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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI ASHWANI TANEJA
Date of Hearing – 21.01.2016 Date of Order – 13.04.2016 4 M/s. GTC Industries Ld. O R D E R PER BENCH
These appeal by the assessee and Revenue are directed against separate orders of the learned Commissioner (Appeals) pertaining to A.Y. 2003–04 to A.Y. 2006–07 and 2008–09. As the issues involved in all these appeals are more or less common, as a matter of convenience, these were heard together and are being disposed off by way of this consolidated order.
./2007 – A.Y. 2003–04
The assessee in this appeal has raised five effective grounds.
Ground no.1 is in relation to disallowance of software expenses of ` 2,27,600, treating it as capital in nature.
Brief facts are, the assessee, a company, is engaged in manufacturing of cigarettes and processed tobacco. For the year under consideration, assessee filed its return of income on 27th November 2003, declaring loss of ` 24,08,76,434. In the course of assessment proceedings, the Assessing Officer while verifying the Profit & Loss account noticed that assessee has debited an amount of ` 5,69,000, towards software expenses. He, therefore, called upon the assessee to explain why the expenditure claimed should not be disallowed as it is 5 M/s. GTC Industries Ld.
in the nature of capital expenditure. In response to the query raised, it was submitted by the assessee that due to advancement of technology at a rapid pace, frequent up–gradation and replacement of computer and software is required. It was submitted, the up–gradation is not of an enduring nature and the computer software becomes obsolete within a short time of span. He, therefore, submitted, the expenditure claimed has to be allowed as revenue expenditure. In the alternative, it was submitted, in case the expenditure is treated as capital in nature, depreciation @ 60 should be allowed. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, as per the schedule of depreciation, computer software is a depreciable asset. Thus, he opined, as computer software has been specifically included along with computer in the depreciation schedule, it is in the nature of capital expenditure and the assessee would be eligible to claim depreciation @ 60%. Thus, the Assessing Officer, applying the said rate, worked out the depreciation at ` 3,41,400, while disallowing balance amount of ` 2,76,600. Being aggrieved of such disallowance, assessee preferred appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) observing that similar claim was made by the assessee in assessment year 2002–03 was not allowed by his predecessor–in–office rejected assessee’s claim.
6 M/s. GTC Industries Ld.
The learned Authorised Representative referring to the written submissions filed before the first appellate authority submitted, out of the total expenditure claimed an amount of ` 3.24 lakh pertained to annual support fee for BAAN–IV ERP users’ licence. It was submitted, the expenditure incurred was not on account of acquisition of any software but is annual support fee which is in the nature of annual maintenance charges in relation to usage of software. He, therefore, submitted, the expenditure is required to be allowed in full as it is not in the nature of capital expenditure. The learned Authorised Representative submitted, the Tribunal, Mumbai Bench, while considering similar payment made for acquiring ERP software licence of the same company in case of Perfect Circle India Ltd. v/s ACIT, 2014–TIOL–807, has held the expenditure as revenue in nature. He submitted, the assessee has paid an amount of ` 1.50 lakh for customisation of time and attendance software, it was submitted, the expenditure incurred was not on account of acquisition of any software but it pertains to fee charged for modification in the existing software which is akin to repair and replacement of the software. Hence, it cannot be treated as capital expenditure and in support of such contention, learned Authorised Representative relied upon the decision of the Hon'ble Madras High Court in CIT v/s Karur Vysya Bank, [2015] 54 Taxmann.com 324 (Mad.).
7 M/s. GTC Industries Ld.
The learned Departmental Representative relied upon the order of the learned Commissioner (Appeals) and the Assessing Officer.
We have considered the submissions of the parties and perused the material available on record. On a perusal of the assessment order, it is noticed that the Assessing Officer while holding the expenditure as capital, has not at all examined the exact nature of expenditure. Before the learned Commissioner (Appeals), though, the assessee has submitted in detail the nature of expenditure incurred in a cryptic and unreasoned order, the learned Commissioner (Appeals) rejected the claim of the assessee by merely referring to the decision of his predecessor–in–office for assessment year 2001–02 and 2002– 03 without even bothering to examine whether the facts involved are similar or not. Though, it may be a fact that computer software along with computer is included in the depreciation schedule and depreciation @ 60% is allowable but that will not be a ground enough to disallow assessee’s claim if the expenditure incurred is of revenue nature. In the present case, it is the claim of the assessee that an amount of ` 3.24 lakh was for annual support fee for maintenance of an existing software. Same is the case of expenditure of ` 1.50 lakh for a customisation of existing software. Undisputedly, the assessee is not in software business but is a manufacturer of cigarette and 8 M/s. GTC Industries Ld.
processed tobacco products. Therefore, if the software enhances efficiency of the assessee’s business and not used as a tool for his business, then the expenditure has to be treated as revenue expenditure. The decision relied upon by the learned Authorised Representative supports this view. In view of the aforesaid, we allow assessee’s claim. Ground no.1, is allowed.
In ground no.2, assessee has challenged the addition made to the closing stock on account of unutilised MODVAT.
At the time of hearing, learned Authorised Representative did not wish to press the ground. Consequently, the same is dismissed as “not pressed”.
In ground no.3, assessee has challenged the decision of the Departmental Authorities in adding the amount of ` 27,27,663, to the stock on account of stocks written–off / taken at nil.
Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has written–off finished goods worth ` 27,27,663. He, therefore, called upon the assessee to justify his claim. In response, it was submitted by the assessee that company has been showing value of closing stock as on the last date of the accounting year at nil value in respect of certain stock of finished good
9 M/s. GTC Industries Ld. whose self–life has expired. It was further submitted, assessee is following the same method of accounting from the earlier year and the value of same stocks which are forming part of the opening stock has also been taken at nil at the closure of account for the preceding assessment year. It was also submitted, in case the Assessing Officer adds the amount to the closing stock, then the opening stock for assessment year 2004–05 should be increased to that extent. The Assessing Officer, after considering the submissions of the assessee observed, the stock of finished goods valued at nil actually has market value and accordingly, made addition of ` 27,27,663 to the closing stock and consequently to the income of the assessee.
