ACIT, LUDHIANA vs. M/S VARDHMAN TEXTILE LIMITED, LUDHIANA

आदेश/Order

Per Sanjay Garg, Judicial Member Bench:

These are cross appeals by the assessee and Revenue preferred against the separate orders of the Commissioner of Income Tax (Appeals)- 1, Ludhiana [hereinafter referred to as CIT(A)] relating to respective assessment years.

ITA No. 1429/Chd/2010 (A.Y. 2006-07). 3. The assessee in this appeal has taken the following grounds of appeal:- 1. That the Ld. CIT(A) has erred in law and on facts while treating interest income amounting to Rs.16517422/- as ''Income from other sources" instead of "Income from Business and Profession".

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana

Name of Anant VSGM Auro Auro Auto Spinning Auto the unit Spinnin EOU Weaving Wvg Mills Textiles. g Mills Unit-2 Unit-3 Unit 3 Deduction 10B 10B/ 80IB 80IB 80IC 80IC Claimed 80IB Rent 494567 249016 73301 38982 1032309 1072193 Misc. 238725 3482 1275 282989 696527 Receipts DEPB/Duty 370206 5820457 68903960 Drawback Commission 7141 1426 2771 Interest 93264

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 4

payable on redemption of optionally convertible foreign currency bonds as revenue expenditure.

That the appellant craves leave to add/alter/amend any ground of appeal on or before the due date of hearing of appeal.

officer had treated interest from customers and suppliers amounting to

Rs. 355.28 lacs and further interest from bank & others amounting to

Rs. 165.17 lacs as ‘income from other sources’ as against the claim of

the business income. The Ld. CIT(A) held that since income on the

delayed payment from customers and suppliers was intrinsically

linked with the business activity of the assessee, hence, the same was

to be treated as business income of the assessee, whereas, the interest

received from bank & others was directed to be treated as ‘income

from other sources’.

find any infirmity in the order of the CIT(A) so far as the treatment of

the interest from customers and suppliers as ‘business income’ and

interest from bank and other sources as ‘income from other sources’

is concerned. However, a contention has been raised by the Ld.

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 5

Counsel for the assessee that where there is a direct nexus between

the interest income earned and the interest expenditure incurred in this

respect, the assessee should be allowed netting of the same before

computing the same under the head ‘income from other sources’. We

find merit in the above contention of the assessee and we order

accordingly.

Ground No.2 : Vide ground No.2, the assessee has agitated the 7.

action of the CIT(A) in directing the Assessing officer to reduce the

eligible profits of the undertaking for the purpose of deduction u/s

10B, 80IB and 80IC of the Income-tax Act, 1961 (in short 'the Act') in

respect of other income received.

income which is mentioned in the ground No. 2 itself. A perusal of

the aforesaid details will reveal that the assessee claimed rent, Misc.

receipts, DEPB, commission and interest income as ‘other income’

and has claimed deductions in respect of the same u/s 10B, 80IB and

80IC etc., as applicable in respect of the respective unit. The Ld.

Counsel for the assessee has fairly agreed that except the brokerage

from ocean freight, the other items do not constitute income derived

from undertaking. So far as the brokerage of ocean freight is

concerned, the Ld. Counsel for the assessee has submitted that the

same is nothing but refund / rebate out of the freight expenditure

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 6

incurred by the assessee which has resulted in increase in income of

the assessee.

assessee

Assessing officer is directed to consider the rebate on ocean freight as

income of the undertaking of the assessee. However, the findings of

the lower authorities in respect of the remaining items is affirmed.

agitated the action of the CIT(A) in directing the Assessing officer in

confirming the action of the CIT(A) for reducing profits of the units

eligible for deductions u/s 10B, 80IC and 80IB of the Act by

allocating Head office expenses. The Ld. CIT(A) while holding so,

however, has directed the Assessing officer to allocate the net Head

office expenses and not the gross net expenditure. We do not find any

infirmity in the order of the CIT(A) on the issue and the same is

accordingly upheld.

action of the CIT(A) in taxing the amount received on sale tax

exemption / subsidy. Both the Ld. representatives of the parties have

fairly submitted that the issue is now covered by the various decisions

of the Hon'ble High Courts including the decision of the Hon'ble

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 7

Supreme Court in ‘CIT-I Vs. M/s Chaphalkar Brothers, Pune and Others’ in Civil Appeal Nos. 6513-6514 of 2012 order dated 7.12.2017, wherein, it has been held that the aforesaid receipt is a capital receipt

and not exigible to taxation. We hold accordingly and the lower

authorities are directed not to tax the aforesaid receipts.

the action of the CIT(A) in directing the Assessing officer to make

disallowance u/s 14A of the Act on the actual expenditure incurred by

the assessee.

issue is squarely covered in favour of the assessee by the decision of

the Hon'ble Jurisdictional High Court in the case of the assessee in

ITA No.141 of 2012 dated 31.7.2013 and has pointed out that in the

year 2000-01, the assessee had earned dividend income of Rs. 2.16

crores whereupon the disallowance of Rs. 1 lac was affirmed by the

Hon'ble High Court. The Ld. Counsel for the assessee has further

submitted that for the year under consideration the assessee had

earned dividend income of Rs. 1.59 crores.

findings of the lower authorities.

