ITO 10(1)(1), MUMBAI vs. HALDYN GLASS LTD, MUMBAI

Income Tax Officer, Haldyn Glass Ltd. Ward 10(1)(1) 9 Gayatri Commercial Mumbai-400 020 Complex, Mittal Indl Estate, A.K. RD, Marol Naka, Vs. Andheri (E) Mumbai-400 059 PAN No. AAACH0411P Appellant .. Respondent Revenue by .. Shri M.C. Omi Ningshen, DR Assessee by .. Shri Piyush Chaturvedi, AR Date of hearing .. 11-05-2017 Date of pronouncement .. 31-05-2017 O R D E R PER MAHAVIR SINGH, JM:

This appeal by the Revenue is arising out of the order of CIT(A)-16, Mumbai, in appeal No. CIT(A)-16/ITO 8(2)(1)/IT 235/2011-12 dated 29-05- 2015. The Assessment was framed by ITO Ward 8(2)(1), Mumbai for the A.Y. 2008-09 vide order dated 23-12-2010 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).

2. The first issue in this appeal of revenue is against the order of CIT(A) deleting the disallowance of expenses made by AO by invoking the provisions of section 14A read with rule 8D qua exempted income. For this Revenue has raised following ground No.1: -

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the appeal of the assessee ignoring the decision of the Jurisdictional Bombay High Court in the case of CIT vs. Godrej & Boyce Mfg (2010) 328 ITR (Bom) wherein it was held that it is mandatory for the assessing officer to employ

Haldyn Glass Ltd. AY:08-09 the Rule 8D to determine the disallowance under section 14A after recording that correctness of disallowance computed by the assessee was not satisfactory.”

3. Briefly stated facts are that the assessee in its profit and loss account has disclosed dividend income from investment in Mutual Funds at Rs. 80,34,079/- and claimed the same as exempted under section 10(34) of the Act. As against this exempted income assessee suo moto computed disallowance towards expenses relatable to and offered for disallowance an amount of Rs. 4,49,937/- under section 14A read with Rule 8D in the computation of income. The AO during the course of assessment proceedings invoking the rule 8D of the rules accepted the disallowance claimed relating to direct expenditure under rule 8D (2)(i) as computed by the assessee. But he disallowed a further proportionate of interest expenditure in term of Rule 8D(2)(ii) and also 0.5 % value of investment thereby made disallowance of Rs. 34,35,736/-. Aggrieved, assessee preferred the appeal before CIT(A), who restricted the disallowance at Rs. 4,46,659/- on the 0.5% of average value of investment of Rs. 9,59,6000/- by calculating the disallowance on average value on total assets for a sum of Rs. 45,00,52,500/-. The CIT(A) deleted the disallowance under rule 8D(2)(iii), the interest disallowance by holding that assessee’s own fund in the form of share capital and reserve are to the tune of Rs. 45.73 crores which is more than enough to finance the investment of 14.82 crores, whereas borrowed funds are only to the tune of Rs. 13.13 crores. Accordingly, he deleted the disallowance on account of interest of Rs. 11,85,473/-. The CIT(A) also observed that assessee has sold the land for a sum of Rs. 10,46,92,000/-, which cannot be from any borrowed funds. In view of these facts, the CIT(A) restricted the disallowance at Rs. 4,49,939/- as computed by the assessee himself. We find that the Revenue now could not assail the findings of CIT(A), hence the same are confirmed. This issue of Revenue’s appeal is dismissed.

4. The next issue in this appeal of Revenue is against the order of CIT(A) allowing the loss on inventory. For this Revenue has raised following ground No. 2 to 5: -

Haldyn Glass Ltd. AY:08-09 “2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the loss of Rs.(-)1 ,09,67,000/- ignoring the fact that the assessee has not produced an item wise list of inventory before the AO, which had become unusable consequent to the closure of the factory.

3. On the facts and in the circumstances of the. case and in law, the Id. CIT(A) erred in allowing ignoring the fact that assessee does not maintain any stock register, nor does it has any regulated inventory management system

4. On the facts and in the circumstances of the case and in law, the Id. C1T(A) erred in ignoring the facts that how just because the laborers and the personnel left their service, the bottles will start cracking and get destroyed automatically.

5. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in ignoring Rule 46A of the I.T. Act.”

Haldyn Glass Ltd. AY:08-09 assessee preferred the appeal before CIT(A), who after considering the submission of the assessee allow the claim of the assessee by observing in Para 2.7 to 2.12 as under “2.7 I find that the AO misunderstood the fact of valuation of salvage items of the discarded inventory as to sale of discarded inventory. There is no adverse material available on record to suggest that there had been actual sale of any of the inventory items under question subjected to salvage. Hence, I find that no sale took place during the year with respect to the discarded items as the impugned inventory were re-valued to bring to it to the net realizable value on the basis of prudence of the day. The AO in his order made the disallowances mainly for the reason that appellant has not submitted the details of such inventory whereas the case of the appellant is that the AO has specifically asked neither the list of inventory items discarded nor any stock registers etc. Being the situation where AO did not deem fit fit to ask such details during the assessment proceedings, but believed that such details could have affected his decision in allowing the impugned loss that he did not allow for what of these details, I myself as CIT(A) pursuant to the power vested under section 250(4) of the IT Act 1961, directed the appellant to submit before me the said details of list of items discarded, details of loss of inventory with supporting documents already available with them that could have been produced before the AO had he specifically asked for them. In compliance to that vide letter dated 26.5.2015, the appellant has submitted working of loss of discarded inventory, list of salvaged items with their re-valuation, certificate of engineers regarding valuation of stores and spares and quotations of salvaged value of stores, spares. The same have been perused and considered by me. I find that the certificate Page 4 of 9