The Learned Commissioner (Appeals) found that similar addition to closing stock in assessment year 2002–03, was challenged before the learned Commissioner (Appeals) and learned Commissioner (Appeals) had directed to enhance the opening stock to that extent in the subsequent assessment year. Accordingly, he directed the Assessing Officer to make similar adjustment in the impugned assessment year also.
The learned Authorised Representative referring to the written submissions filed before the learned Commissioner (Appeals) submitted, certain stocks of manufactured cigarettes are of no use
10 M/s. GTC Industries Ld. after expiry of its self–life. Learned Authorised Representative submitted, the Department has made the addition on the allegation that stocks were not destroyed. He submitted, irrespective of the fact whether stocks are destroyed or not, the crucial aspect required to be seen is whether the stock has any value. He submitted, if the assessee has valued the stock at nil, the Department cannot challenge it. In support of such contention, assessee relied upon the decision of Hon'ble Delhi High Court in CIT v/s Tupperware India Pvt. Ltd., 2014– TIOL–610–HC–DEL–11.
Learned Departmental Representative relied upon the order of the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. As could be seen, neither the Assessing Officer nor the learned Commissioner (Appeals) has given any factual finding whether the stocks valued at nil are similar to stocks valued at market rate. In case, the stocks are damaged or destroyed they cannot be valued at market rate. That being the case, the value of such stock has to be taken at nil. It is seen from the facts on record total sales made by the assessee during the year was to the tune of ` 328.50 crore. During the year, the assessee manufactured total 7,075 million cigarettes and sold 7,204 million cigarettes.
11 M/s. GTC Industries Ld.
Considering the magnitude of manufacture and sale, it is quite natural that small quantity of manufactured product would be damaged. Therefore, without properly examining whether the stock valued at nil would fetch market value merely on presumption and surmises, it cannot be said that such stocks are to be valued at market rate. Therefore, as the Assessing Officer and the learned Commissioner (Appeals) have made the disallowance without physically verifying the stock valued at nil, no disallowance / addition could have been made. However, we make it clear if in the mean time the Assessing Officer has made similar adjustment to the opening stock, then no further relief can be given to the assessee as it will amount to double benefit. Ground no.3, raised by the assessee is allowed subject to above verification by the Assessing Officer.
In ground no.4, the assessee has challenged disallowance of depreciation on account of non-user of the asset.
Brief facts are, while examining assessee’s claim of depreciation, the Assessing Officer noticed, the assessee has claimed depreciation on certain asset given on lease. The Assessing Officer referring to certain judicial precedent opined that if the asset is not to be used, then no depreciation is allowed. He further observed, the assessee has given on lease the assets which were utilised by the parties to whom
12 M/s. GTC Industries Ld. they were given. He observed, as during the relevant previous year assessee has not at all utilised the asset for business it cannot claim depreciation. He further observed, parties to whom the assets have been leased out have the prerogative to claim depreciation. He observed, giving assets on lease is not assessee’s business. Accordingly, he disallowed an amount of ` 6,28,142 out of the claim of depreciation. Assessee challenged the disallowance before the learned Commissioner (Appeals).
Learned Commissioner (Appeals), after considering the submissions of the assessee, relying upon the decision of his predecessor–in–office in assessee’s own case for assessment year 2001–02 and 2002–03 allowed part relief to the assessee.
Learned Authorised Representative, at the outset submitted, the issue has been decided in favour of the assessee by the decision of the Tribunal in assessee’s own case for assessment year 2007–08.
Learned Departmental Representative on the other hand relied upon the order of the authorities below.
We have considered the submissions of the parties and perused the material available on record. As is evident, assessee’s claim of depreciation was disallowed primarily for the reason that it has not 13 M/s. GTC Industries Ld.
used the assets for the purpose of its business as it has leased out such assets to others. It is observed, similar issue came up for consideration before the Tribunal in assessee’s own case for assessment year 2007–08. The Tribunal found that though the assessee had given the assets on lease the ownership of the machine remained with the assessee and there was no scope for transferring the machines to the parties. It was further observed that leasing of plant and machinery has been one of the regular business activities of the assessee. On the aforesaid factual finding, the Tribunal upheld the order of the learned Commissioner (Appeals) in allowing assessee’s claim of depreciation. It is relevant to note in the impugned assessment year also facts are identical. The assessee has leased out the plant and machinery to others without transferring its ownership over them. That being the case, respectfully following the decision of the co–ordinate bench of the Tribunal, as referred to above, we allow assessee’s claim of deprecation. Ground no.4, raised by the assessee is allowed.
Ground no.5 relates to disallowance of interest amounting to ` 58,88,217 under section 14A of the Act.
Brief facts are, during the assessment proceedings, the Assessing Officer, while verifying the return of income, found that the assessee
14 M/s. GTC Industries Ld. has reserve and surplus of ` 104,23,19,824 and loans of ` 116,34,87,602. As against the aforesaid funds available, assessee has shown investment of ` 4,43,49,221. He further observed that it has advanced an amount of ` 6,30,76,406, to its 100% subsidiary GTC Global apart from investment of ` 51.80 lakh made in the said company. He also noticed that assessee has advanced loan amounting to ` 2,55,73,601, without any stipulation for re–payment. According to the Assessing Officer, total interest free loans and investments for which the proportionate interest was required to be disallowed is ` 13,29,99,228. The Assessing Officer observed, similar disallowance made in assessment year 2001–02 was confirmed by the learned Commissioner (Appeals). Though, the assessee objected to such disallowance and made elaborate submissions, but the Assessing Officer rejecting the submissions of the assessee held that the assessee utilised ` 6,54,24,634 of its interest bearing funds for investments / loans and advances without receiving any income. The Assessing Officer observed, even assuming that such loans, advances, investments, etc., are from interest free funds available with the assessee, if the assessee would not have diverted such funds to the subsidiary, there would not have been need for the assessee to obtain borrowed funds and accordingly, its interest burden would have reduced. The Assessing Officer, applying the average interest rate of 15 M/s. GTC Industries Ld.
