AARTI INDUSTRIES LTD,MUMBAI vs. ADDL CIT RG 10(3), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य,राजे�� के अनुसार लेखा सद�य राजे�� के अनुसार -Per Rajendra,AM: लेखा सद�य लेखा सद�य राजे�� के अनुसार राजे�� के अनुसार Challenging the order dated 17.08.2014 of CIT(A)-22 Mumbai the Assessing Officer (A.O.) and the assessee have filed cross appeals for the above mentioned year. Assessee-company,engaged in the business of manufacturing of organic /inorganic chemicals and intermediates,filed its return on 30.09.09 declaring total income at Rs.79.54 crores .A revised return was filed on 29/07/2010,declaring total income at Rs.78.36 crores.The AO completed assessment u/s.143(3) of the Act determining its income at Rs.95.21 crores under normal provisions and at Rs.115.29 crores under section 115JB of the Act. Before us,the Authorised Representative(AR) did not press Ground No.1,7 and 10, hence same stand dismissed as not pressed. ITA/6827/Mum/2014 : 2.First Ground of appeal

09. (ITA/2421/M/2014,dt.21.12.2016). We are reproducing the relevant portion of the order and it reads as under:-

7039&6827/M/14 M/s. Aarti Industries Ltd.

“22. Ground 1: In this ground, the Revenue has challenged the action of Ld. CIT(A) in allowing depreciation of Rs.32,87,726/- which was claimed by the assessee on the basis of letter of approval dated 10-10-2010.

7039&6827/M/14 M/s. Aarti Industries Ltd.

3.Second Ground deals with deleting the disallowance of Rs.72.37 lakhs. The AR and the Departmental Representative (DR) stated that issue was about claim made u/s.32(2AB) of the Act and the Tribunal had decided the issue in favour of the assessee in AY 2008-09 (supra). We find that Tribunal had held as under : “27. Ground 2 : In this ground, the Revenue has challenged the action of Ld.CIT(A) in deleting the disallowance made by the AO of claim of weighted deduction of Rs.64,22,951/- u/s 35(2AB)(3) of the Act.

4.Third Ground is about interest disallowance of Rs.1.79 crores u/s.36(1)(iii) of the Act.We find the identical issue had been decided by the Tribunal in favour of the assessee in AY.s. 2008-09 and 2007-08.We are reproducing para 31-35 of the order of the Tribunal for the earlier AY.(supra).

7039&6827/M/14 M/s. Aarti Industries Ltd.

Further,since the assessee failed to discharge the onus and did not satisfactorily demonstrate that only interest free funds were advanced as loans to sister concern, the AO disallowed proportionate interest @12% on the interest free loans advanced amounting to Rs.2,37,16,415/-. In the appeal before Ld. CIT(A), detailed submissions were made by the assessee wherein it was inter-alia submitted that the assessee had sufficient funds to give these loans and in any case, these amounts were given for the purpose of business of the assessee. XXXX 34. During the course of hearing before us, it was submitted by the Ld. Counsel of the assessee that this issue has been decided in favour of the assessee by the Ld. CIT(A) following the order of the Tribunal for A.Y. 2007-08 .

5.Next Ground is about deleting addition of Rs.30,000/- on computer software.During the assessment proceedings, the AO had found that the assessee had purchased MS Window for a sum of Rs.30,000/-.He held that being a new software,the expenditure was to be capitalised. He allowed depreciation of Rs.9000/-(@30%) by making addition of Rs.21,000/-. 5.1.Aggrieved, by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).He held that the assessee had purchased the microsoft windows 2008 to carry out day to day back office work, that it was a standard operating software that needed frequent updation.He referred to the case of Asahi India Safety Glass Ltd.(64DTR63) of Hon'ble Delhi High Court and held that software packages like MS Window 2008 were utility packages,that they were for regular business use, that such programmes help the assessee to carry-out the business more efficiently and did not enhance the value of profit making apparatus.Finally,deleting the addition made by the AO he held that the expenditure incurred by the assessee for purchasing software should be treated as revenue expenditure. Before us, the DR stated that the matter could be decided on merits. The AR relied upon the judgment of Asahi India Safety Glass Ltd. of the Hon'ble Delhi High Court (supra). We find that the issue stands covered by the above order of the Hon’ble Delhi High Court. Respectfully,following the same, we dismiss Ground No.4 raised by AO. 6.Last Ground of appeal is about deleting the addition of Rs.15.03 lakhs,received by the assessee on account of Insurance claim.During the assessment proceedings,the AO found that the assessee had claimed deduction for insurance claim of Rs.15,03,312/-.In reply to the notices issued in that regard the assessee filed explanation vide its letter dt.07/01/2013.The AO,after considering the submission,held that insurance claim received (stock destroyed by fire Rs.14.80 lakhs +vehicle Rs.22,500/-) was on account of revenue expenses and had to be added to the total income of the assessee.

