ACIT, CHENNAI vs. M/S. KALEESUWARI REFINERY PVT. LTD., CHENNAI

2.1 The learned CIT CA) having r lied on the decision of the Hon'ble ITAT, Hyderabad in the case of M/s Ne Distilleries P. Ltd. Vs ITO Ward 16(2) ought to have appreciated that t e facts of the case discussed in that decision are distinguishable from the facts of the present case, in as much as in the case of MI5

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NCS Distilleries P. Ltd, the business were closed and divested off whereas in the present assessee's case, it is very much a going concern.

2.2 The learned CIT (A) ought to have appreciated that the claim of write off of service tax set off was rightly disallowed by the Assessing Officer, as the said amounts were not offered s taxable receipts in any of the previous years.

3. For this grounds and for any other grounds including amendment that may be raised during the course of the appeal proceedings, the order of learned CIT (Appeals) may be set aside and that of the Assessing Officer be restored. ”

4. The following portion of the order of the CIT (A) brings the issue in detail and the assessee’s submissions on it and hence extracted as under:

“5. …………………………………………………………………………………………………………………

1.……………………………………………………………………………………………………………………

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This was further compounded by the objection raised the Service Tax Department against availing of credit of service tax component on Advertisement & Insurance against service tax payable on C&F commission. The reason for this objection is that, the expenditure incurred on advertisement and insurance related almost entirely to its manufactured goods and therefore had no nexus to the appellant's C&F activity.

3. From 10-09-2004, CENVAT Credit Rules 2004(CCR), is applicable to both service tax credit and CENVAT credit. As per Rule 6(1) of CCR 2004, the CENVAT credit shall not be allowed on such quantity of input or input services which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2). Sub-Rule (2), mandates that, a manufacturer or provider of output services, manufacturing final products or providing output services, which are both chargeable to duty or tax as well as exempted goods or services, shall maintain separate accounts, as regards consumption of input and input services meant for dutiable goods or taxable services and exempted goods and exempted services, and can avail CENVAT credit only on that quantity of input or input services used in the manufacture of dutiable goods or providing taxable services_ Since the appellant is engaged in manufacture of dutiable and exempted goods, as per Rule 6(2) of the CCR it was required to maintain separate accounts, to avail service tax and CENVAT credit. Since the appellant had taken the stand that it had not used any of input services for the manufacture of the final product, directly or indirectly, it had not maintained separate accounts, as envisaged under sub-rule (2), aforesaid. This was disputed by the Service tax Department. As mentioned in para.3, the Department's view is that expenditure on Advertisement and Insurance almost entirely related only to the edible oil manufactured by the appellant and marketed under its brand name 'Goldwinner' and hence, had no relation to its C&F activity. It is precisely for this reason that the Service Tax Department had issued show cause notices to the appellant (Notices NO.16 & 19 of 2005), proposing of withdrawal of service tax and CENVAT credit availed by it and later, passed an adjudication order accordingly.

service tax component therein taken to the Balance sheet, credit availed & utilized as per the CCR, credit disallowed by the Service tax Department as per their Adjudication order, undisputed credit u/s 6(v) and balance claimed for this assessment year. A summary of the 'extract' is given below:

Particulars Amount (Rs.) Service tax credited availed for 10,07,137 the period 01.06.2003 to 31.03.2007, u/r/ 6(v) of CCR Service tax availed for above 2,56,40,549 period, other than u/r6(v) Total credit availed 2,66,47,686 Less: Credit utilized in FY 05-06 20,32,705 Credit utilized in FY 06-07 3,01,785 Credit utilized against 1,01,218 Excise Liability in FY 06-07 Sub - Total 24,35,708 Balance yet to be utilized 2,42,11,978 Less: Credit withdrawn as per the 49,00,197 Adjudication Order & pending in appeal

Undisputed Credit u/r 6(v) 10,07,137 Sub - Total 59 07 334 Balance claimed in AY 2007- 1,83,04,644 08

