D.C.I.T CIR - 3,KOLKATA, KOLKATA vs. M/S CRESCENT FOUNDRY CO PVT LTD, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH ‘C’ KOLKATA [Before Hon’ble Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM ] ITA Nos.973& 974 /Kol/2013 Assessment Years : 2003-04 & 2006-07

D.C.I.T., Circle-3, -versus- M/s. Crescent Foundry Co. Pvt.Ltd Kolkata Kolkata (PAN:AABCC 0101 C) (Appellant) (Respondent) C.O.No.70/Kol/2013 A/o ITA No.974/Kol/2013 Assessment Year : 2006-07

M/s. Crescent Foundry Co.Pvt.Ltd. -versus- D.C.I.T., Circle-3, Kolkata Kolkata (PAN:AABCC 0101 C) (Cross Objector) (Respondent)

For the Department: Md.Ghyas Uddin, JCIT, Sr.DR For the Assessee : Shri Pawan Kumar Kedia, FCA

Date of Hearing : 19.07.2016. Date of Pronouncement : 03.08.2016.

ORDER Per N.V.Vasudevan, JM

ITA No.973/Kol/2013 is an appeal by the Revenue against the order dated 04.01.2013 of CIT(A)-XX, Kolkata, relating to AY 2003-04. ITA No.974/Kol/2013 is also an appeal by the Revenue against the order dated 04.01.2013 of CIT(A)-XX, Kolkata, relating to AY 2006-07. C.O. No.70/Kol/2013 is a Cross Objection filed by the assessee against the order of CIT(A)-XX, Kolkata dated 04.01.2013 relating to AY 2006-07. ITA No. 973/Kol/2013 (A.Y.2003-04): 2. Grounds of appeal raised by the revenue read as follows :- “1. Ld. CIT(A) is erred in law and on the facts and in circumstances of the case by allowing deduction u/s 80HHC for Rs.1,33,92,449/- by violating the provisions of Rule 46A and allowing the claim of the assessee without due verification of the facts & figures required to arrive at the correct amount of allowance. ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

The Assessee is a company. It is engaged in the business of manufacture of iron castings, MS item & plastic items. The assessee filed return of income for A.Y.2003- 04 declaring the total income of Rs.1,49,71,820/-. Order of assessment u/s 143(3) of the Income Tax Act, 1961 (Act) was passed on 30.03.2005. Later on, the AO noticed that because of the change in law by the Taxation Laws (Amendment) Act , 2005 with retrospective effect from 01.04.1998, the assessee’s claim for deduction u/s 80HHC(3) of the Act that was allowed in original assessment proceedings was excessive. Therefore reassessment proceedings were initiated against the assessee u/s 147 of the Act. The issue that was considered by the AO in the re-assessment proceedings was as to the manner in which profit on sale of DEPB licence had to be computed. The AO noticed that the total value of export incentive in the form of DEPB licence received by the assessee during the previous year was a sum of Rs.,1,31,54,015/-. The assessee had however taken only Rs.2,14,209/- as the value of export incentive which had to be deducted from the profits eligible for deduction u/s 80HHC of the Act. The AO accordingly recomputed the deduction u/s 80HHC as follows :- “Deduction computed as per Form No.10CCAC Rs.2,90,07,262/- Less : 90% of DEPB Licenses of the assessee Rs.1,18,38,614/- Rs.1,71,68,648/- 50% thereof Rs.85,84,324/- Penalty u/s 271(1)(c) is initiated separately., Hence, income of the assessee is assessed u/s 147/143(3) of the Act as follows: Income assessee u/s 143(3) Rs.2,95,59,195/- Less: Deduction u/s 80HHC Rs. 85,84,324/- Total Income Rs.2,09,74,871/- Rounded off Rs.2,09,74,870/-“

The deduction u/s 80HHC which was originally allowed was a sum of Rs.1,45,45,505/-. In the reassessment proceedings the sum stood reduced to Rs.85,84,324/-. 3. Aggrieved by the order of AO the assessee preferred appeal before CIT(A). Before CIT(A) the assessee submitted it is engaged in export of 100% of goods manufactured

ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

by them and the export turnover admittedly exceeded Rs.10 crore during the year under review. It had an option to choose either duty draw back or duty entitlement passbook scheme (DEPB) and the rate of drawback credit attributable to the customs duty was not .higher than the rate of credit allowable under DEPB. The assesses company thus opted for DEPB and hence the second, third, and fourth proviso to sec 80HHC (3) would not apply to the assessee. The benefit u/s 80HHC(3) for the assessee would thus be calculated as under: a) Profit of the business X Export Turnover Total Turnover b) The amount in. (a) above. shall be increased by 90% of amount in clause (iiia), (iiib) and (iiic) of section 28 X Export Turnover Total Turnover. c) "Profit of business" means the profit of the business as computed under the head "Profit and gains of business or profession as reduced by - ' i) Ninety percent of any sum refereed to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28. or any receipts by way of brokerage, commission, interest, rent, or any other .receipt of a similar' nature Included in such profits and (ii) the profits of any branch, .office, warehouse or any other. establishments of the assessee situated outside India. In the present case the assessee has availed of the DEPB and therefore clause (iiid) of sec. 28 would be applicable. Clause(iiid) of section 28 dealing with DEPB reads as under: “( iiid) any profit on the transfer of the Duly Entitlement Pass Book Scheme, being the Duty. Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) It was submitted that in clause (iiid) the word mentioned is "any profit on transfer of ........... " It is thus only the profit arising on sale or transfer of DEPB is covered u/s 28(iiid) of the Act and not the entire realization on transfer of DEPB. Upon making an export the exporter becomes entitled to claim credit of certain percentage of value .of exported product which can be used to adjust the amount payable on account of ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

customs duty, if any import is made by him. So as soon as export is made it gives rise to an entitlement basically to neutralize the duty component comprised in raw material used in goods exported. The exporter can either import the goods and use this entitlement for payment of customs duty or transfer the same to any other importer who gets the same benefit. The exporter thus buys goods in local market paying duties and offset the duty element by transferring his entitlement. This is a vital element for calculation of cost when the exporter calculates his sales price in a competitive environment. The profit on transfer of DEPB entitlement is the premium that the exporter gets over and above the credit value from the intending buyer. And it is only this profit: which is envisaged u/s 28(iiid). The face value of DEPB, being in the nature of an assistance, is chargeable u/s 28(iiib). 4. The Assessee substantiated the above contention with an example, by assuming that i) An exporter has exported goods worth Rs.100/-. ii) As. per Import and Export Policy he is entitle for 10% of the -value of goods exported under DEPB Scheme. So he is entitled for Rs.I0/- under. iii) The export can import his raw material and reduce his cost by availing the credit of Rs.-10/- against his liability of customs duty or buy the raw material indigenously by paying a higher price and transfer DEPB, which may be at a bit premium or discount depending on 'market condition. iv) In the -first option of making import, there is no transfer of DEPB while in the second option he transfers his entitlement of Rs:I0/- for say Rs.11/. v) The entitlement value of Rs.l0/-, which could be used for availing tax credit has is, thus, nothing but his cost and any premium received over and above the entitlement value is his profit; which in instant example is Re.1/-. 5. In the. light of above,. while calculating “Profit of Business" u/s 80HHC(4C)(baa) only profit element on transfer of DEPB entitlement is required to be deducted and not the entire value received on transfer of DEPB. It was submitted that the above proposition of law has been upheld by Special Bench of Hon'ble ITAT, Mumbai in the case of Topman Exports Vs. ITO 318 ITR 87 (Mum) (SB)(AT) and the same was ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

also confirmed by the Hon’ble Supreme Court. It was argued that the AO has taken entire amount recd on DEPB sale as profit u/s 28(iiid) which needs to be bifurcated into cost, the entitlement portion, and the profit, the difference between sale price and entitlement portion. The profit can only be ignored while calculating deduction u/s·80HHC and not the entire sale proceed. 6. The CIT(A) found force in the contention of the Assessee and upheld the stand taken by the Assessee. The following were his findings: “6.2 I have perused the assessment order and considered the submission of the appellant. Following the judgement in the case of Topman Export of Hon'ble Supreme Court the AO is directed to calculate the deduction u/s.80HHC as under: Turnover Mfg.Export Trading Export Domestic Sale Total

Sales 167441560 1737155 13154015 182332730 Less : Freight 6902552 21115 6923667 160539008 1716040 13154015 175409063 Profit of the Business Income as per order u/s 143(3) dt. 30.03.2005 29577634 Less: Profit on sale of Investment 105766 90% of Dividend Recd 10955 90% of Interest 332914 90% of face Value DEPB entitlement 14406917 90% of Profit on sale of DEPB28(iiid) 192789 15049341 14528293 Indirect Cost Total Cost 154713808 Less:Direct cost of Trading Goods 1092759 Direct Cost of Mfg. Goods 123907873 Freight 6923667 131924299 Total Indirect cost 22789509 Indirect Cost of Trading Goods (22789509*1716040/175409063) 222951 Profit in respect of Trading Goods Opening Stock 67520 Add:Purchase 1095430 1162950 Less: Closing Stock 70191 ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