9%, disallowed an amount of ` 58,88,217. Being aggrieved of such disallowance, assessee preferred appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) noticing that similar disallowance was upheld by his predecessor–in–office in assessee’s own case in assessment year 2001–02 and 2002–03, dismissed the ground of the assessee.
The learned Authorised Representative submitted, investments of ` 4,43,49,221, are carried over from earlier years appears in the Balance Sheet for assessment year 1998–99. He submitted, the disallowance made was deleted by the Tribunal on the reasoning that assessee had own funds to make the investment. He submitted, as far as investments in subsidiary GTC Global is concerned, the Tribunal in assessee’s own case for the assessment year 2007–08, has dismissed the appeal of the Revenue on the issue by holding that such investment is in course of regular business dealing between the companies. He submitted, other disallowances are also towards receivables from subsidiary companies and advance to manufacturers and suppliers in usual course of business. It was submitted, such advances / investments are for smooth running of business, hence, for business exigencies. It was submitted, even otherwise also, the 16 M/s. GTC Industries Ld.
assessee had running accounts with all the parties and the assessee has to pay much more to the subsidiaries than amount receivable by it from them. In this context, he referred to Noting–18, Schedule–Q at Page–38 of the audited account. Learned Authorised Representative submitted, even otherwise also section 14A, would not be applicable as these are old investments and the assessee has not incurred any expenditure for earning of exempt income. He submitted, the dividend income any way was taxable in the impugned assessment year.
The learned Departmental Representative relied upon the order of the authorities below.
We have considered the submissions of the parties and perused the material available on record. Undisputedly, the investment, loans, advances, etc., on the basis of which the Assessing Officer made proportionate disallowance of interest expenditure are not made during the impugned year but are carried over from earlier assessment year. It is observed, the issue relating to proportionate disallowance of interest had first cropped up in the assessment year 1997–98 and 1998–99. The Tribunal, after going through entire gamut of facts relating to investments / advances made to subsidiary categorically held that such investments, loans, advances, etc., are in regular course of business and for the purpose of business, hence, no 17 M/s. GTC Industries Ld.
disallowance is called for. Similar view was again expressed by the Tribunal in assessment year 1999–2000 vide ITA no.4492/Mum./2004 dated 30th August 2007 and in assessment year 2007–08 vide ITA no. 3198/Mum./2011 and others, dated 26th June 2013. There being no material difference in facts brought to our notice, respectfully following the consistent view of the Tribunal in assessee’s own case, we hold that no disallowance out of interest expenditure can be made as the investments, loans, advances are for business purposes. Even otherwise also, it is a fact on record that the assessee had enough surplus funds to make the investment. Therefore, no disallowance out of interest expenditure can be made. Accordingly, ground no.5 is allowed.
In the result, assessee’s appeal is allowed. ./2007 – A.Y. 2003–04
In this appeal, the Department has raised four grounds.
Ground no.1, is in relation to allowance of assessee’s claim of expenditure in T.V. film advertisement.
Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed expenditure of ` 28,54,98,021, on account of advertisement and sales promotion out
18 M/s. GTC Industries Ld. of which an amount of ` 56,63,499 was incurred towards development of T.V. advertisement film. Noticing such fact, the Assessing Officer called upon the assessee to explain why the expenditure on advertisement should not be disallowed. In response, it was submitted by the assessee that the expenditure was incurred for making T.V. film advertisement for promoting company’s various brands. In support, assessee also submitted supporting bills. The assessee further submitted such advertisement is essentially required to sustain and promote the brands because of stiff competition from giant companies like ITC and VST. It was submitted, the maximum benefit that can be derived from T.V. advertisement film is in six months, hence, there is no enduring benefit to the company. Further, it was submitted ban of advertisement through any media for cigarette and processed tobacco related products by Government has rendered such ad film redundant. The Assessing Officer observed, assessee is not in the business of producing ad films but the films have been produced by the assessee to be used for advertising its product. He observed, production of ad film by itself does not advertise anything. Only after a film has been produced, it is telecast and use for advertisement when it is telecast. He, therefore, concluded, production of ad film is not a business expenditure as it is not for the purpose of business. He was of the view, the expenditure incurred is capital in nature as it was for 19 M/s. GTC Industries Ld. acquiring an asset i.e., advertisement film which can be exploited by advertising it again and again in T.V., radio, etc. Accordingly, he disallowed the expenditure of ` 56,63,499. Being aggrieved of such disallowance, the assessee challenged it before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), noticing similar disallowance made in assessment year 2001–02 and 2002–03, was deleted by his predecessor–in–office followed the same and deleted the addition.
Learned Departmental Representative relying upon the observations of the Assessing Officer submitted, as assessee has produced films, the expenditure cannot be allowed as revenue expenditure.
Learned Authorised Representative on the other hand submitted, the Assessing Officer has completely misconceived the facts while coming to his conclusion. He submitted, assessee had not produced any films but the expenditures are for preparing slides shown in cinema house and for advertisement in print media. He submitted, all necessary and relevant details relating to expenditure incurred was submitted before the Assessing Officer. That being the case, the 20 M/s. GTC Industries Ld.
learned Commissioner (Appeals) was correct in allowing the expenditure claimed by the assessee.
