provides for adjustment in valuation of inventory on the basis of change in method of accounting; and that the assessee is not consistently following any single method of accounting.
4. On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the addition of Rs.53,500/- out of interest paid by the assessee to bank as the assessee has provided interest free fund to its subsidiary company and on the other hand taken interest bearing loan from banks through commercial papers, for its business requirement.
On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the disallowance of Rs.20,13,907/- made on account of ESI & P.F contribution as explanation to Sec 36(1) (VA) provided for ‘due date’ to be the due date of fund.
On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the disallowance for warranty and optional service contract amounting to Rs.3,72,03,000/- as no provision for contingent/unascertained liability is allowable under the Income Tax Act, 1961.
7. On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the disallowance of Rs.142,53,143/- out of the lease rentals despite the fact that the assets, being computers, are being continuously used by the assessee and there is no real transfer of assets. The agreement to sell and lease bck assets is only a ‘colorable device’ in order to inflate expenditure and claim higher depreciation.”
(A.Y 2002-03) “1. On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the addition made on account of disallowance of Rs.1,00,000/- pertaining to the expenditure incurred in earning the dividend income which is exempt from tax.
2. On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the addition of Rs.48,35,989/- on account of valuation of closing stock in spite of the fact that the accounting standard-2 issued by ICAI itself provides for adjustment in valuation of inventory on the basis of change in method of accounting; and that the assessee is not consistently following any single method of accounting.
3. On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the disallowance of Rs.4,89,586/- made on account of ESI & PF contribution as explanation to Section 36(1) (va) provided for ‘due date’.
4. On the facts and in the circumstances of the case, Ld.CIT(A) erred in deleting the disallowing of Rs.1,74,96,745/- out of the lease rentals despite the fact that the assets, being computers are being continuously used by the assessee and there is not real transfer of assets and the agreement to sell and lease back assets is only a colorable device in order to inflate expenditure and claim higher depreciation.”
We will first take the appeal Assessment Year 2001-02.
3. The assessee company is engaged in the business of manufacturing and selling of Consumer Durables such as Refrigerators and Washing Machine for Assessment Year 2001-02. The assessee has earned dividend income of Rs.6,42,750/- on the investment made in the units of UTI & other Mutual Funds. The Assessing Officer on conjectures and surmises disallowed expenditure of Rs.1 lac as expenditure incurred in earning such income under the provisions of Section 14A of the Act. The assessee also claimed Long Term Capital Loss of Rs.75,995/- in the return of income on sale of units of UTI etc. However, Assessing Officer computed Rs.2,08,210/- in respect of sale of the said units. The assessee company comprised of different divisions and has manufacturing units at Fridabad, Pondichery and Pune. The assessee was following weighted average cost method which is an acceptable method of valuation of stocks in all the units except in Capital GNF Division, Pune. The aforesaid method of valuation of inventories was accepted by the Revenue throughout. During the previous year under consideration for GNF Unit the method of valuation of closing stock were changed to weighted average cost method in lying with other units so that the principal of consistency could be followed amount of the units. The tax auditors under Annexure iii of the tax audit report reported that as a result of such changes in the method of valuation of closing stock profit for the year has been under stated by Rs.48,35,989/-. The Assessing Officer made the addition of Rs.48,35,989/- on account of change in method of valuation of closing stocks on the ground that the assessee had artificially increased its losses. The Assessing Officer made the said addition by applying provisions of Section 145A of the Act. For the Assessment Years 1997-98 1998-99 & 1999-2000. The assessee had not claimed depreciation, however, the Assessing Officer computed and allowed depreciation on fix assets in the assessment order holding that the same is compulsory and allow even if no claim is made by the assessee. During the previous year, the assessee claim depreciation on the original written down value of the fix assets without setting of depreciation on fix assets for aforesaid three assessment orders the amount of depreciation without setting of the depreciation for the earlier assessment years come to Rs.1,10,58,57,287/- depreciation on returned down value of fix assets after allowing depreciation for the Assessment Years 1997-98, 1998-99 & 1999-2000 comes to Rs.70,59,29,517/-. The Assessing Officer reduced the licenses of depreciation by Rs.39,99,27,770/- being the difference in the amount of depreciation claimed by the assessee and computed by the Revenue. The Assessing Officer also disallowed sum of Rs.20,13,907/- on account of late payment of PF Dues & ESI Dues. The Assessing Officer also disallowed sum of Rs.53,500/- out of interest paid by the assessee against borrowed funds which were rent to subsidiary as an interest free loan. The Assessing Officer also disallowed expenditure on lease rents claim with Rs.288.40 lacs and allowed expenditure of Rs.1,45,86,857/-.
Aggrieved by this, the assessee filed appeal before the CIT(A).