It can be seen from the Extract of the STA enclosed, that major portion of the service tax credit is from advertisement & insurance. In respect of these two items, the Service tax Department had already held that, the appellant's claim for taking credit against C&F service tax liability is against the provisions of CCR. The appellant's service tax liability is entirely on C&F services. With the withdrawal of duty on edible oil, payment of duty had diminished to a large extent. It can be noticed that in FY 2006-07, the appellant had paid only a sum of Rs.1,01,218/- on the byproducts. Only in respect of services falling u/s 6(v), credit can be availed, against duty payable on byproducts and against service tax payable on C&F services. This is clearly as per the provisions of CCR and is also not disputed by the Department. As regards other items, including advertisement and insurance, credit can be availed only against duty payable on byproducts. This especially so, as per the decision of the Service tax Department and difficulty in establishing their nexus

:-6-: & 2928/Mds/2016 to C&F services. Further, the appellant had also not maintained any separate register as per CCR. It is on this basis, the appellant had claimed the above expenditure, leaving out the undisputed and disputed portions. Further it can be seen that, since only a very small amount is paid as Excise Duty on byproducts, it is nearly impossible to avail the credit against the service tax component on items other than u/r 6(v). Therefore, the AO is entirely in fault in his observation that there was no rationale in the appellant's claim.

6. The AO's understanding that the appellant had deviated from the system of accounting regularly followed by it is totally incorrect. As explained earlier, when there was no more benefit in deferring the expenditure, in view of the change in :-7-: & 2928/Mds/2016

law and the perception of the Department on the appellant's understanding on the same, the appellant decided to claim the expenditure for the above assessment year. This was a bona fide decision taken after considering various factors discussed in the earlier paragraphs, including the opinion of the appellant's legal advisor. It is a settled law that business income has to be computed under ordinary principles of commercial accountancy, no doubt, in accordance with the provisions of Sections 28 to 44 of the IT Act. The decision to claim the expenditure in this AY was not a whimsical one as assumed by the AO, but, was on careful consideration of various factors, none of which have been found by the AO as not bonafide or arbitrary. Just because the appellant had contested the decision of the Service tax Department it does not in any way alter the position taken by the appellant, considering the other factors discussed in the previous paragraphs. Further a liability once attracted by an order passed by a Statutory Authority would not cease to be liability merely because of it is contested in appeal (Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 S.c.). Finally, in addition to the decision of the Chandigarh ITAT in the case of Mohan Spinning Mills v ACIT reported in (2012) 148 TTJ (Chd) (UO) 6, the appellant also wishes to rely on the decision of the Madras HC in the case of CIT v Tex Tool Company Ltd [135 ITR 200] and on the decision of the Amritsar ITAT in the case of TRG Industries Pvt. Ltd v DCIT [2013] 59 SOT 0064. In the former case, the assessee was importing and paid premium that was forfeited on account of non-utilization. Claim of this premium forfeited was held allowable. In the other case, the assessee had purchased quota for a limited period of three years for its business purpose. The assessee could not fully utilize the quota within the period. It was held that the balance unutilized amount lying in the quota account was allowable as business expenditure.

In view of the above stated submissions, it is prayed to delete the disallowance of Rs.1,83,04,644 being the balance in Service Tax Set-Off Account, be written off.”

5. During appellate proceedings, the AR relied on the Hon'ble ITAT (Hyderabad ‘A’ Bench) decision in rendered in the case of M/s. NCS Distilleries (P) Ltd., v. ITO, Ward 16(2) Hyderabad. The CIT (A) has extracted as under:

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"The assessee is engaged in the business of rectified spirit. It claimed an amount of Rs.1,20,62,472 in the P&L Account as write-off of the outstanding unutilized CENVAT Credit available in its books of accounts. Assessing Officer in the course of scrutiny of the assessment did not allow deduction by stating as under:

"3. The assessee has written off an amount of Rs.1,20,62,472/- towards Cenvat receivable written off and made it a charge on the profit and loss account. Since the amount involved is a statutory amount, vide show cause dt.13.12.2010, the assessee was asked to explain as to why the amount written off should not be disallowed. With regard to this, the assessee vide its letter dated 16.12.2010 submitted as under:

It is true that we have written off a sum of Rs.120.62 lacs towards Cenvat Receivables. We have written off this amount since we have not included this in purchase cost. Normally, Cenvat amount to be included In purchase cost or it should be accounted for future set off. We request you to consider our writing off these Cenvat receivables is in order."