We have considered the submissions of the parties and perused the material available on record. As could be seen from the bills raised towards advertisement expenses, these are not for production of any film. On the contrary, they are for advertisement through slides and print media. In our view, the Assessing Officer has not correctly appreciated the facts while coming to the conclusion that assessee has produced T.V. films for advertisement. There is no such film produced by the assessee. In these circumstances, disallowance made by Assessing Officer has rightly been deleted by the learned Commissioner (Appeals). Ground no.1, is dismissed.
In ground no.2, the Department has challenged part relief granted by the learned Commissioner (Appeals) in respect of the addition made to closing stock on account of unutilised MODVAT credit.
Brief facts are, during the assessment proceedings, the Assessing Officer noticed, assessee has unutilised MODVAT credit of ` 12,01,210. He, therefore, called upon the assessee to explain why unutilised MODVAT should not be added to the value of the closing stock. Though, the assessee explained that unutilised MODVAT credit need not be added to the closing stock but the Assessing Officer rejecting
21 M/s. GTC Industries Ld. his claim held that unutilised MODVAT credit in terms of section 145A, has to be included in the value of closing stock. However, the Assessing Officer noticing that an addition of ` 15,85,382 was made on that account in the immediately preceding assessment year i.e., assessment year 2002–03, restricted the addition to ` 3,84,172. Being aggrieved of such addition, assessee challenged the same in preferring appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) following the order passed by his predecessor–in–office for assessment years 2001–02 and 2002– 03 held that if any adjustment made to the closing stock, similar adjustment has to be made to the opening stock also.
We have considered the submissions of the parties and perused the material available on record. It is observed, similar issue arose in case of assessee in ITA no.5213/Mum./2010, dated 26th June 2013, for the assessment year 2007–08, the Tribunal while deciding the issue observed as under:–
“21. During the assessment proceedings the A.O. noticed that the assessee has unutilized Modvat credit of ` 69,17,652 which was not added back to the value of closing stock as per the provisions of section 145 of the Act, hence the assessee was required to explain as to why the unutilized Modvat credit should not be added to the value of the closing stock. In reply it was stated that the assessee had purchased goods from its suppliers for a price and amount paid or incurred by the assessee for such purchases is the purchase price thereof, notwithstanding the fact that such purchase price may include
22 M/s. GTC Industries Ld. certain statutory levies such as sales tax and excise duty which are the liability of the supplier but which are merely recovered by the supplier from the assessee as a part of the purchase price. However, the explanation of the assessee was rejected by the A.O. and made addition of ` 69,17,652. Fuirther the A.O. observed that an addition of ` 96,32,471 made to the closing stock in the immediately previous year i.e. assessment year 2006-2007 hence net addition of ` 26,94,819 was made to the total income. Detailed submission was made before the CIT(A), which has been recorded in page 4 of his order. Thereafter the CIT(A) considering the case of the assessee and the decision of the Mumbai Bench of the Tribunal in the case of Pfizer Ltd. v. JCIT in & 2977/Mum/2003 vide order dated 07.08.2006 found that the additions were not made properly by the A.O. The CIT(A) noted that in view of the decision of the Tribunal mentioned above, the value of opening stock, purchases, sales, closing stock are required to be adjusted in terms of the provisions of the said section in regard to the excise duty etc. attributable to it. The CIT(A) further noted that apart from these adjustments, the adjustment in regard to the excise duty benefit availed under the Modvat Scheme by the assessee- company in regard to raw material consumed is required to be made. If after such adjustment there is a balance amount, that is required to be brought to tax and the said amount is to be added to the income of the assessee. No adjustment on this account will be there only in the theoretical situation where the assessee has utilized Modvat credit available only to the extent attributable to the raw material consumed. However such a situation will be rare considering that the assessee is entitled to utilize Modvat credit available for the payment of excise duty at any point, irrespective of the fact that the raw material to which it related to has been consumed or not. Thereafter some more observations were made by the CIT(A) and the A.O. was directed to modify his order accordingly. The learned AR fairly submitted that the CIT(A) has considered this aspect of the case while deciding the appeal for assessment year 2008-2009 against which no appeal has been preferred by the department. Therefore, for these reasons, the decision of the CIT(A) is liable to be sustained. However, direction should be given to the A.O. to modify his order in accordance with the directions given by the CIT(A). The learned AR has placed reliance on the order of the CIT(A).
22. After considering the order of the A.O. and CIT(A) we found no infirmity in the finding of the CIT(A), who has given direction to the A.O. to consider the aspects once again in 23 M/s. GTC Industries Ld.
view the observations made by him in his order. The learned AR has also accepted that the direction of the CIT(A) are correct which does not require any interference. However he wanted a direction to be given to the A.O. to modify his order as early as possible in view of the direction of the CIT(A). The Assessing Officer is bound to follow the direction of the CIT(A), therefore, he is advised to follow the direction of the CIT(A) in accordance with the directions of the CIT(A). We order accordingly.”
Law is now fairly well settled that the adjustment contemplated under section 145A, has to be made in all items like purchases, sales, opening and closing stock. That being the case, we do not find any infirmity in the order of the learned Commissioner (Appeals). Accordingly, ground no.2, is dismissed.
In ground no.3, Department has challenged the allowance of prior period expenses.
Brief facts are, during the assessment proceedings, the Assessing Officer on going through the tax audit report noticed that the expenditure claimed at ` 3,84,004, pertained to earlier year. He, therefore, called upon the assessee to explain why the expenditure claimed should not be disallowed. Though, assessee objected to the proposed disallowance by stating that the payment crystallized during the impugned assessment year but the Assessing Officer rejecting the claim of the assessee disallowed the amount of ` 3,84,004. Being
24 M/s. GTC Industries Ld. aggrieved of such disallowance, assessee challenged it in appeal preferred before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), after verifying the relevant facts and materials on record, noticed, though the expenditure relates to the previous assessment year but the bills were raised and passed only in previous year relevant to the assessment year 2003–04, hence, the liability accrued only during the year under consideration. Accordingly, he allowed the expenditure claimed by the assessee.