Direct Cost 1092759 Export Turnover of Trading Goods 1716040 Less : Direct Cost 1092759 Indirect cost 222951 1315710 400330 Profit in respect of Mfg. Sale Adjusted Profit of the Business Profit of the business 14528293 Less : Profit of export of trading goods 400330 A 14127963 Adjusted Export Turnover Export Turnover 162255048 Less: Export Turnover of trading goods 1716040 B 160539008 Adjusted Total Turnover Total Turnover 175409063 Less: Export Turnover of trading goods 1716040 173693023 Profit from export of Mfg. Goods (A*B/C) 13058033 First Proviso 90% of sum referred to in section 28(iiia),(iiib) & (iiic)-i.e. Face value of DEPB Licence entitlement 14406917 Export Turnover 162255048 Total Turnover 175409063 Amount to be added under first proviso 13326535 Deduction available u/s 80HHC Profit in respect of Trading Goods 400330 Profit of Mfg Goods 13058033 Amount added in first proviso 13326535 26784898 Amount deductible @ 50% 13392449

28(iii) of the Act and not the entire realisation of transfer of DEPB. The ld. DR however was of the view that even the action of CIT(A) in coming to the conclusion that it is only the profit arising out of sale for transfer of DEPB which is covered u/s 28(iii) of the Act is also challenged in the grounds of appeal. We are of the view that even if the contention of the DR is accepted the same is without any merit in view of the decision of the Hon’ble Supreme Court in the case of Topman Exports Civil Appeal No.1699 of 2012 arising out of SLP (C) No.26558 of 2010 dated 8.2.2012 whereby the ruling of the Special Bench in the case of Topman Exports (supra) has been upheld. Hence, the computation of deduction u/s.80HHC as done by the CIT(A) is in order and calls for no interference. 8. As far as violation of the provision of Rule 46A of the IT Rules as raised by the revenue is concerned, the ld. Counsel for the asessee had no objection if the figures which have been considered by CIT(A) and the statement in support of the same are re-considered by the AO. In view of the above, we set aside the order of CIT(A) in so far as it relates to the computation of the quantum of deduction u/s 80HHC of the Act in the light of the decision of the Hon’ble Supreme Court in the case of Topman Exports (supra). For statistical purposes the appeal of the revenue is treated as allowed. ITA No.974/Kol/2013 A.Y.2006-07 9. As far as the appeal of the revenue is concerned, ground no.1 raised by the revenue reads as follows :- “1. Ld. CIT(A) is erred in law and on the facts and in circumstances of the case by deleting of Rs. 14,32,581/ - accepting the written submission which is not supported by any documentary evidences like certificate from pollution control authority, or any certificate from any technical person / authority certifying that the assets in question are pollution control equipment. “ 10. The facts as far as ground no.1 raised by the revenue is concerned are that the assessee claimed depreciation at 100% on pollution control equipments. The AO called upon the assessee to furnish the details on which the depreciation has been claimed. The asseseee furnished copies of the bills before the AO. The AO on perusal of the bills noticed that the assessee had purchased raw materials like H.R. coil, plate, CD Bars etc. The assessee further claimed that from these raw materials the assessee ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

had manufactured on its own pollution control equipments on which depreciation at 100% was claimed. The AO however made the following observations in the order of assessment to deny the claim of the assessee to depreciation on pollution control equipment. “The assessee was requested to justify the claim of depreciation @100% on alleged pollution control equipments. The details submitted by the assessee did not justify the assessee's claim of depreciation on such pollution control equipments. The claim of tile assessee appears to be with an intention to suppress the profits. It is held that the claim of depreciation by the assessee @l00% on pollution control equipment is not genuine. The assessee has not been able conclusively to establish the justification of the claim. However, the assessee is allowed the claim depreciation ,on the equipment, considering the equipment as "plant & machinery". Therefore, the claim is allowed @15%. Accordingly, the depreciation is re-worked to Rs.2,11 ,602/ - and the balance amount of depreciation amounting to Rs.14,32,581/- is disallowed out of the claim of depreciation and added back to the assessee’s total income. “” 11. Before CIT(A) the assessee submitted that the assessee was in the manufacture of iron castings. In the process of manufacturing of castings a considerable amount of polluted air is released. The assessee gave a list of pollution control equipments it had installed to reduce the air pollution. This list is given in para 5.1. of the CIT(A)’s order. The assessee further pointed out that it was not possible for the assessee to carry on its manufacturing activity without such pollution control equipments as these are statutory requirements and inspected by the pollution control authorities. The assessee also pointed out that the AO has not doubted the claim of the assessee that it had on its own manufactured the pollution control equipments by buying the required raw materials and in the circumstances the claim for deduction of depreciation at 100% should be allowed. The CIT(A) found force in the submissions of the assessee and he has accordingly allowed the claim of the assessee by observing as follows :- “5-2 I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the appellant claimed depreciation on an asset claiming as Pollution Control equipment, However, the A.O treated the same as Plant and Machinery and accordingly allowed depreciation @15% as against' 100% claimed by the appellant. However; .the A.O could not bring any material on record to establish that same was not pollution control Equipment whereas the appellant proved the requirement and established the same being pollution control equipment. After' careful consideration of the Submission, I find from the facts that the so claimed asset was pollution control equipment which can not be treated as general plant and machinery