The submissions made by the assessee in this regard have been examined. The submission of the assessee that the amount is written off since it is not included in the purchase cost is not acceptable for the reason that if duty is included in the purchase cost, the same has to be included in the turnover and also in the inventory in terms of provisions of section 145A. This has a neutralizing effect. The amount under consideration is statutory amount due to the assessee which can be used to set off duty payable on the finished goods. The assessee has not demonstrated as to how the cenvat credit available cannot be availed set off during the year so as to write it off. Under the circumstances, the writing off of cenvat credit does not appear to be in order, and therefore, the deduction claimed under "cenvat written off" is disallowed."

3. Before the Ld. CIT(A), assessee argued that the company is loosing money/credit on account of rate differential between input and output excise duty. As this phenomena is going on year after year, the incomes in the P&L account were shown excess and being unrealistic. The CENVAT credit receivable which could not be set off was claimed as deduction. It was further submitted that assessee company has two divisions viz., Distilleries and Property. The distilleries division was finally demerged and its assets and liabilities are transferred to another company w.e.f. 01.04.2008 in a scheme of arrangement approved by the :-9-: & 2928/Mds/2016

Hon'ble High Court of Andhra Pradesh. Accordingly, the outstanding CENVAT Credit was written-off in the books of accounts as the assessee-company was 'divested of its distilleries business and it has no facility to claim any further creditas the business-itself was stopped.

4. Ld. CIT(A), however, did not agree and after analyzing the CENVAT provisions came to the conclusion that there are only two ways which could be debited to the P&L account i.e., one as a bad debt and the other as a business expense of the current year. He did not allow it as a bad debt on the reason that it is not treated as receipt at all and assessee has not furnished year-wise details of the amounts. With reference to loss/claim under section 37(1), the Ld. CIT(A) was of the opinion that this amount is not an expense of the year and since the amount is not expense of the year, the same cannot be allowed in the year under consideration. For these reasons, he rejected the claim.

5. Before us, Ld. Counsel submitted that assessee has written-off the amount in the books of accounts. Therefore, Ld. CIT(A) was wrong in not allowing it as bad debt. Even otherwise, the same is allowable as business loss. He relied on the principles laid down by the Hon'ble Supreme Court in the case of Woodward Governor India P Ltd., 312 ITR 254. Learned further A.R. relied on the following case laws:

(i) M/s. Mohan Spinning Mills vs. ACIT /2011 dated 25.04.2012

(ii) Girdhar Fibres P. Ltd., vs. ACIT ITA.No.2027/Ahd /2009 dated 12.10.2012.

(iii) ACIT vs. Rangoli Industries P. Ltd., ITA.No.1936/Ahd /2010 dated 11.01.201.3

"7. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in respect of the deduction claimed on account of CENVAT amounting to Rs.35,94,577. The assessee was engaged in the business of manufacturing and trading of yarn and fibre. The yarn manufactured by the assessee was an excisable item. The assessee was paying excise duty on the raw material purchased i.e. acrylic yarn/fibre and polyester yarn/fibre. In turn, assessee

:-10-: & 2928/Mds/2016 was liable to pay duty on its manufactured items. The rate of excise duty payable on the raw material was higher and the assessee was depositing the excise duty in PLA account which in turn was adjustable against the excise duty payable on the finished products.

The excise duty payable on the finished products was on the lower side and consequently over the period of years the assessee had credit of excise duty resulting in accumulation of CENVAT."