We have considered the submissions of the parties and perused the material available on record. As could be seen, the only reason for which the Assessing Officer disallowed the expenditure is, it pertains to the previous assessment year. However, as per the finding of fact recorded by the learned Commissioner (Appeals), the bills for expenditures were raised only in the impugned assessment year, therefore, the expenditures crystallised only in the impugned assessment year. That being the case, assessee is eligible to claim deduction for the expenditure incurred. Thus, ground no.3, is dismissed.
In ground no.4, the Department has challenged the relief granted by the learned Commissioner (Appeals) in enhancing the opening stock by ` 15,22,377.
25 M/s. GTC Industries Ld.
This ground is consequential to ground no.3, raised by the assessee in its appeal being ITA no.6995/Mum./2007. However, to briefly reiterate the facts of the case while deciding the appeal for assessment year 2002–03, in assessee’s own case, the learned Commissioner (Appeals) while upholding the order of the Assessing Officer in adding the value of stock taken at nil to the closing stock had directed the Assessing Officer to enhance the value of opening stock to that extent in assessment year 2003–04. However, while completing the assessment for the impugned assessment year, Assessing Officer did not make such adjustment to opening stock. The assessee, therefore, raised a ground before the learned Commissioner (Appeals) for enhancement of opening stock.
The learned Commissioner (Appeals), following the direction of his predecessor–in–office for the assessment year 2002–03 directed the Assessing Officer to enhance the opening stock by ` 15,22,377.
Having heard the parties and perused the material on record, we do not find any infirmity in the order passed by the learned Commissioner (Appeals). If some addition has been made to the closing stock, consequently, similar adjustment has to be made to the opening stock for the succeeding year. Accordingly, ground no.4, is also dismissed.
26 M/s. GTC Industries Ld.
In the result, Department’s appeal stands dismissed. ./2008 – A.Y. 2004–05
In this appeal, the assessee has raised seven grounds.
Ground no.1, relates to addition of unutilised MODVAT credit to the closing stock.
Learned Authorised Representative submitted before us that he did not wish to press this ground. Consequently, ground no.1, raised by the assessee is dismissed as ”not pressed”.
In ground no.2, assessee has challenged disallowance of prior period expenses of ` 14,994.
During the assessment proceedings, the Assessing Officer noticing that expenditure of ` 14,994, claimed under the head “Personal Cost” actually relates to bonus pertaining to earlier years. He, therefore, called upon the assessee to explain why the expenditure being a prior period item should not be disallowed. In response, it was submitted, though, the expenditure relates to a transaction taking place in the immediately previous assessment year, however, the liability to pay has accrued in the impugned assessment year, the Assessing Officer, however, did not accept the explanation of the 27 M/s. GTC Industries Ld.
assessee and disallowed the amount of ` 14,994, as such expenditure according to him did not relate to the impugned assessment year.
Learned Commissioner (Appeals) also confirmed the disallowance with the remark that details of such expenditure was not provided to establish the fact that the bonus pertains to the year under consideration. The learned Authorised Representative submitted, bonus expenses through were estimated in the previous year, however, the bonus became payable only in the current year. Therefore, the shortage or surplus is always considered in the year of actual expenses. In support of such contention, learned Authorised Representative referred to the note of auditor in Annexure–K, a copy of which is placed at Page–19 of the paper book.
The learned Departmental Representative relied on the order of the authorities below.
We have considered the submissions of the parties and perused the material available on record. Undisputedly, bonus relates to the previous assessment year. Though, the assessee has claimed that in the assessment year 2003–04, has created provisions for bonus payment on estimate basis, however, the amount became payable in the current assessment year. In our view, if the assessee has not claimed the expenditure or the expenditure has not been allowed in 28 M/s. GTC Industries Ld.
the previous assessment year, it should be allowed in the impugned assessment year. The Assessing Officer is directed to verify this aspect and decide the issue accordingly. Ground no.2, is allowed for statistical purposes.
In ground no.3, the assessee has challenged the addition made to closing stock on account of stock valued at nil.
This ground is similar to ground no.3, raised by the assessee in its appeal being ITA no.6995/Mum./2007, wherein we have decided the issue in favour of the assessee. Consistent with the findings given in Para–15 as aforesaid, we set aside the impugned order passed by the learned Commissioner (Appeals) on this issue and allow the ground no.3, raised by the assessee with similar observation.
Ground no.4, relates to disallowance of assessee’s claim of depreciation on leased assets.
This ground is also similar to ground no.4, raised by the assessee in its appeal being ITA no.6995/Mum./2007, wherein we have decided this issue in favour of the assessee. Consistent with the findings given in Para–21 as aforesaid, we set aside the impugned order passed by the learned Commissioner (Appeals) on this issue and allow the ground no.4, raised by the assessee.
29 M/s. GTC Industries Ld.
Ground no.5, relates to disallowance made out of interest expenditure on account of investments, loans, advances, etc., made to subsidiary.
This ground is similar to ground no.5, raised by the assessee in its appeal being ITA no.6995/Mum./2007, wherein we have decided this issue in favour of the assessee. Consistent with the findings given in Para–27 as aforesaid, we set aside the impugned order passed by the learned Commissioner (Appeals) on this issue and allow the ground no.5, raised by the assessee.
Ground no.6, relates to the issue of disallowance of ` 35,333, on account of payment of PF / ESIC dues.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that assessee has paid employees’ contribution for PF / ESIC after the specified due date, disallowed the amount of ` 35,333. Being aggrieved of such disallowance, though the assessee challenged the same before the learned Commissioner (Appeals), but at the time of hearing of appeal before the first appellate authority, the assessee did not press the ground.