5. As relates to ground no. 1, the CIT(A) held that the assessee’s counsel pointed out ITAT order in the case of Eicher Limited and the order of the Hon’ble High Court in department’s appeal against that order which held that the department had challenged the ITAT order only in respect of the issue relating to provision for bad and doubtful debts vis-à-vis section 115JA. Further, the assessee also placed on record an order of the Hon’ble Delhi High Court in the case of CIT Delhi Vs. Chemical and Metallurgical Design Co. Ltd: wherein the Hon’ble High Court held that making a proportionate disallowance of expenses on estimate basis could not be sustained under Section 14A of the Act. Thus, the CIT(A) agreed with the assessee’s contentions and held that the dividend was received from an investment in units of UTI and the assessee has received two cheques for the amounts of dividend. It does not seem probable that a company would be required to incur an expenditure of Rs.1,00,000/- for this nominal activity. The disallowance was held purely arbitrary and the CIT(A) followed the decisions of the ITAT Delhi Bench and the Delhi High Court, the same was deleted and the assessee got a relief of Rs.1,00,000/-.
6. The Ld. DR submitted that the CIT(A) erred in deleting the addition made on account of disallowance of 1 lac pertaining to the expenditure incurred in earning the dividend income which is exempt from tax. The Ld. DR submitted that the Assessing Officer’s observation that the assessee company in its own submissions stated that some expenditure on conveyance was attributable to deposit the dividend warrants in the banks. There would have been incurring some expenditure on record keeping of dividend i.e expenditure under the head proving/stationary and part salary of at least one employee who would be keeping track of dividend warrants, record their realization and further prospects of the investments. The Assessing Officer was correct in holding that the assessee company has fail to quantify the expenditure. Thus, the Ld. DR submitted that in absence of any quantification available a sum of Rs.1 lac is properly disallowed on account of expenditure incurred on earning exempt dividend income disallowable as per provisions of Section 14A.
The Ld. AR relied upon on the order of the CIT(A).
We have heard both the parties and perused the records. The CIT(A) has rightly given a finding that the investment in units of UTR was made in the earlier years and all that it had to do for earning the dividend was to deposit the cheque. This does not require the assessee to incur expenditure, the assessee’s contention that Section 14A does not envisage disallowance to any ad-hoc or an estimated expenditure. It is only en expenditure actually incurred for earning an income exempt from tax that would be disallowed u/s 14A. Reliance of the Ld. AR in case of Maruti Udhyog Ltd. Vs. DCIT 92 ITD 119 & ACIT Vs. Eicher Ltd. 101 TTJ 369 Delhi wherein it was held that the word incurred as used in Section 14A clearly indicates that it must be shown as a fact that some expenditure was in-fact incurred by the assessee to produce exempt income. The register did not empowering the A.O to make an arbitrary estimate of expenditure and disallow the same. The CIT(A) has rightly relied on the order of Hon’ble Delhi High Court in case of CIT Vs. Chemical & Metalogical Design Company Ltd, 2008 wherein it is held that making a proportionate disallowance of expenses on estimated basis could not be sustained under Section 14A of the act. Thus, the CIT (A) has rightly deleted the said addition. This ground is dismissed.
As relates to Ground no. 2 and 3 of the appeal, the CIT(A) held that the assessee had claimed long term capital loss of Rs.75,995/- on sale of 1140 units of VECAUS-II 1990. The Assessing Officer, however, computed a gain of Rs.2,08,210/- in respect of sale of the said unit only 700 units & not 1140. The assessee contended that the Assessing Officer failed to take into account the indexed cost of acquisition for Assessment Year 1990-91 and also the fact that the same pertained to 1140 units. In support of its contentions the assessee submitted the notes attached to the return of income and computation of capital gains for the year under appeal. Thus the Assessing Officer was directed to grant relief, while giving effect of the CIT(A)’s order, after verifying the computation of capital gains by the CIT(A). Consequently, the CIT(A) directed the A.O. that the addition of Rs.48,35,989/- made on account of valuation of closing stock be deleted. Thus, the assessee got relief of Rs.48,35,989/-.
The Ld. DR in respect of Ground No. 2 and 3 submitted that the CIT(A) erred in directing the Assessing Officer to grant leave relief to the assessee after verifying the computation of capital gain of Rs.2,08,210/- in respect of sale of unit of capital VECUS & ii (1990) in spite of fact that the Assessing Officer has provided for indexation in his order. The Ld. DR further submitted that the assessee has switched off to weighted average cost method for valuation of stock from first in first out method, which was being followed earlier. By this change in method, the assessee company has artificially reduced its trading profit thereby increasing its returned loss. The change has brought about a onetime reduction. Since next year’s profits have been worked out and the change in method of accounting of stock i.e. both opening and closing stock would be valid at weighted average cost method, the reduction of profit in a current year is not set off by any corresponding increase in profits in subsequent years. In accordance with the provisions of Section 145 A the profits of the assessee company are to be worked by adopting a method of valuation of stock consistently being followed by the assessee company i.e by following capital FIFO method. Thus, the addition of Rs.48,35,989/- was rightly made by the Assessing Officer .
