ACIT, CHANDIGARH vs. M/S VTL INVESTMENT LTD., CHANDIGARH

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ITA 762/CHANDI/2009Status: DisposedITAT Chandigarh11 December 2018AY 2006-0713 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal restricted the disallowance under Section 14A to 5% of the total tax-exempt earned income. It also directed the inclusion of interest from customers, insurance claims, and processing charges in eligible income for Section 80IC deduction, while excluding profit on raw material sale.

What were the facts?

The assessee appealed against the disallowance of expenses related to dividend income and exclusion of certain receipts from eligible profits for deduction. The Revenue also appealed against certain directions of the CIT(A) regarding deductions and disallowances.

What were the issues?

The key issues were the computation of disallowance under Section 14A for exempt dividend income and the eligibility of various receipts for deduction under Section 80IC.

Which sections of the Income-tax Act were involved?

Section 14A,Section 80IC

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आदेश/Order

Per Sanjay Garg, Judicial Member:

The captioned appeals have been preferred by the assessee and

Revenue against the separate orders of the Commissioner of Income Tax

(Appeals), Chandigarh [hereinafter referred to as CIT(A)].

2.

First, we shall take up assessee’s appeal in ITA No. 550/Chd/2009,

wherein, following grounds of appeal have been taken: 1. That the Ld. CIT(A) has erred in law and on the facts while upholding the action of the Assessing officer for allocating proportionate Salary, traveling & conveyance, postage & telegram and telephone & telex expenses amounting to Rs. 270645 to exempted dividend income and disallowing the same u/s 14A of Income Tax Act.

2.

Without Prejudice to Ground No. 1 above, the Ld. CIT(A) has erred in law and on the facts while upholding the action of the assessing officer for calculating the allocable expenses for earning dividend income by apportioning the expenses in the ratio of dividend income to profits of the undertaking instead of dividend income to total receipts of the appellant.

3.

That the Ld. C1T (A) has erred in law and on the facts while upholding the action of the Assessing officer for excluding following receipts from the eligible profits for deduction u/s 80-IC of Income Tax Act.

Particulars Amount (Rs.)

Sale of DEPB 224462 Profits on sale of raw material 4330

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 3

4.

That the Ld. C1T (A) has erred in law and on the facts while directing to exclude Interest received, provision no longer required written back, sundry balances written back and Misc. Receipts from the eligible profits for deduction u/s 80-IC of Income Tax Act.

5.

That the Ld. CIT (A) has erred in law and on the facts while not directing the Assessing officer to observe consistency in approach in Income tax Proceedings against the appellant while allowing deduction u/s 80-IC of the Income Tax Act.

6.

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

It is prayed that 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.

4.

Ground Nos.1 & 2 : Vide these grounds, the assessee has agitated

the disallowance of Rs. 2,70,645/- on account of apportionment and

thereby disallowance of expenditure relatable to the earning of tax exempt

dividend income under the provisions of section 14A of the Income-tax

Act, 1961 (in short 'the Act').

Admittedly, the assessment year involved in this appeal is assessment

year 2006-07. The assessee did not offer any disallowance u/s 14A of the

Act, whereas, the Assessing officer made the disallowance of Rs.

2,70,645/-, however, the assessee has disputed the computation made by

the Assessing officer. It may be observed that in the case of ‘Godrej &

Boyce Manufacturing Co. Ltd. 234 CTR 1 (Bom.) the Hon'ble Bombay

High Court has held that Rule 8D of the I.T. Rules r.w.s. 14A(2) of the

I.T. Act is not arbitrary or unreasonable but can be applied only if the

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 4

assessee's method is not satisfactory. It has been further held that Rule 8D

is not retrospective and applies from A.Y. 2008-09. For the years for which

Rule 8D is not applicable and in the event of that the AO is not satisfied

with the explanation/working given by the assessee, disallowance under

section 14A has to be made on a reasonable basis. Almost similar view has

been expressed by Hon'ble Delhi High Court in the case of 'Maxopp

Investment Ltd, & Others' vs. CIT (247 ITR 162). In respect of cases prior

to assessment year 2008-09, the different co-ordinate Benches of this

Tribunal have observed that certain percentage of exempt income can

constitute a reasonable estimate for making disallowance for the years

earlier to assessment year 2008-09. The Hon'ble Bombay High Court in

the case of ‘CIT Vs. Godrej Agrovet Ltd.,’ (ITA No. 934/2011) decided on

8.1.2013 has upheld the order of the Tribunal directing the Assessing

officer to restrict the disallowance to the extent of 2% of the total exempt

income earned by the assessee. The Coordinate Mumbai Bench of the

Tribunal in the case of ‘M/s ‘CIBA India Ltd Vs. DCIT’ ITA No.