"10. Various tests have been laid down by various High Courts and the Apex Court in relation to the allowability of expenditure under section 37(1) of the Act while computing the income from profits and gains of business or profession. In the facts of the present case, the assessee had paid CENVAT on purchase of raw material which was deposited in its PLA account for claiming the benefit of set off against the excise duty payable on the manufactured items i.e. branded yearn. The assessee was paying higher rate of excise duty on the raw material purchased by it as against the rate of excise duty applicable on the manufactured items, consequently credit of excise duty was available with the assessee. The said excise duty paid from year to year was not claimed as an expenditure but was carried forward from year to year to be adjusted against the excise duty payable by the assessee on its manufactured items. However, during the year under consideration the assessee closed down its manufacturing unit and consequently the benefit of the CENVAT credit remained un- adjusted. Once the manufacturing unit of the assessee is closed down, admittedly the benefit of CENVAT credit not availed of against the excise duty payable on manufactured items, cannot be utilized by the assessee and the said write off of CENVAT credit, is allowable as an expenditure in the year under consideration on the closure of the business. The write off of CENVAT credit by the assessee in its books of account is thus allowable as business expenditure under the provisions of section 37(1) of the Act relatable to the year, in which the manufacturing activities are closed down by the assessee. Accordingly, we direct the Assessing Officer to allow the claim of the assessee in respect of write off of CENVAT credit of Rs.35,94,577 /-. Ground No.1 raised by the assessee is thus allowed."

6.1. We have also noted that the Coordinate Bench "A" Ahmedabad in the case of Girdhar Fibres Pvt.Ltd. (supra) has also opined as under:-

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7. Similar view was also taken in the case of ACIT vs. Rangoli Industrie P Ltd. ITA.No.1936/Ahd /2010 dated 11.01.2013. In the light of the above decisions on identical facts, since a view has already been taken in favour of the assessee on this issue, respectfully following that, we hereby hold that AO and Id.CIT(A) was not right in disallowing the claim. AO is directed to allow the amount as claimed, subject to assessee furnishing the details of credit year wise and other excise registers/forms to establish that Cenvat credit was available to it, before writing off the same. Accordingly, grounds raised by the assessee are allowed.

6. After considering the assessment order, ground, written submissions, additional submissions and the case laws relied upon by the appellant, the CIT(A) held that “as the facts of the instant case in appeal and the facts of :-12-: & 2928/Mds/2016 the case in which the Hon'ble ITAT, Hyderabad had rendered a decision in favour of the appellant in that case, are identical, respectfully following the decision, I am of the considered view that the action of the AO in rejecting the claim of the appellant is not legally correct and I hereby direct the AO to delete the addition of Rs.1,83,04,644/- This ground of appeal is therefore allowed”.

ITO, Ward 16(2) Hyderabad and submitted that the CIT (A) has correctly directed the AO to delete the addition of Rs.1,83,04,644/- and allowed the appeal which may be sustained .

8. We heard the rival submissions, gone through relevant material and the orders. The assessee has clearly explained the rationale for claiming the impugned sum of Rs.1,83,04,644/-, in para 4, supra, which has been upheld by the different benches of the Tribunal , as is extracted and discussed by :-13-: & 2928/Mds/2016 the Hon'ble ITAT (Hyderabad ‘A’ Bench) , supra. As the facts of this case and the facts of the cases in which the Hon'ble ITAT, Hyderabad had relied and rendered the decision are identical with the assessee, the order of the CIT(A) is held as justified and hence the grounds of Revenue’s appeal are dismissed.

9. Thus, the Revenue’s appeal in Mds/2016 for assessment years 2007-08 is dismissed.

Revenue’s appeal in /Mds/2016 for assessment year 2011-12:

(i) Disallowance u/s 14A Rs.7,49,214/- (ii) Disallowance u/s 40(a)(ia)/40a(i) Demurrage Rs.85,11,844/- (iii)Disallowance u/s 40(a)(ia) Payment to Port Trust - Rs.38,27,366/-

Aggrieved against that order, the assessee filed an appeal before the CIT (A) and the CIT (A) partly allowed the assessee’s appeal. Against the CIT (A) order, the Revenue filed the appeal in ITA 2928 /Mds/2016 .Its grounds of appeal are extracted as under :

“1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in laws.

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2. The learned CIT (A) erred in deleting the disallowance of Rs. 7,49,214/- made by the Assessing Officer u/s 14A of the IT Act r.w. Rule 8D of the IT Rules 1962 for the AY 2011-12.

2.1 The learned CIT CA) is not justified in holding that the investments were made out of own funds, in the absence of materials facts supporting such a conclusion.