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 8

involved admittedly is 2006-07. The Hon'ble Bombay High Court in

the case of ‘Godrej & Boyce Manufacturing Co. Ltd.’ 234 CTR 1 (Bom.)

held that Rule 8D of the Income Tax Rules is applicable from the

assessment year 2008-09 onwards and that for the year prior to

assessment year 2008-09, the disallowance u/s 14A is to be made on

some reasonable basis. Considering the overall facts and

circumstances of the case and the respective submissions of the Ld.

representatives of the parties, we confirm the disallowance of Rs. 2

lacs u/s s 14A of the Act on this issue for the year under

consideration. The remaining disallowance made by the lower

authorities is ordered to be deleted.

agitated the disallowance of foreign travel expenses of Rs. 11,46,863/-

in respect of expenditure on foreign travelling of the wife of the

Chairman & Managing Director, pleading that she had accompanied

him for business purpose and that she had duly assisted for procuring

business.

of the Managing Director of the assessee is neither employee nor the

director of the company, hence, the expenditure relating to her

foreign travelling should be disallowed.

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 9

In rebuttal, the Ld. Counsel for the assessee has submitted that

the company had passed a resolution authorizing the director of the

company to accompany his wife on the foreign travel and further that

she had duly helped the director in his business tour.

are of the view that the interest of justice will be well served if 50%

of the expenditure incurred on the foreign traveling of the wife of the

director is allowed. We, therefore, confirm the disallowance upto the

extent of 50% of the aforesaid amount and the remaining 50% of the

disallowance on this issue is ordered to be deleted.

Ground No. 9 : Vide ground No.9, the assessee has agitated the 20.

action of the CIT(A) in confirming the action of the Assessing officer

in not allowing premium payable on redemption of optionally

convertible foreign currency bonds as Revenue expenditure.

the decision of the Hon'ble Jurisdictional High Court in the case of

‘CIT Patiala Vs. Industrial Cables (P) Ltd’. reported in (2007) 162

taxman 272 (P&H), wherein, the issue is as to whether the premium

paid on expiry / redemption of debentures was to be treated as capital

expenditure or Revenue expenditure. The Hon'ble Court while relying

upon the other case laws held that the said premium paid by the

assessee on redemption of debentures as Revenue expenditure. The Ld.

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 10

counsel has further relied upon the decision of the Hon'ble Supreme

Court in the case of ‘Taparia Tools Ltd Vs. JCIT’ (2015) 7 taxman 361

wherein, the Hon'ble Supreme Court has held that such type of

premium / interest paid to debenture holders was to be allowed as

Revenue expenditure in the year of payment itself. Admittedly, in the

year under consideration, the assessee has booked the aforesaid

expenses payable which was paid in the assessment year 2011-12. In

view of this, the said expenditure is to be allowed in the year of

payment. Subject to the above observation, this ground of the

assessee’s appeal for the year under consideration is hereby

dismissed.

ground of appeal which reads as under:-

“That the authorities below have erred in treating the interest reimbursement of Rs. 24,64,44,644/- under Technology Upgradation Fund Scheme (TUFS) as Revenue receipt instead of capital receipt.”

24,64,44,644/- received under ‘Technology Upgradation Fund Scheme’

(TUFS) should be treated as capital receipt instead of Revenue receipt

as treated by the lower authorities.

Admittedly, this ground has been taken as addition ground which

has not been examined by the lower authorities. The Ld. Counsel for

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 11

the assessee submitted that in the earlier years also this issue has been

restored to the file of the CIT(A) for decision afresh.

assessee, this additional ground is restored to the file of the CIT(A)

for adjudication afresh in accordance with law taking intro

consideration the relevant case laws as may be available or cited

before him.

The appeal of the assessee is accordingly treated as partly

allowed.

ITA No. 35/Chd/2011 (A.Y.2006-07)

Now coming to the Revenue appeal in ITA No. 35/Chd/2011 25.

(A.Y.2006-07), in its appeal, has taken the following grounds:-

2 (i) That the Id. CIT(A) has erred in law and facts in directing the A.O. to treat the interest received from the customers and suppliers to be the income derived from industrial undertaking and eligible for exemption u/s 10B and deduction u/s 80IB and 80IC.