The Ld. AR relied upon the order of the CIT(A).
We have heard both the parties. The CIT(A) has rightly directed the Assessing Officer to grant relief as the assessee had claimed long term capital loss of Rs.75,995/- on sale of 1140 units to VECAUS-ii-1990. The CIT(A)’s finding is correct that the Assessing Officer fail to take into account the indexed cost of acquisition for Assessment Year 1990-91 and also the fact that the same pertaining to 1140 units. This is supported by the notes attached to the return of income and computation of capital gains for the year under appeal. As relates to Ground No. 3, the assessee has adopted method of valuation of closing stock which is most suitable to the GNF Unit also method has been changed to weighted average cost method in line with other units so that the principle of consistency could be followed among all the units. In-fact, the Assessing Officer’s addition on account of change in method of valuation of closing stock applying provisions of Section 145A does not come in consistence with the proper change of method of accounting, without this fact it could not have been possible to implement the ARP Software for accounting, the said reason is not disputed by the Assessing Officer either in the order or in the remand report. The CIT(A) (A) has rightly deleted this addition. These grounds are dismissed.
As relates to ground no. 4 which challenges the disallowance of Rs.53,500/- out of interest paid by the assessee being 10% of the sum of Rs.5.35 lakhs, the same was advanced by the assessee to its subsidiary company in an earlier year. The CIT(A) observed that the A.O nowhere suggested that the assessee used any interest bearing loan funds to make this payment. Thus, the CIT(A) followed the decision of the Delhi High Court in the case of CIT vs. Tin Box Co. 260 ITR 637, by directing deletion of disallowance of Rs.53,5000/-.
The Ld. DR submitted that the loan of Rs.5.35 lacs cannot be said to be advance for business purposes. The assessee company has advanced an interest free loan to its 100% subsidiary. However, it is for its business purpose, the assessee has borrowed funds from banks through commercial purpose. The rate of which varies from 9.55 % to 12.25%. Had the assessee company utilized this sum for business purposes it would have reduced its interest liability to such extent. Adopting an average rate of 10% interest on the sum of Rs.535 lacs come to Rs.53,500/- which was rightly disallowed by the Assessing Officer.
The Ld. AR relied upon the order of the CIT(A).
We have heard both the parties. This amount was paid by the assessee to its subsidiary company Kelbex International Ltd, which was no longer an operating company being under liquidation, to meet its statutory expenses such as filing fee and audit fee, etc. The assessee had enough funds of its own to advance this money in the year when it was paid. The A.O nowhere suggested that the assessee used any interest bearing loan funds to make this payment. Thus, the CIT(A) rightly agreed with the assessee’s contentions and followed the decision of the Delhi High Court in the case of CIT vs. Tin Box Co. 260 ITR 637, by directing deletion of disallowance of Rs.53,5000/-. The CIT(A) has rightly directed the Assessing Officer to delete the said amount. This ground is dismissed.
The Ground no. 5 challenges the disallowance of Rs.19,53,571/- being contribution to PF and Rs.60,336/- being contribution to ESI under Section 43B of the Act. The A.O disallowed these sums on the ground that though these were paid during the previous year, they represented amounts paid beyond the relevant due dates of the respective months. The CIT (A) directed the A.O. to delete the disallowance of Rs.20,13,907/- as per various decision relied by the assessee.
The Ld. DR submitted that the disallowance of Rs.20,13,907/- made on account of ESI & PF Contribution as Explanation to Section 36(1) (va) provided for due date to be a due date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant period.
The Ld. AR relied upon the order of the CIT(A).
We have heard both the parties. Though the contribution to PF & ESIC were paid during the previous year, the presented amounts paid beyond the relevant due dates of the respective months. In view of the amendment of the first provision of Section 43 (B) deletion of the second proviso by Finance Act, 2003 any payment on account of PF etc if made before the due date for filing return would not be hit by Section 43(B). The reliance on the judgment of Delhi ITAT in case of ACIT Vs. M/s Vestas RRB India Ltd. 92 ITD 1 is rightly taken into account by CIT(A). This ground is dismissed.
The Ground No. 6 challenges the disallowances of provision for Warranty and Optional Service Contract (OSC) amounting to Rs.3,72,03,000/-. In view of the judicial pronouncements, decision of the ITAT in the assessee’s own case for Assessment Year 1993-94 and decision of the CIT(A) IX New Delhi in the assessee’s case for Assessment Year 2000-01, the CIT(A) deleted the disallowance of Rs.3,72,03,000/-.