Haldyn Glass Ltd. AY:08-09 issued by the engineer after physical verification to be a genuine &bona fide one as in his certificate the facts mentioned that the accessories and spares were of very old and cannot be used in nowadays machineries as the appellant was having manufacturing facilities of 1965 and accumulating accessories, spares since then, are in consonance with the facts available on record through the regularly & consistently maintained books of accounts that had never been rejected u/s 145 of the IT Act, 1961. He has also rightly mentioned further, that these accessories and spares having pertained to old, semi-automatic designed pliant of the company that was unique in design therefore these stores and accessories could have not used anywhere due to their design, size and other technical specifications. So they do not have any market value and can be sold only on weight basis. He has again certified that the raw material and packing material were old and kept idle for last few years and got contaminated, mixed and became useless. Further, the raw material item being alumina rehydrate, carbon powder, etc. were spoilt by rain and thus not remained in a position to sale at all.

2.8 I have also perused the quotations given by the two vendors namely Viral Trading & S M Metal Scrap and find that the appellant has valued the accessories, spares on weight basis by taking the higher quotation that cannot be doubted in absence of any adverse material on record.

2.9 While going through the aforesaid letter of the engineer and the explanation made before the AO by the appellant that were reproduced in the assessment order as well in earlier paras of this order, and it is found that both are having the same contents. Before the AO also similar facts were explained through the aforesaid Page 5 of 9

Haldyn Glass Ltd. AY:08-09 explanation dated 3.12.2010. Hence, I find that there is no dispute that the appellant was having a manufacturing unit in Mumbai since 1965 which was closed down and the appellant was forced to sell off its land and building. In that situation the appellant was supposed to value the inventory at its realizable value only which has been done in the instant case. It appears that the AO failed to appreciate this factual & vital aspect of the issue in hand.”

Aggrieved, now Revenue is in appeal before us.

Haldyn Glass Ltd. AY:08-09 inventory, stores, spares and packing material etc. We are of the view that this value does not replicate the amount released from sale of such item but the net estimated realisable value of the salvage item. The assessee has submitted the complete list of items in which the value of Rs. 6.22 lakh had been arrived by taking the value on weight basis of the salvage inventory, stores and spares and packing material etc. In the similar facts Hon’ble Bombay High Court in the case of CIT vs. Tata Iron and steel Co. Ltd. (1977) 106 ITR 363 (Bom) held as under: - “That brings me to the item of Rs. 1,78,277, which is the subject-matter of the third question referred to us. As far as this item is concerned, it will be necessary to state a few facts. The method of accounting regularly adopted by the assessee-company was to claim obsolescence allowance in respect of discarded plants under section 10(2)(vii) of the Act, retaining, however, in the books 1% of the value of such discarded plants. When the discarded plants were eventually sold, the profit on sale was duly brought to account, after making an adjustment in regard to the value of the discarded assets retained as stated above. Over a period of years the debit raised in respect of the 1% value of the discarded plants got accumulated and could not be directly connected with the sales thereof made from time to time. During the year of account the assessee-company had obtained a surplus on sale of discarded plants of Rs. 7,89,211, and after making adjustment referred to above, had brought to account the sum of Rs. 6,06,361 as profit liable to tax under section 10(2)(vii) of the Act. The assessee also made a simultaneous claim for a deduction of Rs. 1,78,277 as representing the value of the discarded plant which had been retained in the books, but which on physical verification was found to be non-existent. It may be stated that such physical verification was made by the assessee- company from time to time at certain intervals. The said Page 7 of 9

Haldyn Glass Ltd. AY:08-09 amount of Rs. 1,78,277 could not be claimed by the assessee-company as obsolescence allowance under section 10(2)(vii) of the Act, but it had claimed that amount as a deduction under section 10(1) of the Act. Mr. Joshi sought to contend that this amount is not allowable as a deduction under section 10(1)] of the Act but, in my opinion, question No. 3 as framed does not raise that wider point but is restricted to the question as to in which assessment year the same could be allowed as a deduction. After some argument, Mr. Joshi, very fairly himself veered round to that view of the question, having regard particularly to the application for reference which the Commissioner had himself made to the Tribunal. The Income-tax Officer took the view that in view of the correspondence produced by the assessee-company itself, it was clear that the total loss of the value of the discarded plants retained in the books had been finally ascertained as at the end of the accounting year, being the financial year ended 31st March, 1957, and it was, therefore, contended on behalf of the Commissioner that the deduction, if any, could not be claimed by the assessee in respect of this item in the accounting year under consideration, corresponding to the assessment year 1958-59, with which the court is concerned in the present case. I need not consider what should be the proper mode of accounting in this respect, for section 13 of the Indian Income-tax Act, 1922, lays down that income, profits and gains must be computed for the purposes of the Act in accordance with the method of accounting regularly employed by the assessee. Mr. Kolah has, therefore, contended that this is the way in which the assessee has, at all times, kept its accounts in regard to the item which I am now considering. Indeed, it would be difficult for a company which carries on business of the magnitude of the assessee-company to fix Page 8 of 9

Haldyn Glass Ltd. AY:08-09 in which particular year a particular plant which was obsolete became nonexistent, or in which particular year the company became aware of the non-existence of a particular plant. The Tribunal has, in paragraph 22 of its order dated 2nd June, 1964, rightly stressed the method of accounting followed by the assessee-company and has come to the conclusion that the method could not be said to be unreasonable even if a better method could, perhaps, be visualised. I see nothing wrong in that view of the Tribunal, and, in my opinion, the allowing of this deduction by the Tribunal cannot be said to be against any provisions of law, having regard, particularly, to section 13 of the Indian Income-tax Act, 1922, to which I have already referred.”

Order pronounced in the open court on 31-05-2017.