2.2 The learned CIT (A) having regard to the findings given by the Assessing Officer in the assessment that the assessee had incurred some expenditure, arising from use of office establishment utilization of staff and monitoring of investments by the directors / professionals, which certainly resulted in hidden cost to the company out of overall cost incurred, ought to have confirmed the disallowance made by the Assessing Officer u/s.14A in its entirety.

2.3 The Id. CITCA) ought to have brought out any materials to show that the investments were made out of surplus and no borrowed funds were utilized for the investments.

3. The learned CIT (A) erred in directing the Assessing Officer to delete the disallowance made by the AO u/s 40(a)(ia) of the IT Act in the assessment for AY 2011-12 in the case of the assessee towards payment of demurrage charges made to foreign companies viz., Rs. 17,47,531/- to M/s Golden Agri International P. Ltd., Singapore and Rs.21,97,127/- paid to M/s. Noble Resources, Switzerland.

3.1. The learned CIT(A) is not justified in holding that the demurrage charges paid to the above foreign companies are in the nature of reimbursement without bringing on record supporting facts to substantiate the same.

3.2. Having held that the payments of demurrage charges by the assessee to the foreign companies are in the nature of reimbursement, the learned CIT(A) ought to have appreciated that, but for such payment by the said foreign companies, the assessee company ought to have made the payment itself and in such case, the provisions of TDS are attracted.

4. The learned CIT(A) erred in deleting the disallowance of port entry pass - Rs.5,09,025/- , reimbursement of expenses to port trust - Rs.2,81,457/- and weighment charges - Rs.2,860 made u/s 40(a)(ia) towards payment made by the assessee without making tax deduction at source(TDS).

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4.1. The learned CIT(A) ought to have appreciated that the above expenses attracts TDS provisions and in the absence of TDS on the same by the assessee, ought to have confirmed the said disallowances made by the Assessing Officer.

5. For this grounds and for any other grounds including amendment that may be raised during the course of the appeal proceedings, the order of learned CIT (Appeals) may be set aside and that of the Assessing Officer be restored.”

The assessee admitted income from dividend which is exempt under the Act. However it had not made any disallowance u/s 14A. During the course of scrutiny assessment, the assessee was asked to furnish its clarification in this regard. The A.R. contended that no specific expenditure was incurred attributable to earning the dividend and therefore disallowance u/s 14A would not arise. The AO has not accepted this contention for the reason that obviously the assessee has used its office establishment as well as its staff, thus incurring some expenditure for earning this dividend income.

These investments would require monitoring by the directors or senior professionals, which would certainly result in hidden cost to the company out of the overall cost incurred. Therefore, considering all of them , the AO is satisfied that disallowance u/s.14A is called for. Since the assessee has not brought out any material to show that the investments were made out of surplus and no borrowed funds were utilized for the investment, proportionate disallowance of interest not directly attributable to the earning of such dividend requires to be made and accordingly the AO disallowed

:-16-: & 2928/Mds/2016 Rs.6,27,451/- under the second limb of Rule 8D and Rs.6,27,451/- and Rs.1,21,763/- under the third limb of Rule 8D , a total of Rs.7,49,219/- u/s.14A r.w. rule 8D .

11.1 Before the CIT (A), the AR submitted that the investments were made out of own funds more than a decade ago, the shares are held in Demat account, the dividends are directly credited in the appellant's bank account and hence no question of incurring any expenditure. Considering them, the CIT (A) held that the AR's explanation seems to be reasonable. In addition to the case laws relied upon by the appellant, it is also seen that in the case of CIT v. Hero Cycles Ltd., 2009 (P & H) (HC) the Hon'ble High Court held that wherever it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. Further in the case of CIT v. K. Raheja Corporation (P) Ltd. (2011)(Bom) the Hon'ble High Court held that in the absence of any material or basis to hold that interest expenditure directly or indirectly was attributable for earning dividend income, interest expenditure could not be disallowed u/s.14A. Relying on these decisions, wherein the facts are similar to the facts obtained in the appellant's case, the CIT (A) was of the opinion that no addition on this count is needed.