7039&6827/M/14 M/s. Aarti Industries Ltd.

6.1.Before the FAA,during the appellate proceedings the assessee argued that insurance claim of Rs.14.80 lakhs was received against the loss of Plant &Machinery due to fire and the balance was received against damage of vehicle. It referred to section 43(6)(c) of the Act. After considering the available material,the FAA held that there was a fire at the Tarapur factory of Avinash Drugs Ltd.on 01.10.2004,that Plant &Machinery were destroyed in fire, that a claim was made against destruction of machinery before insurance company, that during the year under appeal Avinash Drugs Ltd. got merged with the assessee, that insurance claim made by erstwhile company was received by the assessee, that the claim was made against Plant &Machinery, that the insurance claim received was treated as capital receipt as per provisions of section 43(6)(c), that the assessee had reduced the same from the WDV of Plant &Machinery block,that it was credited to P&L Account in the books of account, that while determining the profits and gains from business it had reduced the same, that the treatment given by AO to the amount in question was not tenable.Finally, he allowed the appeal of the assessee. 6.2.Before us,the DR stated that matter could be decided on merits.The AR referred to the provisions of section 43(6) and treatment given in the books of account. We find that there was fire in the factory premises of Avinash Drugs Ltd. in AY 2005-06, that it made a claim before insurance company with regard to damage caused by fire, that during the AY.2009-10 Avinash Drugs Ltd. merged with the assessee,that it received insurance claim about damage to Plant &Machinery and its vehicle.As the money received by the assessee was against the capital asset, therefore, same has to be treated in the nature of capital receipt.In our opinion, assessee had rightly reduced the said sum while computing the income for the year under consideration. As there is no legal or factual infirmity in the order of the FAA,so confirming the same, we dismiss last Ground of appeal,raised by the AO.

ITA/7039/Mum/2014:

7.First effective Ground (GOA2),raised by the assessee,is about disallowance of Rs.1.86 crores made u/s.14A of the Act r.w.r 8D of the Income tax Rules,1962(Rules).During the assessment proceedings the AO found that the assessee had received dividend income of Rs.24.28 lakhs and had claimed it as exempt, that the accounts maintained by it were mixed, that the common funds were employed for earning exempt income as well as taxable income, that the assessee had made a disallowance of Rs.48,387/- on its own. After considering the 7039&6827/M/14 M/s. Aarti Industries Ltd. judgment of Godrej & Mfg. Co.Ltd. of the Hon'ble Bombay High Court (328ITR81),he made a disallowance of Rs.1.86 crores invoking the section of 14A r.w.r.8Dof the Act. 7.1.Aggrieved by the order of AO,the assessee preferred an appeal before the FAA and made elaborate submissions.Referring to his own order for the AY 2008-09, the FAA upheld the order of the AO stating that there was no change in the facts and circumstances. 7.2.Before us, the AR stated that while deciding the appeal for AY 2008-09,the Tribunal had directed the AO to delete the disallowance on account of interest expenditure and to restrict 0.5% of disallowance of expenditure by reducing investment made in subsidiary/group companies,that during the year under consideration the assessee has sufficient fund,(Rs. 341. 37 crores),that it had made investment of Rs.15.27 crores only, that it had no objection if the order of the Tribunal for the earlier assessment year was followed. The DR left the issue to the discretion of the Bench. 7.3.We have heard the rival submissions.We find that the Tribunal in its order for AY 2008- 09 (supra) has held as under :- 7. We have gone through the orders passed by the lower authorities. It is noted from the perusal of the table reproduced by the Ld. CIT(A) in his order on page 12 that net worth of the assessee company comprising of share capital and reserves aggregated to Rs.284.27 crores, whereas the aggregate amount of investments was merely to the tune of Rs.26.19 crores. Thus, ‘own funds’ of the assessee were apparently far more than the amount of investments in tax free securities. Under these circumstances, no disallowance can be made on account of interest in view of judgements of Hon'ble Bombay High Court in the case of CIT vs Reliance Utilities Ltd vs CIT (supra) and HDFC Bank Ltd (supra). Therefore, disallowance on account of interest of Rs.1,16,01,605 is hereby directed to be deleted.