9128/2010 for assessment year 2006-07 vide order dated 20.2.2015 while

relying upon the decision of the Hon'ble Bombay High Court in the case of

‘CIT Vs. Godrej Agrovet Ltd.,’(supra) taking into account the

consideration of facts and circumstances of that case has held that the

expenditure equal to 4% of the exempt income earned by the assessee

would constitute reasonable disallowance u/s 14A and directed

accordingly.

Applying the above proposition and considering the facts and

circumstances of the case, in our view the interest of justice will be met if

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 5

the disallowance made u/s 14A of the Act is restricted to 5% of the total

tax exempt earned income . We order accordingly.

5.

Ground No.3: This has not been pressed and the same is dismissed

as not pressed.

Ground No.4 : Vide ground No.4, the assessee has agitated the 6.

action of the lower authorities in excluding certain income like interest

received, provision written back, sundry balances written back and Misc.

receipts from the eligible profits for deduction u/s 80IC of the Act. As per

the lower authorities, since the aforesaid receipts did not constitute income

from the manufacturing process, hence, the same was not allowable to be

includible for the purpose for eligible income for deduction u/s 80IC of

the Act.

7.

So far the issues relating to the non-inclusion of the receipts, on

account of interest received from customers on account of delayed

payments, the provision of written back and sundry balances written back

are concerned, the Ld. counsel has invited our attention to the order of

the Tribunal in the own case of the assessee, in the earlier / changed

name of the assessee ‘Vardhman Yarn & Threads Ltd’, in ITA No.

530/Chd/2012 & others vide order dated 13.7.2017 and has submitted that

while deciding Revenue’s appeal bearing No. 569/Chd/2012, the Tribunal

has dealt with the issue taken in ground No.3 of the assessee which has

been decided in favour of the assessee . We have also examined the details

of claim in respect of Misc. receipts which constitute the insurance claim

of Rs. 1,89,394/- on account of damaged stock, which in our view, is a

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 6

loss compensated for the damaged stock and thereby it will have effect to

reduce the loss / expenditure, hence allowable for deduction u/s 80IC of

the Act. So far as the receipts on account of interest from customers,

provisions written back and sundry balances written back, these

undisputedly relate to the business activity of the assessee and from

income from the unit of the assessee. So far as the discount on brokerage

of ocean freight is concerned, the Ld. Counsel for the assessee has

explained that it is discount received by the assessee on payment of

brokerage and it will have resulted in netting of the expenditure incurred

on account of brokerage and this will goes on to increase the business

income of the assessee.

8.

In view of this, in the light of the decision of the Tribunal in the

own case of the assessee bearing ITA No. 530/Chd/2012 & others order

dated 13.7.2017 (supra) and in view of our above discussion, the income

for the times as discussed above is eligible to be considered and included

in the income the assessee for the purpose of deduction u/s 80IC of the

Act. However, the claim of duty draw back amounting to Rs. 427/- and

Misc. receipts of Rs. 1201/- is not found tenable and the said receipts are

to be excluded for the purpose of computing deduction u/s 80IC of the Act

9.

Ground No.6 is general in nature and does not require any specific

adjudication.

The appeal of the assessee stand partly allowed.

ITA No.762/Chd/2009 Now coming to the appeal of the Revenue in ITA No.762/Chd/2009. 10.

The Revenue has raised the following grounds of appeal:-

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 7

1.

On the facts and in the circumstances of the case, the Learned C.I.T. (Appeal) in Appeal No. 353/P/08-09 dated 01.05.2009 has erred in deleting the addition of Rs. 56,770/- on account of shortage of finished goods..