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because all the facts and conditions which require for an asset to treat it as pollution control equipment are satisfied. Therefore, the ground of appeal is allowed.”

Hon 'ble Court held that it is to the assessee to show by flow of fund that no amount of expenditures has been incurred in relation to exempt income and assessee company failed to discharge the burden.” 15. The assessee earns dividend income of Rs.7,69,946/- which did not form part of the total income under the Act. In view of the provision of section 14A of the Act read with Rule 8D of the IT Rules, 1962 (Rules) any expenditure incurred in earning income which does not form part of the total income under the Act cannot be allowed as deduction while computing the total income. On a query by the AO on the disallowance u/s 14A of the Act the assessee specifically brought to the notice of the AO that it had sufficient own funds out of which investments which yielded tax free income was made. The Assessee also submitted that surplus funds were invested to make investments. The Assessee had authorized the bank to make investments and no expenditure whatsoever was incurred to earn the tax free income and therefore no disallowance of expenses u/s.14A of the Act is necessary. 16. The AO however in the order of assessment did not make any reference to the aforesaid contention of the assessee and proceeded to determine the disallowance u/s 14A of the Act by applying the formula given in Rule 8D of Rules. The following was the computation done by the AO :- “The disallowance in respect of the long term investments as above is computed under Rule 8D read with Sec.14A holding that the provisions of Rule 8D are applicable with retrospective effect as under: Direct Expenses : The amount of expenditure directly relating to income which does not form part of total income – In the P&L A/c. No item of expenditure is identified which can be directly attributable to earning of such income or making of the long term investments listed above. Therefore, this figure is adopted at Rs. Nil. Disallowance of Interest = A x B/C Where A = Amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year : B = The average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; Here, A = Rs.27,38,878/- B = Rs, 1,80,72,310/- (being average of long term assets as on 31.03.05 and those as on 31.03.06.) ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

C = Rs.16,58,94,269/- (being average of total assets appearing in the balance sheet as on 31.03.06 and 31.03.05 respectively.) Therefore, the disallowance = Rs.27,38,878/- x Rs.1,80,72,310/- = Rs.2,98,370/- Rs.16,58,94,269/- Disallowance of ½% of average value of investment : The average value of investment income from which does not or shall not form part of total income in assessee’s case is Rs.1,80,72,310/-. Therefore, this component of disallowance would be Rs.90,362/-.

Therefore, total disallowance u/r. 8D read with sec. 14A = (i) + (ii) = (iii) = Rs.3,88,731/-.”

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Further there was short term capital gain of Rs.460893/- on above investments, on which tax is duly paid. The deletion of the addition made on account of disallowance of interest expenses is therefore held to be proper and order of the CIT(A) on the same is confirmed. 20. As far as the disallowance of other expenses is concerned it has been held by a co-ordinate Bench of this Tribunal in the case referred to by the CIT(A), that prior to A.Y.2008-09 Rule 8D was not applicable and disallowance u/s 14A of the Act had to be made on a reasonable basis. The Tribunal in several cases has applied 1% of the tax free income has amount which can be disallowed under the head “Other Expenses” This view of this tribunal has also been approved by the Hon’ble Calcutta High Court. We therefore confirm the order of the CIT(A) on this issue also. 21. Ground No.3 raised by the revenue reads as follows :- “3. Ld. CIT(A) is erred in law and on the facts and in circumstances of the case by deleting of Rs. 40,23,251/- made on account Bad Debt without rebutting the case laws cited by the AO and the reasons stated by the AO.”