The Ld. DR submitted that the CIT(A) erred in deleting the disallowance for warranty and optional service contract amounting to Rs.3,72,03,000/- as no provision for contingent/unascertained liability is allowable under the Income tax Act 1961. The Ld. DR submitted that the assessee company is also booking the cost actual incurred by the company on warranty repairs and replacing and the expenses on optional service contract actually incurred during the year. Thus, the provision on warranty and optional service contract based on a certificate is being added back as per detail furnished by the assessee. The sum of incriminating provision booked as result of water and optional service contract comes to Rs.372.03 lacs. Thus, the Assessing Officer rightly disallowed the same.
The Ld. AR relied upon the order of the CIT(A).
We have heard both the parties. The Assessing Officer observation that the provision on the basis of acturual valuation certificate could not be allowed due to over statement of book loss on account of change in the method of accounting for the year under consideration. The decisions cited provides the proposition that provision for warranty was for a definite and ascertain liability and the same could not be disallowed as contingent liability. In-fact in the immediate preceding year i.e. Assessment Year 2000-01 similar disallowance made by the Assessing Officer was deleted in appeal by the CIT(A) and in A.Y. 1993-94 by the ITAT. There is no interference required in the order of the CIT(A) as related to this ground. This ground is dismissed.
The Ground No. 7 challenges a disallowance of Rs.1,42,53,143/- out of the lease rentals amounting to Rs.288.40 lacs. The CIT(A) observed that the assessee had sold the entire block of fixed assets being computers to L & T Finance Ltd. for a consideration of Rs.8,34,57,714/- in the year ended 31/3/2000. Since the opening WDV and addition made in respect of said block of assets in previous year relevant to Assessment Year 2000-01 was less than the sale consideration, the differential amount of Rs.1,84,33,029/- was offered to tax as short term capital gain in Assessment Year 2000-01 and assessed as such in that year. The assessee entered into lease agreement with L & T Finance Ltd. on 29/3/2000 for lease of computers and pursuant thereto paid lease rent of Rs. 288.40 lacs during the previous year under consideration. The CIT(A) further observed that in the present case, there was no doubt about existence of the assets, the sale proceeds and consequent short term capital gains were duly assessed in Assessment Year 2000-01, and the transaction entitled the assessee to the use of the sale proceeds at a cost lower than borrowing through debentures. Thus, the CIT(A) deleted this addition.
The Ld. DR submitted that CIT(A) erred in deleting the disallowance of Rs.142,53,143/- out of the lease rentals despite the fact that the assets being computers and being continuously used by the assessee and these is not real transfer of assets. The agreement to sell and lease back assets are only colourable device in order to inflate expenditure and claim higher depreciation. The Ld. DR submitted that the CIT(A) has not given a correct finding.
The Ld. AR relied upon the order of the CIT(A) and stated that CIT(A) has taken all the due full cognizance of the records and rightly passed the order.
We have heard both the parties. In the Remand Report, the A.O accepted the assessee’s contentions, that the assessee and L & T Finance were in no way related to each other, and the assessee would have been entitled to higher depreciation as contended in the assessee’s submission. The A.O. also accepted the assessee’s contention that the assessee had indeed paid 15% interest on moneys borrowed through debentures. The CIT(A) held that the computers were sold to L & T Finance and that a lease agreement was entered into is not disputed by the A.O. The assessee clearly stated this transaction to be a means of arranging fiancé at a relatively lower cost. If the entire transaction were to be ignored, then the taxable income of the assessee for both Assessment Year 2000-01 and 2001-02 would be significantly lower than what has been returned in these two years. Thus, CIT(A) disagreed with the A.O’s contention that the lease charges had to be restricted to the WDV of the assets as at 31/3/2000. The A.O did not take into account the accounting of the sale proceeds in the year ended 31/3/2000 and also the interest factor for the period of 51 months. Lease financing through sale cum lease back transactions have been in practice for quite some time and if it is only when the existence of assets itself is in doubt or when an asset subject matter of transfer actually from a physical part of another larger asset or such sham transaction takes place that the revenue can rightly object to the arrangements. in the present case, there was no doubt about existence of the assets, the sale proceeds and consequent short term capital gains were duly assessed in Assessment Year 2000-01, and the transaction entitled the assessee to the use of the sale proceeds at a cost lower than borrowing through debentures. The CIT(A) has rightly deleted the same. This ground is dismissed.
As relates to A.Y. 2002-03, the Ground No. 1 is identical to the Ground No. 1 of Ground No. 2 is identical to Ground No. 3 of the ITA NO. 2285/DEL/2009, Ground No. 3 is identical to Ground No. 5 of the ITA NO. 2285/DEL/2009 and Ground No. 4 is identical to Ground No. 7 which are decided hereinabove. The same findings will be applicable to this appeal as well.
In result, both the appeals of the Revenue are dismissed.