2.

The Learned C.I.T. (Appeal) has erred in deleting the addition of Rs. 1,41,346/- on account of free samples with regard to closing stock details which the assessee could not clarify.

3.

The Learned C.I. T. (Appeal) has erred in deleting the addition of Rs. 48,014/- made by the A. O. on account of excess depreciations claimed on printer.

4.

The Learned CIT(A) has erred in allowing deduction u/s 80IC of the Income tax Act, to the assessee especially when the process undertaken by the assessee is not manufacturing as it does not entail bringing into existence a new and distinct product and nor was the change irreversible.

5.

The Learned CIT(A) has erred in directing to work out profit on sale of raw material for disallowing the same from claim of deduction u/s 80IC when the assessee had itself shown the same as income.

6.

The Learned CIT(A) has erred in holding that deduction u/s 80IC was to be allowed on the income from waste and scrap sale when these were not manufacturing activity.

7.

The Learned CIT(A) has erred in directing to allow deduction u/s 80IC on processing which is not manufacturing activity.

8.

The Learned CIT(A) has erred in deleting the addition made by the A.O. on account of purchase of steam on arm length pricing especially when steam is a fast depleting commodity and can not possibly be sold in the open market.

11.

At the outset, both the Ld. Representatives of the parties have drawn

our attention to a chart to demonstrate that most of the issues are covered

in favour of the assessee by the earlier orders of the Tribunal.

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 8

12.

Ground Nos. 1 & 2: So far as ground Nos. 1 & 2 which are relating

to the addition of Rs. 56,770/- on account of shortage of furnished goods,

the same is covered by the decision of the Tribunal in the own case of the

assessee for assessment year 2003-04 bearing ITA No. 265/Chd/2007

dated 23.12.2013, wherein, identical issue is decided vide para 11 of the

said order for assessment year 2003-04, and the Tribunal after discussing

the facts of the case has observed that the shortage in the finished goods

being very small and is normally due to wastage etc. and also considering

the plea of the assessee that it is customary that some of the samples may

be distributed for promotion of the products, had deleted the addition.

13.

Considering the above decision of the Tribunal and also considering

meager amount as compared to the large stock of the assessee of the

finished goods, we do not find any merits in these grounds of the Revenue

and the order of the CIT(A) is upheld on these issues,

14.

Ground No.3 is relating to the claim of excess depreciation on

printer. As per the assessee, the same being a computer software asset, the

assessee was entitled to the depreciation @ 60% which otherwise is upheld

by the CIT(A).

15.

However, the Ld. DR has submitted that the printer does not

constitute software which is depreciable and, hence, the depreciation at

the normal rate should have been allowed.

16.

We have heard the rival contentions. The assessment year involved is

assessment year 2006-07. Even if the depreciation is allowed at a higher or

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 9

normal rate of the depreciation rate, the entire of the depreciation will be

get absorbed / stands allowed by now i.e. i.e. in the assessment year

2019-2020. We do not see any merit at this stage to interfere as it will not

serve any purpose as the same will ultimately have ‘nil’ tax effect. Hence,

without deliberating upon the merits of the issue, we think that at this

stage, the findings of the CIT(A) needs not to be disturbed. This ground of

the Revenue’s appeal is therefore, stands dismissed.

17.

Ground No.4: Vide ground No.4 the Revenue has agitated the action

of the CIT(A) that as to whether the activity carried on by the assessee

constitute the ‘manufacturing process’. The issue is admittedly covered by

the decision of the Tribunal in ITA No. 569/Chd/2012 vide order dated

13.7.2017, wherein, the Tribunal has discussed this issue vide paras 13 to

15 of the said order. Since the issue has already been decided in favour of

the assessee in the own case of the assessee in earlier assessment year and

no contrary decision has been cited before us, this ground of the Revenue

has no merit and the same is accordingly dismissed.

18.