The learned Authorised Representative submitted, the assessee has paid the employees’ contribution for PF / ESIC before the due date
30 M/s. GTC Industries Ld. of filing of return of income, hence, the deduction claimed has to be allowed. In support of such contention, he relied upon the decision of Hon'ble Jurisdictional High Court in CIT v/s Hindustan Organic Chemicals Ltd., Income Tax Appeal no.399 of 2012, dated 11th July 2014. The learned Authorised Representative submitted, though the assessee did not press this ground before the learned Commissioner (Appeals) keeping in view the law prevailing at the relevant point of time, but in view of the decision of the Hon'ble Jurisdictional High Court in assessee’s own case, assessee is entitled to deduction.
Learned Departmental Representative on the other hand submitted, as the assessee did not press this ground before the learned Commissioner (Appeals), he cannot raise it again at this stage.
We have considered the submissions of the parties and perused the material available on record. As is evident, assessee on his own volition, did not raise the ground before the learned Commissioner (Appeals). Accordingly, ground was dismissed as not pressed. That being the case, though, in principle, we agree that employees’ contribution to PF / ESIC if paid after the specified due date under the relevant statute, but before the due date of of return under section 139(1) of the Act, eligible for deduction, but since the assessee has 31 M/s. GTC Industries Ld.
given up the issue, we decline to entertain this ground. Ground no.6, is dismissed.
Ground no.7 relates to charging of interest under section 234A, 234B and 234C of the Act.
This ground is consequential in nature. Hence, we direct the Assessing Officer to give consequential effect in accordance with law while re-computing the income of the assessee.
In the result, assessee’s appeal is partly allowed for statistical purposes. ./2008 – A.Y. 2004–05
In this appeal, the Department has raised four grounds.
Ground no.1 relates to addition made to closing stock on account of unutilised MODVAT credit.
This ground is similar to ground no.2, raised by the Department in its appeal being ITA no.7223/Mum./2007, wherein we have decided this issue in favour of the assessee. Consistent with the findings given in Para–38 and 39 as aforesaid, we uphold the order passed by the learned Commissioner (Appeals) on this issue and dismiss ground no.1, raised by the department.
32 M/s. GTC Industries Ld.
In ground no.2, Department has challenged the decision of the learned Commissioner (Appeals) in deleting the addition made on account of disallowance of bad debts amounting to ` 1,13,214.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of ` 1,13,214, on account of bad debt written–off, called upon the assessee to furnish details in respect of bad debt. After going through the details submitted by the assessee, the Assessing Officer referring to certain judicial precedents held that for claiming bad debt, the assessee must prove that the debt is not recoverable and the decision to write–off is an honest decision. Accordingly, he disallowed the claim made by the assessee. The assessee challenged the disallowance before the learned Commissioner (Appeals).
Learned Commissioner (Appeals) allowed assessee’s claim by holding that once the assessee writes–off the bad debt in the books of account, there is no need for the assessee to further prove that the debt has become irrecoverable. Accordingly, he allowed assessee’s claim.
We have considered the submissions of the parties and perused the material available on record. As per the provisions of section 33 M/s. GTC Industries Ld.
36(1)(vii), the assessee has to fulfill two conditions for claiming bad debt; firstly, it must have been shown as income earlier; and secondly, the amount claimed as bad debt has actually been written–off in the books of account. The assessee nee not prove that the debt is no longer recoverable. In the present case, the Assessing Officer has disallowed assessee’s claim merely for the reason that assessee has failed to prove that debt has become irrecoverable. In our view, the reasoning on which the Assessing Officer disallowed the claim is not on sound legal principle. Accordingly, finding no infirmity in the order of the learned Commissioner (Appeals), we uphold the order of the learned Commissioner (Appeals) by dismissing the ground no.2, raised by the Department.
In ground no.3, Department has challenged the decision of the learned Commissioner (Appeals) in deleting the addition of ` 5,000, under section 40A(3) of the Act.
Brief facts are, during the assessment proceedings, the Assessing Officer found that assessee has made cash payment of ` 25,000 towards salary to employees in violation of section 40A(3). Though, the auditors in his notes on account stated that as per assessee the payment is covered by the exceptions provided under rule 6DD(i), but the Assessing Officer called upon the assessee to explain why 20% of 34 M/s. GTC Industries Ld.
the amount shall not be disallowed under section 40A(3). Though, the assessee objected to the proposed disallowance, but the Assessing Officer disallowed an amount of ` 5,000 under section 40A(3) of the Act. Being aggrieved, assessee challenged before the learned Commissioner (Appeals). However, in the course of hearing of appeal, assessee did not press this ground. Consequently, the learned Commissioner (Appeals) decided the issue against the assessee.
Learned Departmental Representative submitted before us that though the assessee did not press the ground before the learned Commissioner (Appeals), but he wrongly allowed the assessee’s claim.
Learned Authorised Representative fairly submitted, the assessee did not press this ground before the learned Commissioner (Appeals). However, referring to the observations of the learned Commissioner (Appeals), learned Authorised Representative submitted that the learned Commissioner (Appeals) has actually dismissed the ground.
We have considered the submissions of the parties and perused the material available on record. Undisputedly, before the learned Commissioner (Appeals), assessee did not press this ground. It is noted by us, assessee raised this issue in ground no.10, before the learned Commissioner (Appeals). The learned Commissioner (Appeals) decided the issue against the assessee by observing as under:–
35 M/s. GTC Industries Ld.
“The ground nos.9 and 10 have not been pressed during the appeal proceedings and under the circumstances, the grounds are decided against the appellant.”
In view of the aforesaid decision of the learned Commissioner (Appeals), we fail to understand how the Revenue can raise this ground. Accordingly, ground no.3, having become infructuous is dismissed.
In ground no.4, the Department has challenged the decision of the first appellate authority in treating the interest income earned as income from business as against income from other sources as held by the Assessing Officer.