Hence , the CIT (A) allowed the assessee’s appeal.

We heard the rival contentions. The Revenue pleads that CIT (A) ought to have brought out materials to show that the impugned investments were :-17-: & 2928/Mds/2016 made out of surplus and no borrowed funds were utilized for the investments.

Since the relevant facts are not brought in the order of the CIT(A) , we deem it fit to set aside this issue to the A O for a fresh examination. The A O, after affording due opportunity to the assessee , shall pass a speaking order.

The assessee has incurred demurrage charges totalling to Rs.

39,44,658/- to 2 foreign companies as under:

Payment to Amount (a) M/s Golden Agri International Pte Ltd, Singapore 17,47,531 (b) M/s Noble Resources, Switzerland 21,97,127 On these payments, the assessee has not deducted TDS .When the assessee was required to explain as to why these expenditure should not be disallowed u/s.40a(i) , it contended that since they are reimbursements made to those parties in respect of demurrage paid by the shippers, they will not attract the provisions of section 40a(i). The AO has not accepted the assessee's contention, as it is held in the decision of CIT v Orient (GOA) P Ltd (Bom)

325 ITR 554 that demurrage paid by Indian Company to foreign company without TDS attracts disallowance u/s.40a(i). Accordingly, the AO disallowed them u/s 40a(i) / 40a(ia) .

:-18-: & 2928/Mds/2016 12.1 The CIT (A) after considering the assessee’s submissions in this regard held that the appellant itself has not paid the demurrage charges and it only made reimbursement of the expenditure incurred by the foreign companies.

In the case law relied on by the AO viz., CIT v. Orient (Goa) P Ltd. (Bom) 325 ITR 554, it has been held that demurrage paid by Indian Company to foreign company without TDS attracts disallowance u/s.40(a)(i). Whereas in the case of the appellant, the fact is different inasmuch as it is only reimbursement and not demurrage payment and hence the action of the AO is untenable and hence the CIT (A) directed the AO to delete the disallowance and allowed the assessee’s appeal.

12.2 The D R presented his arguments on the lines of the assessment order and on the grounds of appeal . Per Contra, the AR invited our attention to the relevant portion of the paper book wherein a copy of sales contract with M/s Noble Resources, commercial invoice from M/s Noble Resources and invoice , Debit note issued to appellant from M/s Golden Agri International Pte Ltd, Singapore and submitted that the assessee made reimbursements only.

The D R submitted since these documents are presented for the first time they require scrutiny.

We heard the rival contentions. Since the relevant facts require examination, we deem it fit to set aside this issue to the A O for a fresh

:-19-: & 2928/Mds/2016 examination. The A O, after affording due opportunity to the assessee , shall pass a speaking order. without TDS:

The AO disallowed the following payments made to Chennai Port Trust without TDS.

A Payment for civil and electrical work 15,88,818 B Port Entry Pass 5,09,025 C Port rent 10,26,535 D Reimbursement of expenses to port trust 2,81,457 E Terminal handling charges 60,830 F Weighment charges 2,860 G Wharfage 3,57,841 Total 38,27,366

Out of the above, on the port Entry Pass, weighment charges, reimbursement of expenses to the port trust, the assessee pleaded before the CIT (A) that these payments do not attract TDS provisions and hence no need to deduct tax. The CIT (A) held that this is explanation is acceptable and hence the disallowances made against these amounts are directed to be deleted.

13.1 The Revenue pleads that learned CIT(A) erred in deleting the disallowance of port entry pass - Rs.5,09,025/- , reimbursement of expenses to port trust - Rs.2,81,457/- and weighment charges - Rs.2,860 made u/s :-20-: & 2928/Mds/2016 40(a)(ia) when these expenses attract TDS provisions . In the absence of TDS on them, the CIT (A) ought to have confirmed these disallowances.

We heard the rival contentions. Since the relevant facts require examination, we deem it fit to set aside this issue to the A O for a fresh examination. The AO , after affording due opportunity to the assessee, shall pass a speaking order.

Order pronounced on Thursday, the 5th day of October, 2017 at Chennai.