Ground No.5: Vide ground No.5, the Revenue has agitated the action

of the CIT(A) in directing the Assessing officer to work out the profit on

the sale of raw material and thereafter disallow the same for the eligible

profits u/s 80IC of the Act. The Ld. Counsel for the assessee has

submitted that admittedly the sale of raw material cannot be said to be an

activity from the manufacturing unit of the assessee. However, what is to

be disallowed is the profit on the sale of the raw material. We do not find

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

upheld.

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 10

19.

Ground No.6 : The Revenue vide this ground has agitated the action

of the CIT(A) in allowing deduction u/s 80IC of the Act on the income

from waste and scrap sale. The plea of the assessee is that the waste and

scrap is generated out of the manufacturing activity of the assessee. The

Ld. CIT(A) considering the facts and circumstances of the case has also

held so. In view of this, we do not find any infirmity in the order of the

CIT(A) on this issue. This ground of the Revenue is therefore, dismissed.

20.

Ground No.7 : Vide ground No.7, the Revenue has agitated the

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

u/s 80IC of the Act on the processing charges received by the assessee.

The Ld. CIT(A) after considering the submissions of both the parties and

also examining the facts of the case held that the same to be an activity

carried out by the assessee for third party and has directed the Assessing

officer to allow deduction u/s 80IC of the Act on the profits earned from

the processing activity of the assessee.

21.

After considering the rival submissions, we do not find any infirmity

in the order of the CIT(A) on this issue also. This ground, therefore, stands

dismissed.

22.

Ground No.8: Vide ground No.8, the Revenue has agitated the

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

addition made by him on account of purchase of steam on arm length

pricing from the sister concern. The case of the Assessing officer was that

since the aforesaid product was a fast depleting commodity and could not

have been possibly sold in the market, the assessee devised the aforesaid

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 11

method of sale / purchase from the sister concern, therefore, the said

expenditure was not allowable as expenditure. The Ld. CIT(A) after

considering the submissions of the assessee and also considering the fact

that only a reasonable profit @ 7.37& has been paid to the sister concern,

deleted the disallowance of the expenditure.

23.

We have considered the rival submissions and also have gone

through the order of the CIT(A) and we do not find any infirmity in the

same. In view of this, there is no merit in the ground raised by the

Revenue and the same is accordingly dismissed.

In the result, the appeal of the Revenue is partly allowed.

ITA No. 539/Chd/2011:

24.

The assessee in this appeal has taken following grounds of appeal:-

1.

That the Ld. C1T(A) has erred in law and on facts while passing the impugned appellate order on the following issues.

2.

That the Ld. CIT(A) erred in law and on facts while upholding the impugned order of the Ld.AO on regarding exclusion of the following receipts from eligible profits for deduction u/s 80IC of The Income Tax Act. 1961 :

Particulars Amount(Rs.) Interest from 10,72,909 customers Insurance Claims 5,82,944 Raw material 27,84,591 sale DEPB 14,278 Processing 53,299,902 Charges

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 12

3.

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

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

25.

A perusal of the above grounds of appeal reveals that all the issues

taken in this appeal have been discussed in the earlier paras of this order

while disposing of the appeal of the assessee for assessment year 2006-07

in ITA No. 550/Chd/2009.

26.

In view of our observations made above, the receipts of interest from

customers, insurance claims and profits of processing charges as directed

above are to be included under the eligible income for the purpose of

deduction u/s 80IC of the Act. However, the claim of the assessee

regarding DEPB has since not been pressed, is rejected.

So far as the receipts on account of raw material sale is concerned, as

observed above, only the profit element in the sale / purchase of raw

material is to be excluded for deduction u/s 80IC of the Act as directed

above, while deciding ground No.5 of the Revenue’s appeal for

assessment year 2006-07 as above.

27.

There is an additional ground moved by the assessee in this appeal

in respect to disallowance u/s 14A read with Rule 8D (2)(iii) of the Act

amounting to Rs. 53,43,300/-. However, during the course of hearing the

appeal, the Ld. Counsel for the assessee has not pressed this ground,

hence; this ground is dismissed as not pressed.

In the result, the appeal of the assessee is treated as partly allowed.

ITA Nos. 762 & 550/Chd/2009 & 538/Chd/2011- M/s VTL Investment Ltd. 13

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 : 11.12.2018 “आर.के.”

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

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