Brief facts are, the Assessing Officer in the course of assessment proceedings, noticed that assessee has received interest of ` 1,09,78,163, during the relevant previous year which has been shown as income under the head “Business”. He, therefore, called upon the assessee to explain why such income shall not be treated as income from other sources. In response to the query raised by the Assessing Officer, it was submitted by the assessee that as the interest was earned out of deposits given to various banks towards margin money for executing Government contract, the interest income has to be treated as business income. The Assessing Officer, however, did not 36 M/s. GTC Industries Ld.
find merit in the submissions of the assessee. He observed, the assessee is involved in the business of manufacturing and sale of cigarette. Therefore, interest earned on idle money kept in the banks is not the business activity of the assessee, hence, the interest income has to be treated as income from other sources and, accordingly, passed the assessment order. Being aggrieved of such decision of the Assessing Officer, assessee challenged the same before the learned Commissioner (Appeals).
Before the learned Commissioner (Appeals), it was argued by the assessee that in the course of its business activities, assessee has to execute bank guarantee in favour of Government Departments and issue letter of credit to the suppliers and to avail such facilities from the bank it is mandatory to maintain with the bank a specific percentage of the sanctioned amount as margin money in the form of fixed deposit. Thus, it was submitted by the assessee the interest received on such fixed deposits being integrally connected to the business activities should be treated as business income. The learned Commissioner (Appeals), after considering the submissions of the assessee and factual details available on record, found that the interest income earned is on fixed deposit kept as margin money for bank guarantee / letter of credit. Learned Commissioner (Appeals) having found that such bank guarantee / letter of credit were obtained
37 M/s. GTC Industries Ld. from the banks mainly in connection with the business activities, held the interest earned on margin money kept as fixed deposit has to be treated as business income. Accordingly, learned Commissioner (Appeals) allowed assessee’s claim.
Learned Departmental Representative relying upon the reasoning of the Assessing Officer in Para–10.7 of his order submitted, interest earned on fixed deposit under no circumstances, can be treated as business income of the assessee.
Learned Authorised Representative on the other hand strongly supporting the order of the learned Commissioner (Appeals) submitted, as the interest earned on fixed deposit kept as margin money in respect of bank guarantee / letter of credit obtained from banks is in connection with the business activities, the income has to be treated as business income of the assessee. Learned Authorised Representative submitted, similar issue arose in assessee’s own case for assessment year 2007–08 and the Tribunal accepted assessee’s claim by directing the Assessing Officer to treat it as business income after verification. Learned Authorised Representative also referred to the decision of the Hon'ble Gujarat High Court in Empire Pump Pvt. Ltd. v/s ACIT, of 2003 & Ors., dated 14th October 2014.
38 M/s. GTC Industries Ld.
We have considered the submissions of the parties and perused the material available on record. As is evident from the facts and material on record, the fixed deposit on which the assessee has earned the interest income are kept as margin money with the banks against the bank guarantee / letter of credit, issued to various authorities, State Government in connection with assessee’s business activities. Therefore, as the fixed deposit kept with the banks has a direct nexus with the business activities of the assessee, the interest income has to be assessed under the head “Business”. It is further observed, the issue arose in assessee’s own case for assessment year 2007–08 and the Tribunal while deciding the issue in ITA no.5213/Mum./2010 dated 26th June 2013, held as under:–
“25. After considering the orders of A.O. and CIT(A) and the submissions of both parties, we found that the facts of the case was not properly examined either by the A.O. or by the CIT(A). It is seen that major part of interest is earned from Syndicate Bank, Canara Bank, State Bank of India, Allahabad Bank, UTI Bank. These interests earned by the assessee from these banks are against bank guarantee or letter of credit. Therefore, these interests had been directly linked with the commercial activity of the assessee. When there is a commercial activity established, then of course, earning of interest or incurring of expenditure for earning the interest is to be treated as for business expediency. The decision of the Bombay High Court in the case of Lok Holdings (supra) whereby it has been held that interest on FDR is to be treated as business income as there was a direct nexus. In the case of assessee also there is a direct nexus between the borrowed funds and the margin money deposited by the assessee with the bank. Accordingly, we direct to allow the issue in favour of the assessee after verification of the facts that there is a direct nexus between the earning of interest and expenditure of interest. If the interest is earned on account of deposits made
39 M/s. GTC Industries Ld. on account of bank guarantee or letter of credit then of course it has to be treated as there is commercial expediency, and therefore, the interest expenditure or interest income is treated for the purpose of business. Accordingly, we direct the A.O. to do the needful as per our above observations. This ground is of the assessee is allowed as stated above.
Further, the Hon'ble Gujarat High Court in Empire Pump Pvt. Ltd. (supra) while considering similar nature of dispute held as under:–
“10. Thus, it is clear that the income earned from fixed deposit placed for business purpose cannot be treated as income from other source but must be seen as part of the assessee’s business income. In the present case also the assessee was compelled to park a part of its funds in fixed deposits under the insistence of the financial institutions and therefore the income received thereupon cannot be termed to be income from other sources.”
In view of the principle laid down as above, we do not find any infirmity in the order passed by the learned Commissioner (Appeals) on this issue. Accordingly, ground no.4, is dismissed.
In the result, Department’s appeal is dismissed. ./2010 – A.Y. 2005–06
In this appeal, the assessee has raised two effective grounds. 91. Ground no.1, relating to addition made to closing stock on account of unutilised MODVAT credit was not pressed at the time of hearing. Hence, this ground is dismissed as not pressed.
40 M/s. GTC Industries Ld.
In ground no.2, the assessee has challenged the decision of the first appellate authority in treating the interest income earned as income from other sources as against income from business as claimed by the assessee.
This ground is similar to ground no.4, raised by the Department in its appeal being ITA no. 2921/Mum./2008, wherein we have decided this issue in favour of the assessee by dismissing the ground raised by the Department. Consistent with the findings given in Para–87, 88 and 89 as aforesaid, we set aside the impugned order passed by the learned Commissioner (Appeals) on this issue and allow ground no.2, raised by the assessee.