would be recoverable and hence 60% was written off as bad debt in the books of accounts. The A.O differed on the estimation and disallowed 50% of the claim of bad debts on the reasoning that the assessee has to establish that the debt has become bad. 23. Before CIT(A), the Assessee submitted that the deduction on a/c of bad debt as allowed u/s 36(l)(vii) read with section 36(2), after amendment by the Direct Tax Laws (Amendment) Act 1987, envisage merely wiring off the debt as irrecoverable in the accounts of the assessee as a condition for such an allowance. Before the amendment by the DTL (Amendment) Act 1987, of course, there was a condition to establish that the debt has become bad. After the amendment the CBDT issued a circular no 551 dated 23.03.1990 clarifying that after the amendment the law no longer requires the assessee to establish that the debt has actually become bad. It was clarified that under the amended law write off of debt would be regarded as sufficient compliance of the provision in order to claim deduction u/s 36(1)(vii) of the Act. Further Hon'ble supreme court in the case of T.R.F. Limited vs C.I.T reported in 323 ITR 397(SC) has clearly observed that after 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Hence it was claimed that in view of the above circular of CBDT and the above judgment of Hon'ble Supreme Court, the A.O. has clearly erred in restricting the claim of Bad Debt to 50% of the claimed amount and the entire amount of Bad debt of Rs.8046502/- needs to allowed u/s 36(l)(vii). 24. The CIT(A) accepted the contention of the assessee and deleted the disallowance made by the AO. Aggrieved by the order of CIT(A) the revenue has raised ground No.3 before the Tribunal. 25. We have heard the submissions of the ld. DR and relied on the order of AO. The ld. Counsel for the assessee relied on the order of CIT(A). After considering the rival submissions we are of the view that order of the CIT(A) on this issue does not call for any interference. As rightly held by CIT(A) the deduction on account of bad debts had to be allowed if the debt in question or part thereof is written off as bad in the books of accounts of the assessee. There are other conditions for allowing the claim for ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

deduction on account of bad debts but the existence of those conditions in the case of the assessee has not been disputed by the AO. The only dispute raised by the revenue is that the only part of the debt written off is bad and therefore it cannot be said that the debt itself has become bad. In our view this inference drawn by the AO is not correct and in the light of the decision of the Hon’ble Supreme Court in the case of T.R.F. Limited vs CIT 323 ITR 397 (SC) it is not necessary after the amendment to the law w.e.f. 01.04.1989 provision of section 36(1)(vii) of the Act that the assessee is no longer required to establish that the debt in question which is written off as bad has in fact become bad and irrecoverable. We find no grounds to interfere with the order of CIT(A). Consequently ground no.3 raised by the revenue is dismissed. 26. In the result the appeal by the revenue is dismissed.

C.O.No.70/Kol/2013 (A/o ITA NO.974/Kol/2013 A.Y.2006-07 27. The grounds raised in the Cross Objection by the assessee read as follows :- “1.For that the CIT(A) should have allowed the assessee’s claim for additional depreciation @20% on Rs.1644183/- u/s 32 (iiia). 2.For that the CIT(A) should have deleted the entire disallowance of Rs.388731/- under section 14A.” 28. As far as ground no.1 is concerned this ground is an alternative claim in the event of depreciation on pollution control equipments is not allowed at 100% as claimed by the assessee. Since we have already allowed the claim of the assessee for deduction at 100% on pollution control equipments this ground raised in the cross objection has been infructuous and the same is dismissed as infructuous. 29. As far as ground no.2 raised in the cross objection is concerned the assessee has submitted that no disallowance of other expenses under Rule 8D (2)(iii) of the IT Rules should have sustained. We are of the view that in the light of the decision of the Tribunal referred to by CIT(A), for sustaining the disallowance at 1% of the tax free income, we do not find any merit in this ground raised in the cross objection. Accordingly this ground raised in the cross objection is dismissed.

ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07

[Waseem Ahmed ] [ N.V.Vasudevan ] Accountant Member Judicial Member Dated : 03.08.2016. [RG PS] Copy of the order forwarded to: 1.M/s. Crescent Foundry Co. Pvt. Ltd., Suit No.406, 7/1, Lord Sinha Road, Kolkata- 700071.

2.D.C.I.T., Circle-3, Kolkata

Asst. Registrar, ITAT, Kolkata Benches Kolkata Benches

ITA Nos.973&974/Kol/2013&C.O.70/Kol/2013-M/s. Crescent Foundry Co.P.Ltd.A.Y.200304&2006-07