working out the average value of investments. For the purpose of rule 8D(2)(iii). As a result, ground 1 is partly allowed.” Respectfully following the same ,we direct the AO to delete the disallowance on account of interest and follow the direction of the Tribunal with regard to other disallowance.(0.5% dis - allwoance).First Ground of appeal is decided in favour of the assessee,in part. 8.Next Ground of appeal (GOA-3) is about computation of book profit with regard to disallwoance u/s.14A.As the issue is consequential to Ground No.2,same is allowed for statistical purposes . 9.Fourth Ground deals with disallowance of foreign exchange fluctuation, of Rs.11.86 crores. During the assessment proceedings,the AO found that the assessee had availed foreign currency term loan from SBI(Rs.1.30 crores.) and loan by way of External Commercial Borrowing(Rs.3.09 crores).He directed it to file details of realised and unrealised foreign exchange fluctuation gains/loss on account of above loan.After considering the submission of the assessee,the AO held that the loan was utilised for capital asset, that the loss arising on account of exchange fluctuation was capital in nature,that the same was to be capitalised, that the assessee had not carried out any adjustment in terms of AS-11, that same was debited to P&L account as a period cost, that later on it amended its claim with a request to capitalise the said amount to the fixed asset and to allow depreciation on the same. The AO made an addition of Rs.11.86 crores after allowing depreciation of Rs.66.13 lakhs. 9.1.Before the FAA the assessee made elaborate submissions and relied upon various case laws.After considering the submission of the assessee and the assessment order,the FAA held that the business of the assessee was such that foreign currency was not at all utilised or intended to be utilised for business, that if there was loss in the trading account it would be considered business loss, that loss in respect of fixed capital loss was not a revenue loss, that the assessee had not utilised the foreign currency for its business, that it did not hold the foreign currency on account of revenue or on account of trading. He referred to case of Woodward Governor India P.Ltd.(312ITR254) and Dempo & Co. Pvt.Ltd.(206ITR291); Sutlaj Cotton Mills (116ITR111); that the foreign currency term loan obtained from SBI and ECB was utilised for purchase of fixed assets, that it was on account of capital, that the claim of the assessee ,that the losses arose while carrying on business were not acceptable.Finally, he upheld the order of the AO. 9.2.Before us,the AR relied upon the case of Health Prime Services (India) Ltd. (ITA/122/ Mum/2013,dt.18.11.2016) and Cooper Corporation Pvt.Ltd. (159ITD165). DR supported the order of the FAA.

7039&6827/M/14 M/s. Aarti Industries Ltd.

9.3.We have heard the rival submissions and perused the material before us.We find that the assessee had availed foreign currency term loan from SBI and a loan by way of ECB,that it had claimed the loss arising on account of fluctuation in foreign exchange borrowings as revenue expenditure, that the FAA,while confirming the order of the AO,held that the loss claimed by the assessee was not revenue loss,but was capital loss.The issue of revenue/capital loss has been subject of extensive litigation.So,before proceeding further,we would like to enumerate certain principles governing the losses and same can be summarised as under: i).Words ‘revenue loss’ and ‘Capital loss’ have not defined anywhere in the Act.But,whether a particular loss is a trading loss or a loss on the capital side,would depend on the facts of each case.The question, however,is not one of pure fact but a mixed question of fact and law and the decided cases indicate how the matter is to be viewed in the context of the facts.It has been held that the problem must be approached in such cases in the light of the intention of the assessee,having regard to the legal requirements which are associated with the concept of trade or business. ii).The list of allowances enumerated in sections 30 to 43A of the Act is not exhaustive and an item of business loss can be deducted in computing the profits and gains of the business,if it is deductible according to ordinary commercial principles of accounting. iii).The mere fact that there is some remote connection between a loss and the business would not bring the loss within the expression "loss incidental to the business".It should spring directly from the carrying on of the business.In short,in order to entitle a deduction on the ground of business loss,the loss should not only have been incurred in the course of the business,but it should also be in the nature of a revenue loss. iv).Assessee having treated the loss as a revenue loss and obtained relief on that basis, any recovery made in respect of that loss must be regarded as a revenue gain,as and when it occurred.In other words,if a part of the income is lost,and subsequently it comes back to the assessee,it is liable to be taxed. v).Where the property is not purchased as stock-in-trade but as a capital,sale and consequent loss arising on account of sale of such property would not be revenue loss. vi).In the absence of any evidence to show that the assessee had treated the shares as stock- in-trade of his business, the loss cannot be allowed as business loss.

7039&6827/M/14 M/s. Aarti Industries Ltd. vii).Expenses incurred for carrying on business,after it is set up,are allowable as business expenditure.But,expenditure preparatory to commencement of business is a capital expenditure.Business can be said to have been set up when reasonable quantity of end product is obtained-mere installation of machinery is not sufficient.In such matter fact that end product obtained was sub-standard is irrelevant. viii).Though the assessee might have originally borrowed the amount for the purpose of import of capital goods or setting up of a plant,at the time when the amount was utilised the loan amount had undergone a change and had assumed a new character of stock-in-trade or circulating capital and,therefore,any loss suffered by the assessee on account of foreign exchange fluctuation would have to be treated as revenue loss and not capital loss. ix).With regard to treatment to be given to foreign exchange fluctuation it has been held that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him,on conversion into another currency,such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by him on revenue account or as a trading asset or as part of circulating capital in the business. It would, however, be profit or loss of capital nature,if the foreign currency is held as a capital asset or as fixed capital.For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilisation of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had originally been utilised for acquisition of fixed asset,if at the time of devaluation it had changed its character and had assumed the new character of stock-in-trade or circulating capital,the loss that occurred on account of devaluation shall be a revenue loss and not a capital loss.

In the case of Dempo & Co. Pvt.Ltd. (supra),the Hon’ble Bombay High Court has held as under: “In determining whether a loss is allowable as a business loss the principles applicable are- (i) A loss arising in the process of conversion of foreign currency which is part of the trading asset of the assessee is a trading loss as any other loss. (ii) The cause which occasions the loss is immaterial; what is material is whether the loss has occurred in the course of carrying on the business or is incidental to it. (iii) If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the business.

7039&6827/M/14 M/s. Aarti Industries Ltd.

(iv) Loss in respect of circulating capital is revenue loss whereas loss in respect of fixed capital is not. (v) Loss resulting from depreciation of foreign currency which is utilised or intended to be utilised in business and is part of the circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. (vi) For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilisation of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had originally been utilised for acquisition of fixed asset, if at the time of devaluation it had changed its character and had assumed the new character of stock-in-trade or circulating capital, the loss that occurred on account of devaluation shall be a revenue loss and not a capital loss. (vii) the way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Now,we would like to discuss the facts of the case in light of the above principles.It is a fact that the loan from the SBI and the ECB was availed by the assessee for purchasing capital assets and the loss arising out of the fluctuation in foreign exchange was not relatable to circulating capital or stock in trade of the assessee.It is not the case of the assessee that borrowed amount for the purpose of import of capital goods was utilised for other purposes or that the loan amount had undergone a change and had assumed a new character.It was a plain and simple transaction of purchasing the capital goods,so any loss related with it has to be considered as capital loss.It is also found that the AO had allowed depreciation on the assets.We would like mention that we have gone through the cases relied upon by the assessee.It is found that both the cases are clearly distinguishable on facts.In the case of Health Prime Services(supra) the issue was disallowance of loss resulting on account of fluctuation in foreign exchange rate on the closing date of the year under consideration, primarily on the ground that it was a contingent liability and notional in nature.It was a matter of reinstatement of the External Commercial Borrowings (ECB).It had nothing to do with acquisition of capital assest.In the case before us,the FAA has not held that the liability was contigent.He has given a categorical finding of fact of purchase of machinery i.e.capital asset. Similarly,in the case of Cooper Corporation of India(supra)the Tribunal was dealing with business assets and not capital assets.

7039&6827/M/14 M/s. Aarti Industries Ltd.

Considering the peculiar facts and circumstances of the matter before us,we are of the opinion that the order of the FAA does not suffer from any technical or legal infirmity.So, confirming the same,we decide ground no.4 against the assessee. 10.Next ground pertains to disallowance of additional depreciation u/s.32(1)(iia)of the Act. During the assessment proceedings,the AO directed the assessee to give explanation as to why 10% of depreciation amounting to Rs.1.85 crores on machinery purchased during AY 2008-09should not be disallowed.After considering the submission of the assessee and referring to the provisions of clause(ii) of sec 32(1), the AO held that the assessee was not entitled to claim depreciation @10% for the year under appeal. 10.1.Before the FAA ,the assessee made submissions and referred to MITS Rolling Mills Pvt. Ltd.,Cosmo Films Ltd. (139ITD628); SIL Investment Ltd. (54SOT54).The FAA referred to amended provisions of Section 32(1)(iia) and held that additional benefit in the form of additional allowance was a onetime benefit, that the assessee had not produced any evidence as to why same was not claimed in the earlier AY,that same could not be claimed during the year under appeal, that the assessee did not claim any additional depreciation in the first year of installation, that the AO was justified in disallowing the claim. 10.2.Before us the AR argued that in case of sister concern-Anushakti Chemicals and Drugs Ltd. the Tribunal had decided the identical issue in favour of the assessee (ITA 7495/M/2010 dt.19.2.2014), that the assessee had claimed the additional depreciation in the earlier AY.and was allowed by the AO in that year, that the FAA had wrongly held that same was not claimed in the AY 2008-09.The DR supported the order of the FAA. 10.3.We have heard the issue and perused the material before us.We find that the issue stands covered in favour of the assessee by the judgment delivered by the Hon’ble Karnataka High Court in the case of Rittal India Pvt.Ltd.(380ITR428).The relevant portion of the order reads as under: “Additional depreciation allowable under section 32(1)(iia) of the Income-tax Act, 1961is a one-time benefit to encourage industrialisation and the relevant provisions have to be construed reasonably and purposively. The additional depreciation is allowed in the year of purchase and if in the year of purchase the assessee is eligible only for 50 per cent. depreciation, the balance 50 per cent. can be carried forward for the subsequent year. 11.Next ground is about disallowance of Rs.7.83 lakhs u/s.40a(ia) of the Act.During the course of assessment proceedings the AO found that the assessee had claimed prior period expenses of Rs.7,83,852/-.He directed it to file a detailed explanation in that regard.From the details filed,the AO could ascertain that the payments related to freight and commissio ,that the auditor,while auditing the books for subsequent year had pointed out that the expenses 11

7039&6827/M/14 M/s. Aarti Industries Ltd. related to the year under appeal.He held that the assessee did not deduct Tax at source,while making payment invoking provisions of section40(a)(ia). He disallowed the entire payment. 11.1.Before the FAA it was argued that tax was deducted at source and same was deposited before the due date of filing of return i.e.,before 31/09/2009, that the AO wrongly alleged that the assessee did not comply to the TDS provisions, that the assessee had disallowed the said expenditure in the AY.2010-11 by adding back the same to its income, that the expenses were booked in the next accounting year,that the same were not claimed as deduction in subsequent years.Alternatively,it was argued that if the expenses were to be disallowed for the year under appeal same should be allowed for AY 2010-11. 11.2.The AR argued,before us,that expenditure was incurred for business purposes,that the difference of opinion was about the year in which it has to be allowed.The DR left the issue to the discretion of the Bench. We find that the AO or the FAA has not doubted the genuineness of incurring of expenditure, that the assessee had on its own disallowed the expenses in question in AY.2010-11,that taxes were deducted and paid before the due date i.e.the due date of filing of return of income as per the provisions of section 139(1)of the Act.Considering the peculiar circumstances and facts of the case,we direct the AO the allow the expenditure during the year under appeal. GOA-7 is decided in favour of the assessee.

12.Next Ground is about alleged wrong entry passed by Amarjyot Chemicals Limited (ACL), amounting to Rs.25,036/-.During the assessment proceedings,the AO observed that as per the AIR information ACL had paid interest to the assessee amounting to Rs.25,036/-, that it had claimed the TDS credit towards the taxes.Therefore, he added the said sum to the income of the assessee. 12.1.During the appellate proceedings,the assessee filed an affidavit obtained from ACL stating that TDS on salary had been inadvertently deducted,that same was reported in the name of the assessee instead of employee, that there was no salary payment to the assessee. The FAA observed that though the ACL, in its affidavit, had mentioned that the TDS return for the 4th quarter of AY 2009-10 was furnished but no such return was available, that there was nothing on record to accept the contention of the assessee. 12.2.Before us,the AR stated that the assessee had not made any claim for credit, that the AO should be directed to verify the claim. The DR left the issue to the discretion of the Bench. After considering the available material,we are of the opinion that matter should be restored back to the file of AO for further verification.He is directed to afford a reasonable opportu - 12

7039&6827/M/14 M/s. Aarti Industries Ltd. nity to the assessee and decide the issue afresh.Ground No.8 is decided in favour of the assessee,in part. 13.Disallowance of depreciation on asset purchased from Pravin Metal Corporation is the subject-matter of Ground No.9. It was brought to our notice that identical issue was set aside to the file of AO by the Tribunal in the earlier years.While deciding the appeal for earlier AY the Tribunal has observed as under : “12. Ground 3: This ground is with regard to the disallowance of depreciation on assets purchased from M/s Pravin Metal Corporation of Rs.22,057/-. During the course of hearing it was brought to our notice that this issue has been set aside to the file of the AO vide order of the Tribunal for A.Ys 2005-06 to 2007-08 dated 06-02-2015.