In the result, assessee’s appeal is allowed. ./2010 – A.Y. 2005–06
In this appeal, the Department has raised two effective grounds.
Ground no.1, relates to disallowance of depreciation on leased assets.
This ground is also similar to ground no.4, raised by the assessee in its appeal being ITA no.6995/Mum./2007, wherein we have decided this issue in favour of the assessee. Consistent with the findings given
41 M/s. GTC Industries Ld. in Para–21 as aforesaid, we set aside the impugned order passed by the learned Commissioner (Appeals) on this issue and allow the ground raised by the assessee.
Ground no.2, relates to deletion of disallowance of interest expenditure made by the Assessing Officer amounting to ` 63,62,782.
This ground is similar to ground no.5, raised by the assessee in its appeal being ITA no.6995/Mum./2007, wherein we have decided this issue in favour of the assessee. Consistent with the findings given in Para–27 as aforesaid, we uphold the order of the learned Commissioner (Appeals) on this issue by dismissing the ground raised.
In the result, departments appeal is dismissed. ./2010 – A.Y. 2006–07
In this appeal, the assessee has raised two effective grounds.
Ground no.1, relating to addition made to closing stock on account of unutilised MODVAT credit is dismissed as not pressed.
In ground no.2, the assessee has challenged the decision of the first appellate authority in treating the interest income earned as income from other sources as against income from business as claimed by the assessee.
42 M/s. GTC Industries Ld.
This ground is similar to ground no.4, raised by the Department in its appeal being ITA no. 2921/Mum./2008, wherein we have decided this issue in favour of the assessee by dismissing the ground raised by the Department. Consistent with the findings given in Para–87, 88 and 89 as aforesaid, we set aside the impugned order passed by the learned Commissioner (Appeals) on this issue and allow ground no.2, raised by the assessee.
In the result, assessee’s appeal is allowed. ./2010 – A.Y. 2006–07
In this appeal, the Department has raised two effective grounds.
Ground no.1, relates to disallowance of depreciation on leased assets.
This ground is similar to ground no.4, raised by the assessee in its appeal being ITA no.6995/Mum./2007, wherein we have decided this issue in favour of the assessee. Consistent with the findings given in Para–21 as aforesaid, we do not find any reason to interfere with the order of the learned Commissioner (Appeals) and dismiss the ground no.1 raised by the Department.
43 M/s. GTC Industries Ld.
Ground no.2, relates to deletion of disallowance of interest made by the Assessing Officer amounting to ` 22,95,665.
This ground is similar to ground no.5, raised by the assessee in its appeal being ITA no.6995/Mum./2007, wherein we have decided this issue in favour of the assessee. Consistent with the findings given in Para–27 as aforesaid, we uphold the order of the learned Commissioner (Appeals) and dismiss ground no.2, raised by the Department.
In the result, Revenue’s appeal is dismissed. ./2012 – A.Y. 2008–09
In this appeal, the Department has raised two effective grounds.
Ground no.1, relates to allowance of depreciation on discarded and leased assets.
Brief facts are, during the assessment proceedings, the Assessing Officer after verifying the details of depreciation found that the assessee has claimed depreciation on leased and discarded assets. He, therefore, called upon the assessee to justify its claim. In response, it was submitted by the assessee that depreciation on leased plant and machinery is very negligible amounting to ` 171. As far as depreciation on discarded asset is concerned, it was submitted by the assessee that 44 M/s. GTC Industries Ld.
it is eligible for such claim. The Assessing Officer after considering the submissions of the assessee, however, did not find merit in the same. As far as leased assets are concerned, he observed that since they were not used by the assessee for its own business, no depreciation is allowable. As far as discarded assets are concerned, it was held by the Assessing Officer that depreciation on such asset is not allowable as the assessee itself has stated that due to oversight, it was claimed. Being aggrieved of such disallowance, assessee challenged the same before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) after considering the submissions of the assessee, however, allowed the claim of depreciation. As far as depreciation on leased asset is concerned, the learned Commissioner (Appeals) held that in assessment year 2007– 08, his predecessor–in–office has held that leasing of plant and machinery is the regular business of the assessee, hence, depreciation on leased assets is to be allowed. As far as discarded assets are concerned, the learned Commissioner (Appeals) held that since such assets are part of block of assets even if such asset is not used for the purpose of business, however, as the block as a whole is used, depreciation is to be allowed for the entire block and cannot be segregated.
45 M/s. GTC Industries Ld.
We have considered the submissions of the parties and perused the material available on record. As far as leased assets are concerned, the issue is covered by the decision of the Tribunal for assessment year 2007–08 referred to in the earlier part of the order while deciding similar issue. As far as depreciation on discarded asset is concerned, undisputedly, such assets form part of the block on which assessee has claimed depreciation. Therefore, when the assessee is claiming depreciation on block of asset, out of such depreciation claimed some disallowance cannot be made on the ground that some assets forming part of the block have not been used for the business. In Natco Exports v/s DCIT, 86 ITD 445 (Hyd.), relied upon by the learned Authorised Representative, it has been held that the expression used “for the purpose of business” has to be construed to mean that the discarded plant and machinery on which the assessee has claimed depreciation was used for the purpose of assessee’s business in the earlier financial years even though they may not have been used in the relevant previous year. In view of the aforesaid, we do not find infirmity in the decision of the learned Commissioner (Appeals). Ground no.1, raised by the Department is dismissed.
Ground no.2, relates to disallowance of interest on investments in sister concern.
46 M/s. GTC Industries Ld.
This ground is similar to ground no.5, raised by the assessee in its appeal being ITA no.6995/Mum./2007, wherein we have decided this issue in favour of the assessee. Consistent with the findings given in Para–27 as aforesaid, we uphold the order of the learned Commissioner (Appeals) and dismiss ground no.2, raised by the department.
In the result, Department’s appeal is dismissed. Order pronounced in the open Court on 13.04.2016