(ii) That the Id. CIT(A) has erred in law and facts in directing the A.O. to allow deduction u/s 80IB and 80IC and exemption 10B on profits after excluding loss debited in the accounts in respect of which the Insurance claims were received. (iii) That the Id. CIT(A) has erred in law and facts in directing the A.O. not to reduce foreign exchange fluctuation gain from eligible profits of units

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 12

eligible for deduction u/s 80IB and 80IC and exemption u/s 10B. 3 . The Id. CIT(A) has erred in law and facts in directing the A.O. to allocate the eligible head office income to the respective unit for calculating deduction u/s 801B and section 80IC and exemption u/s 10B. 4 . That the Id. CIT(A) has erred in law and facts in allowing the deduction u/s 80IB on profits of unit named Vardhman Spinning & General Mills (100% EOU) on which exemption u/s 10B has been claimed. 5 . That the Id. CIT(A) has erred in law and facts in deleting the addition of Rs. 16,43,668/- made u/s I4A by the A.O. on proportionate basis out of personal, administrative and financial expenses for earning of dividend income.

agitated the action of CIT(A) in deleting the interest received on

account of delayed payment from customer’s and suppliers as business

income instead of income from other sources.

In view of our findings given above awhile deciding ground No.1

of the assessee’s appeal in ITA No. 1429/Chd/2010, we do not find

any infirmity in the order of the CIT(A) on this issue. Ground No.1 of

the Revenue’s appeal is accordingly dismissed

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 13

parts. The Revenue in the Ist part has agitated the action of the

CIT(A) in directing the Assessing officer to treat the interest received

from the customers and suppliers to be income derived from industrial

undertaking and eligible for exemption u/s 10B and deduction u/s

80IB and 80IC of the Act. Since we have already held that the interest

income received on delayed payment is in fact part of the sale

consideration / receivable from the customers and we have also held

that the same to be treated as business income and since the aforesaid

receipts are relating to the sale receipts of the assessee of the

produced manufactured, hence, we do not find any infirmity in the

order of the CIT(A) in this respect.

In the second part of ground No.2, the Revenue has agitated the

action of the CIT(A) in directing the Assessing officer to allow

deduction u/s 80IB and 80IC and exemption u/s 10B on profit after

excluding loses debited in the accounts in respect of which insurance

claims were received. The Ld. Counsel for the assessee in this respect

has invited our attention to the paper book page 2 wherein the details

of the items has been given on which insurance claim was received.

However, after perusal of the same, it is not clear as to which of the

items constituted capital assets and which of the items constituted

trading asset of the assessee. We therefore, restore this issue to the

file of the assessee to bifurcate the items between capital assets and

trading assets and to allow the claim in respect of insurance claim

received on trading assets only.

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 14

in directing the Assessing officer not to reduce foreign exchange

fluctuation gain from eligible profits of units eligible for deduction

u/s 80IB and 80IC and exemption u/s 10B of the Act.

exchange fluctuation gain is in respect of export receipts / receivable

of the assessee and any gain in respect of receivable on account of

foreign exchange fluctuation in fact contributes to the profits of the

assessee from the sale/ export of the products. We find force in the

aforesaid contention. We do not find any infirmity in the order of the

CIT(A) in this respect also.

action of the CIT(A) in directing the Assessing officer to allocate the

eligible Head office expenses to the respective units for reducing the

same out of eligible profits of assessee for claim of exemption /

deduction u/s 80IB, 80IC and u/s 10B of the Act.

This issue has already been discussed while adjudicating ground

No.4 of the assessee’s appeal wherein we have upheld the order of the

CIT(A) on this issue.

In view of this, ground No.3 of the Revenue’s appeals is hereby

dismissed.

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 15

action of the CIT(A) in allowing deduction u/s 80IB in respect of unit

which has already claimed exemption u/s 10B of the Act. The Ld.

Counsel for the assessee has submitted that the assessee has claimed

deduction u/s 80IB in respect of unit Vardhman Spinning & General

Mills on the balance amount, after excluding the amount upon which

the exemption u/s 10B of the Act has been claimed.

In view of this, it is not a case of double deduction, hence we do

not find any infirmity in the order of CIT(A) on this issue also. The

order of the CIT(A)on this issue is accordingly upheld.

action of the CIT(A) in reducing / deleting the addition made by the

Assessing officer u/s 14A of the Act on account of expenditure

incurred for earning of tax exempt dividend income. This ground has

already been dealt with while adjudicating ground No.7 of the

assessee’s appeal wherein after considering the over facts and

circumstances of the case, we have directed to restrict the

disallowance to Rs. 2 lacs on this issue. We order accordingly.

action of the CIT(A) in treating the income from sale of shares as

income from capital gains instead of income from speculative loss as

assessed by the Assessing officer.

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana

going through the impugned order of the CIT(A), we are of the view

that the Ld. CIT(A) has rightly held that it was not a case of

speculative / trading in sale and purchase of the shares. The Ld.

CIT(A) therefore, has rightly treated the same as income from capital

gains while following the order of his predecessor for assessment year

2005-06. In view of this, we do not find any infirmity in the order of

the CIT(A) on this issue.

not require any specific adjudication.

In view of our findings given above, both the appeals of the

assessee and Revenue are treated as partly allowed.

ITA No. 270 & 286/Chd/2011 (A.Y.2007-08)

following grounds of appeal :-

Anant Auro Auro Auro Arisht Name of the VSGM Auro Spinning Wcavin Wvg Spinning Spinning unit EOU Textiles Mills Unil3 g Unit-2 Unit-3 Mills Mills

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana

Deduction 10B/ 10B 801 B 801 B 80IC 80IC 80IC claimed 80IB Interest from 304 Bank Interest from 103854 1627 others DEPB 142386 97833 134407 769738 2056766

Duty 2447280 2755000 293032 201342 13696283 8894379 11284064 Drawback Rent 471200 235503 80710 43397 12359452 1 593793 636884 1 Misc. 1406002 978 51888 53682 Receipts 586025 Commission 603 1996 1083 94395

Total 4429243 2993477 516128 342572 26243113 11845562 14125791

Anant-III Vsgm(Eou) Auro Auro Auro Spg. Auro Arisht Wev.II Wev.III Tex.

6449934 6077375 3632454 1746372 10711082 36161544 18348549

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 18

Hence the appeal may kindly be allowed, necessary reliefs as per aforesaid grounds may kindly be granted and/or other reliefs deemed fit and proper under the circumstances of the case may kindly be granted.

additional ground of appeal, which reads as under:-

“That the authorities below have erred in treating the interest reimbursement of Rs. 37,77,75,988/- under Technology Upgradation Fund Scheme (TUFS) as Revenue receipt instead of capital receipt.”

following grounds of appeal:-

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 19

2 (i) That the Id. CIT(A) has erred in law and facts in directing the A.O. to treat the interest received from the customers and suppliers to be the income derived from industrial undertaking and eligible for exemption u/s 10B and deduction u/s 801B and 80IC.

(ii) That the Id. CIT(A) has erred in law and facts in directing the A.O. to allow deduction u/s 8OIB and 80IC and exemption 10B on profits after excluding loss debited in the accounts in respect of which the insurance claims were received.

(iii) That the Id. CIT(A) has erred in law and facts in directing the A.O. not to reduce foreign exchange fluctuation gain from eligible profits of units eligible for deduction u/s 801B and 80IC and exemption u/s 10B.

3 . The Id. CIT(A) has erred in law and facts in directing the A.O. to allocate the eligible head office income to the respective unit for calculating deduction u/s SOIB and sec 80IC and exemption u/s 10B.

4 . That the Id. CIT(A) has erred in law and facts in allowing the deduction u/s 80IB on profits of unit named Vardhman Spinning & General Mills (100% EOU) on which exemption u/s JOB has been claimed.

the issues either by the assessee or by the Revenue are identical to that

have been taken for assessment year 2006-07, hence our findings

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 20

arrived at in respect of each of the issue will apply mutatis-mutandis

to the issues taken by the assessee as well as by the Revenue for

assessment year under consideration i.e assessment year 2007-08. It

is clarified that one of the issue which is identical to assessment year

2006-07 in relation to the disallowance u/s 14A of the Act, there is a

difference in figure of tax exempt dividend income earned by the

assessee during the year. The assessee during the year had earned

dividend income of Rs. 2.19 cores whereas in the assessment year

2006-07, the assessee had earned dividend income of Rs. 1.59 crores.

14A of the Act is restricted to Rs. 2.50 lacs for the year under

consideration. As discussed above, our findings as arrived at in the

assessment year 2006-07 on the remaining issues will apply to the

issues raised in appeals relating to assessment year 2007-08 also.

Accordingly, the appeals of the assessee as well of the Revenue are

treated as partly allowed.

Order dictated and pronounced in the Open Court immediately on completion of hearing.

Sd/- Sd/- (अ�नपूणा� गु�ता / ANNAPURNA GUPTA) (संजय गग� / SANJAY GARG) लेखा सद�य/ Accountant Member �या�यक सद�य/ Judicial Member Dated : 18.12. 2018 “आर.के.”

ITA Nos. 1429-c-10 & 35-C-2011- & 270 & 286-c-2011- M/s Vardhman Textiles ltd., Ludhiana 21

आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar