Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri N.V.Vasudevan & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
These two sets of Cross-appeals by Revenue and assessee are against the orders of Commissioner of Income Tax (Appeals)-X, Kolkata dated 16.09.2005 and 29.01.2007. Assessments were framed by DCIT/ACIT, Circle- 10/Range-10, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide their orders dated 30.03.2005 and 28.02.2006 for assessment years 2002-03 and 2003-04 respectively.
First we take up assessee’s appeal in ITA No.488/Kol/2006 (A.Y.02-03) 2. At the time of hearing Ld. AR stated that he has been instructed by assessee not to press Ground no. 4 & 5, hence same are dismissed as not pressed.
The first issue raised by assessee in ground no. 1(a) and 1(b) in this appeal is that ld. CIT(A) erred in confirming the order of AO by holding the expenses incurred for business re-organization as capital in nature whereas these are revenue in nature. The assessee further alternatively claimed for the allowing of the deduction of depreciation if treated the said expenditure as capital in nature.
The facts in brief are that the assessee in the present case is a limited company and engaged in the manufacturing business of paints, pharmaceuticals and rubber etc. The assessee for the year under consideration has claimed cost of business re-organization of ₹5,23,93,000/- in the profit & loss A/c which includes the following – a) An amount of ₹421.24 lakhs accrued in the books of account in respect of voluntary compensation (including amounts provided for various
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 3 retirement benefit fund) for certain employees who have accepted premature retirement. b) The cost of restructuring of rubber chemicals business activities at the Rishra Factory. The re-organisation expense of Rs.102.69 lakhs comprise mainly of salary and overhead cost of personnel engaged in the restructuring exercise.
The AO during assessment proceedings sought clarification from the assessee about the nature of such expense and questioned that why such expense should not be treated as capital in nature as there will be enduring benefit out of such re-organisation expenses. In compliance to the notice the assessee submitted that the restructuring expenses are revenue expenses related to business and therefore eligible for deduction. However the AO found that in the earlier assessment year 2001-02 similar expenses were also disallowed which was also confirmed by the Ld. CIT(A). Accordingly the cost of business re-organisation amounting to Rs.5,23,93,000/- was also disallowed during this year by treating the same as capital expenditure due to long enduring benefit to the assessee and added to the total income of the assessee.
Aggrieved assessee preferred an appeal before ld. CIT(A) where it was submitted that the AO disallowed the cost of business reorganization without the application of mind as the components of the re-organization expenses in the current year are different compared to the earlier years. The expenditure also does not result in any capital asset which can be termed an enduring benefit as the expenses are purely revenue in nature. Assuming but not admitting that if the said expenditure is treated as capital in nature, the appellant should be allowed deduction by way of depreciation in the current year and the following year. However the ld. CIT(A) disregarded the plea of the assessee by observing as under :
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 4 “I have carefully considered the submission of the AR and facts of the case. As apparent from the impugned order, the appellant has made similar and identical submission before the AO during the assessment proceeding. The AO after having duly considered the submission or the appellant company has not accepted the same. In the assessment year 2001-02, similar course of business re-organization consists of components of similar and identical nature was disallowed by the AO and the same was confirmed by the then CIT(A) after having considered the merits and facts of the case. Although the appellant has stated that the reorganization expenses for the year under consideration are different from the expenses incurred in earlier year, it could not substantiate the said contention with supporting materials to establish and support the contention. I find the nature of re-organization expenses are similar and identical with the expenses incurred in earlier years. Accordingly, the disallowance of Rs.5,23,93,000/- stands upheld.”
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
Before us the ld. AR submitted the paper book which is running from pages 1 to 179 and stated that the amount of payment towards the voluntary retirement of the employees is very much covered under section 35DDA of the Act. With regard to the salary and overhead cost of the personnel involved in the business reorganization the assessee submitted that all these expenses are revenue in nature and therefore eligible for deduction. The ld. AR also alternatively submitted that in case the expenditure incurred on the business reorganization are treated as capital expenditure then the same should be eligible for the depreciation. On the other hand the ld. DR vehemently supported the order of the lower authorities.
From the aforesaid discussion we find that the AO has disallowed the expenses comprising of VRS, salary and other over-head cost of personnel by treating them as capital expenditure. The Ld. CIT(A) has also confirmed the disallowance made by AO. However, we find that the coordinate Bench of this Tribunal has decided the identical issue in assessee’s own case in its favour
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 5 in ITA No.1721/Kol/2008 (supra) for allowing the deduction of VRS expenses, the relevant extract is reproduced below:- “10. In respect of ground no. 1 of the appeal, the AO has stated that the assessee debited Rs.4,57,00,000 towards cost of business organization in respect of voluntary compensation for certain employees who have accepted premature retirement during the year. AO has stated that similar claim for the assessment years 2001-02, 2002-03 and 2003-04, and 2003-04 was disallowed. Hence, AO disallowed the claim of the assessee in the assessment year under consideration.
In the first appeal, the learned C.I.T.(A) has deleted the said addition by observing that ITAT, ‘C’ Bench, Kolkata in the case of Exide India Ltd. vs DCIT in ITA No. 2933/Kol/03 dated 11.02.2004 allowed the amount paid to the employees on account of voluntary premature retirement considering as revenue expenditure. C.I.T.(A) has also placed reliance on the decision of the Apex Court in the case of India Cables AIR (1972) (SC) 2195. Hence, department is in further appeal before the Tribunal.
During the course of hearing the learned DR relied on the order of the AO whereas the learned AR of the assessee submitted that similar issue in the case of the assessee was considered by the I.T.A.T., Kolkata Bench in the assessee’s own case for the assessment year 2001-02 in ITA No. 448/Kol/2005 vide order dated 21.04.06 (copy placed on record) and the Tribunal directed the AO to allow deduction in accordance with the provisions of section 35DDA at 20% instead of the entire amount with a direction to allow the balance of 20% each in four succeeding years and the department had agreed with the direction of the ITAT and did not dispute the same in further appeal. Learned DR has not disputed the above contention of the learned AR.
In view of the above submissions of the learned representatives of the parties and respectfully following the earlier order of the tribunal dated 21.04.2006 (supra), we modify the orders of the authorities below and direct that the claim of the assessee be allowed in accordance with the provisions of section 35DDA at 20% of the amount of the expenditure incurred and balance amount be allowed in accordance with the provisions of the Act. Hence ground no.1 of the appeal of the department is allowed in part.”
Taking a consistent view of the Co-ordinate Bench of this Tribunal, we allow assessee’s ground. With regard to the expenses incurred in connection with the re-organisation expense of Rs.102.69 lakhs which comprise mainly salary
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 6 and overhead cost of personnel engaged in the restructuring exercise, we find that all of these expenses are revenue in nature. These expenditures do not result into any fixed assets. In this connection, we rely in the judgment of Hon’ble Punjab and Haryana High Court in the case of CIT v. JCT Electronics Ltd. (2010) 188 taxman 191 (P&H), wherein head note Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of – Assessment year 2004-05 – Whether where Tribunal had treated expenditure for restructuring and viability study and preparation of restructuring proposal as revenue expenditure by recording findings of fact that expenses were incurred for purpose of business and were in conformity with provisions of section 37, no question of law arose from Tribunal’s order – Held, yes
Finally we hold that the VRS expenses amounting to Rs. 421.24 lacs will be allowed in five equal instalments in the manner as laid down under section 35DDA of the Act. For the salary of the personnel along with their overhead cost amounting to Rs. 102.69 lacs engaged in the business reorganisation activity will be allowed in full as revenue expenditure. AO is directed accordingly. Hence this ground of appeal of assessee is allowed.
The second issue raised by assessee in ground no. 2 in this appeal is that ld. CIT(A) erred in confirming the order of the AO by wrongly disallowing the income tax depreciation for Rs. 4,53,90,731.00 on the WDV of the block of assets by wrongly interpreting the income tax provisions of income tax Act with regard to the undertaking sold in the past as going concern for a slump sale.
The assessee in the earlier assessment years has sold its business undertakings and claimed in the return of income as long term capital gain under section 45 read with section 48 of the Act. However the AO treated the sale of undertaking as taxable under section 50 of the Act. As a result there was change of depreciation claimed by the assessee and allowed by the Department. For the year under consideration the depreciation claimed by the assessee was Rs.28,96,78,803/- but the Department allowed for Rs.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 7 24,42,88,072/-. Accordingly the AO disallowed the excess depreciation of Rs. 4,53,90,731/- and added to the total income of the assessee.
Aggrieved assessee preferred an appeal before CIT(A) who after considering the contentions of the assessee has dismissed the claim of the assessee by observing as under : “6. I have duly considered the submission of the AR and the findings of the AO in the impugned order. Similar and identical issue came up in appeal for assessment year 1999-00 in appeal No.44/CIT(A)- X/Cir.10/05 and vide order dated 1.9.05 in Para 9 and 10, I have discussed facts and merit involved in the ground and decided the issue against the appellant company thereby upholding the AO’s order in this read. I therefore, find no necessity of further detailed discussion in the instant ground. Following the aforesaid order the AO’s disallowance and addition of Rs.4,33,90,731/- is upheld.”
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
At the outset, we find that the instant issue is already covered in favour of assessee in its own case for the assessment year 04-05 in ITA No.1721/Kol/2008 date 26.11.2010. The relevant extract ground of appeal and relevant order are reproduced below : “The assessee company claimed depreciation amounting to Rs.24,27,86,408/- in its computation of income. This issue is also covered in earlier year’s assessment. Depreciation claimed by the assessee was disallowed in earlier year based on WDV of the block of assets arrived at after adjusting sale consideration of the undertaking viz., fertilizer, old fibres, seeds, Agro chemicals etc., transferred following which depreciation as per reduced WDV adopted by the Department works out at Rs.22,02,10,622/- as against claim of Rs.24,27,86,408/- keeping in view the practice adopted in the past assessment years, the difference amount of depreciation (Rs.24,27,86,408/- - Rs.22,02,10,622/-), being reduced to the extent of Rs.2,25,75,786- against the claim of the assessee.”
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 8 16. During the course of hearing, the learned DR placed reliance on the order of the AO whereas the learned AR submitted that the above issue is covered in the assessee’s case for the assessment year 1994-95 reported in (2008) 23SOT 58, copy placed on record and also in the assessee’s own case for assessment year 1997-98 in ITA No.2900(Kol)/2003 vide order dated 20th July, 2007. Learned DR has not disputed the above contention of the assessee.
In view of the above, we do not find any reason to interfere with the order of the learned CIT(A) and accordingly reject ground no. 2 of the appeal taken by the department.”
In view of above, we accordingly dismiss the orders of lower authorities and allow this ground of appeal of the assessee.
The third issue raised by the assessee in ground no. 3 of this appeal is that Ld. CIT(A) erred in confirming the order of AO for not appreciating the fact that the expenses amounting to Rs. 2,43,56,107/- for the period starting from the date when the commercial risks for the pharmaceutical business were assumed by the purchaser till the actual date of transfer of the said business are only the expenses relating to corporate office/functions which have not been allocated.
The assessee during the year has sold its pharmaceutical business undertaking as a going concern for a slump price to Nicholas Piramal India Ltd., (NPIL for short) on dated 01.01.2002 although the actual transfer of the business to NPIL was on 27.03.2002. The assessee has not included its earning from the said undertaking for the period 01.01.2002 to 26.03.2002 in the accounts of the current year. The AO during assessment proceedings observed that the assessee has claimed all expenses of that that undertaking incurred after 1.1.2002 and upto the date of actual transfer. In response to the notice from the AO the assessee clarified that as per the agreement it was agreed with the purchaser of the business to bear the revenue expenses during the period 01.01.2002 to 26.03.2002 other than operating expenses.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 9 These expenses were pertaining to corporate/office expenses of the assessee as a whole. Hence these expenses were claimed as revenue expense. However the AO disregarded the claim of the assessee on the ground that if the commercial risk after 01.01.2002 are to be assumed by NPIL and if the income for that period has not to be accounted for in the books of the assessee, no deduction for pharmaceutical revenue expenses after 01.01.2002 can be allowed in the hand of the assessee either under business head or under the head of capital gain.
Aggrieved assessee preferred appeal to ld. CIT(A) who upheld the order of the AO by observing as under : “12. I have minutely considered the submission and contention of the AR. I have also gone through the AO’s impugned order in this regard. However, I decline to support the contention of the AR of the appellant company. The said expenses were borne by the company from 11.1.2002 to 26.3.02 without getting the corresponding benefit of income for the same period. if the commercial risk after 1.1.2002 is to be assumed by the Purchaser, NPIL, it is natural and consequently both operating and revenue expenses are to be assumed by it in pursuant of assumption of commercial risk. Besides although the appellant claimed to have borne the expenses from 1.1.02 to 26.3.03 the corresponding income upto the date of actual transfer of the pharmaceutical business to NPIL has not been shown for the period. as noted by the AO, therefore, the contention of the appellant company is not maintainable in view of facts discussed above. If no earning for the above period is included no expenditure for the same period can also be not allowable either under the head business or capital gain. Accordingly, the AO’s order in this regard is upheld.”
Being aggrieve by this order of Ld. CIT(A) assessee came in second appeal before us.
Before us ld. AR submitted that the pharmaceutical unit was not a separate independent business. It was part and parcel of the same business having several units under the control of management. On the other hand, Ld. DR relied on the orders of Authorities Below.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 10 16. We have heard the rival contentions and perused the materials available on record. From the aforesaid facts of the case, we find that NPIL was to bear the operative expenses out of the operating revenue from the said business undertaking. The assessee has not allocated revenue expenses relating to the corporate office / functions pertinent to the pharmaceutical business undertaking in terms of the agreement with the purchaser. In the instant case, the pharmaceutical business undertaking was supposed to be transfer to the buyer on 1st January, 2002 but in actuality it was transferred to 27.03.2002. It was agreed with the buyer of the undertaking that the assessee shall bear all the expenses pertaining to the corporate office other than the operating expenses of said undertaking which will be borne by the purchaser. As the actual date of transfer of the business is 27.03.2002 then the assessee was liable to bear all the expenses upto 27.03.2002. In the instant case, assessee was having several other business units and the expenses were incurred for the running of the business units on continuous basis and the unit which was under consideration owned by the assessee till the actual date of transfer. In the similar facts and circumstances, the Hon’ble Supreme Court in the case of B.R. Ltd. v. V.P.Gupta, CIT in Civil Appeal Nos. 1594 to 1594 of 1972 dated 03.05.1978, wherein the head note – Section 72 of the Income-tax Act,. 1961 [Corresponding to section 24(2) of the Indian Income-tax Act, 1922] – Losses – Carry forward and set off of business losses – Assessment years 1954-55 to 1956-57 – Whether test to determine whether two business constitute same business, is unity of control and not nature of two lines of business – Held. Yes – Business of import of woolen goods carried on by assessee-company was stopped due to losses during assessment year 1953- 54 – From assessment year 1954-55, it carried on business of exporting of cotton textiles and earned profits – There was common control and common management of same board of directors of business of import and export – Whether on facts, it could be said that there was dovetailing or interlacing between business of import and business of export carried on by assessee and that they constituted same business – Held, yes.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 11 Respectfully following the decision of the Hon’ble Supreme Court in the case of B.R. Ltd. (supra) we allow assessee’s ground. The 4th issue raised in ground no. 6(a) to (f) by assessee in this appeal 17. is that ld. CIT(A) erred for accepting the valuation of Chowringhee property on the basis of DVO report instead of taking the valuation made by the registered valuer engaged by the assessee.
The assessee was having the land & building located at ICI House at Chowringhee, Kolkata consisting of total area of the property 35.60 kottah. The assessee has sold its property for a composite consideration of Rs. 21 crores on dated 28th June 2001 to M/s Reliance Industries Limited. The sale price for the land was considered at Rs. 17,92,41,908/- and balance of Rs. 3,07,58,092/- was considered as sale price of the building. The assessee claimed long term loss of Rs. 12,74,78,092/- after arriving indexed cost of acquisition of Rs. 30,67,20,000/-. The assessee got the valuation of the property from the registered property valuer as on 1.4.1981 which was determined at Rs. 7.20 crores (Rs. 20 lakhs per kottah x 35.60). However the AO was not satisfied with the valuation done by the assessee therefore the matter was referred to the DVO (District Valuation Officer) who determined the valuation as on 1.4.1981 for Rs. 5 lacs per kottah based on comparable cases and after considering all the relevant factors like size, shape, frontage, location, transport facilities and other amenities. Accordingly the AO worked out the indexed cost of acquisition for Rs. 7,58,28,000/- and computed the capital gain of Rs.10,34,13,908/- (Rs. 17,92,41,908- Rs. 7,58,28,000) which was added to the total income of the assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A), whereas assessee submitted that the DVO has adopted Rs.5 lakhs per cottah in respect of land as on 1/4/81 which is not based on any logic and is totally ad hoc. The actual instances of sale during 1978 to 1980 given by the DVO are also not at all comparable to the prime property at the above address.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 12 Alternatively the assessee submitted that “That the Ld. AO erred in making the reference to the Valuation Officer u/s. 55A of the Act for the property at 34, Chowringhee Road, Kolkata in as much as section 55(a) clearly states that in a case where the value of assets as claimed by the assessee is in accordance in relation to the estimate made by the registered valuer reference can be made to the Valuation Officer only if the Ld. DC is of the opinion that the value so claimed is less than the fair market value which is not the case in respect of the above property.” However the ld. CIT(A) rejected the plea of the assessee by holding as under :
“24. I have carefully considered the submission and acts of the case. In the case of K G Kew reported in146 ITR 611, the Hon’ble Karnataka High Court has held that a Valuation Officer appointed u/s. 16A of the W.T. Act, 1957 to whom reference can be made by the AO before completing his assessment order is a statutory authority under the Act. the Court further held that the valuation made by the DVO is binding on the AO unlike the valuation made by the registered valuer. The AO is bound to complete the assessment in conformity with the valuation of the Valuation Officer although the assessee is not precluded from objecting and challenging the same in appropriate legal authority. In spite of the submission of the appellant company, the registered valuer engaged by the company has not cited any comparable cases to come to the conclusion that the value of land per cottah at Rs.20 lakhs as on 1.4.81 and it was based on estimate value. As the AO has found that the valuation made by the registered valuer of the company is not based on acceptable basis he has referred the matter to the DVO who after considering all the material facts and comparable cases submitted his report which was followed by the AO. As held in the aforesaid decision the valuation report of the DVO is binding on the Ao once the matter has been referred to him before completion of the assessment ordered. There is no valid material ground for holding that the valuation made by the Registered Valuer engaged by the company is more authentic and more reliable than the valuation of the DVO. I therefore find no logic and merit in the contention of the appellant company. Accordingly, the AO’s finding and order in this ground is justified and hence upheld.”
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 13 20. Before us Ld. AR submitted that the valuation done by DVO at Rs.5 lakh per kottah in respect of land as on 1.4.1981 is not based on any logic and it is totally ad hoc. Ld. AR further submitted that the valuation report given by the Registered Valuer, Sri De which the assessee has submitted during assessment proceedings logically sets forth the basis of valuation after giving due consideration to the following:- a) the demand and availability of plots of land having similar location, area, characteristic, as well as, the prices offered for such land in the open market for sale; b) “Transfer of interest” and any covenants; and c) the maximum ‘development potential’ of the land from the buyers point of view
He further stated that the valuation report of the registered Valuer, Sri De very lucidly and succinctly brings out due to consideration given for the above factors. On the other hand, Ld. DR relied on the orders of Authorities Below.
We have heard the rival contentions and perused the materials available on record. From the above discussion, we find that lower authorities have disputed the valuation given by the Registered Valuer as on 01.04.1981. The valuation done by the Registered Valuer was at Rs.20 lakhs per kottah as on 01.04.1981 and on the other hand, DVO valued the same at Rs.5 lakhs per kottah as on 01.04.1981. Now the issue before us arises for our consideration is as to whether the valuation made by the DVO as on 01.04.1981 should be adopted for working out of capital gains in the instant case. We find that as per the provisions of Sec.55A of the Act the AO can be made the reference to DVO only if he is of the opinion that the value so claimed if less than its fair market value. In the instant case, assessee has shown fair market value more as determined by the DVO, therefore, in our considered view, lower authorities have no power to refer the matter before DVO u/s. 55A of the Act. In this connection we are putting our reliance of the judgment of this jurisdictional
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 14 High Court in the case of CIT v. Umedbhai International P. Ltd. (2014) 45 taxman. Com 306 (Cal), wherein the head note:- Section 55A of the Income- tax Act, 1961 – Capital gains – reference to Valuation Officer (Condition precedent) –Whether formation of opinion of Assessing Officer that value claimed by assessee is less than its fair market value is since qua non before referring matter to departmental valuation office under section 55A and reasons recorded after order of reference for valuation of registered valuer is not substitute of pre-decisional formation of opinion – held, yes – Assessee- company sold entire land of its rice mill and got property valued by registered valuer to determine fair market value as on 1-4-1981 – However, Assessing Officer referred matter to departmental valuer to determine value of said property – Assessee submitted that reference to valuation officer was without jurisdiction as Assessing Office had not formed opinion that value claimed by assessee was less than its FMV – Whether since department had not brought any material on record that Assessing Officer had formed an opinion having regard to nature of assessee and other relevant circumstances for making reference Departmental Valuation Officer, reference was not in compliance with section 55A and it was without jurisdiction – Held, yes
Taking the consistent view of Hon’ble jurisdictional High Court in the case of Umedbhai International P.Ltd. (supra) we reverse the orders of lower authorities and allow assessee’s ground.
The fifth issue raised by assessee in this appeal is that ld. CIT(A) erred in disallowing the expenses under section 14A of the Act.
The assessee has declared dividend of Rs.4.55 crores as exempt under section 10(34) of the Act without making any disallowance of the expenses as per provisions of Sec. 14A of the Act. In compliance to the notice the assessee replied that no borrowed funds incurring interest was used in the investment and there is no expense related to earning of dividend income.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 15 However the AO disregarded the claim of the assessee by holding that the assessee failed to furnish with any specific nexus that borrowed fund has not been diverted and the entire investment was made out of own fund only. Besides the above the AO observed that to supervise a investment portfolio which yield dividend to the extent of Rs.4.55 crores. The assessee needs to have infrastructure like manpower, office, accountants, records, etc., hence on estimate, Rs.10 lakh is attributed to earning of dividend and the same is disallowed u/s. 14A. by AO.
24 Aggrieved assessee preferred an appeal before Ld. CIT(A) who confirmed the action of AO by observing as under:- “34.I have duly considered the submission of the AR of the company. The Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation Ltd. vs CIT, 242 ITR 450 has held that only such expenses related to earning of exempted dividend income are disallowance u/s. 14A of the IT Act. However, the appellant company has also not quantified the specific amount of expenses although it has implicitly admitted that certain expenses are bound to be incurred for earning the exempted dividend income. The company has earned a total dividend income of Rs.4.55 crores during the relevant previous year under consideration. The AO has estimated the disallowable amount at Rs.10 lakhs without specifying the exact amount of expenditure relatable to earning of dividend income. However, certain expenses in the form of clerical works and other office expenses cannot be ruled out. I therefore, find it will be reasonable and fair to disallow 1% of the total dividend income as proportionate expenses for earning the said dividend income. The AO is directed to restrict the disallowance at 1% of the total dividend income earned during the year.”
Being aggrieve by this order of Ld. CIT(A) assessee came in second appeal before us.
At the outset, we find that similar issue was dismissed by the jurisdictional High Court in the case of CIT vs. M/s R.P.Sen & Brothers (P) Ltd. in GA No. 3019 of 2012 dated 04.01.2013, wherein the Hon’ble jurisdictional High Court has held as under:-
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 16 “The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under the income tax. The Tribunal has computed expenditure at 1 per cent of such dividend income which, according to them, is the thumb rule applied consistently. We find no reason to interfere.”
Taking a consistent view, of this Hon’ble jurisdictional High Court in the case of M/s R.P.Sen & Brothers (P) Ltd. (supra) we find no reason to interfere in the order of Ld. CIT(A). Hence, this ground of assessee’s appeal is dismissed.
The 6th issue raised by the assessee in this appeal is that ld. CIT(A) 26. erred in confirming the order of AO by disallowing the brought forward business loss and long term capital loss for AY 2000-01.
The assessee has set off of long term brought forward capital loss of Rs.17,23,36,729/- and business loss of Rs. 6.25 crores. The assessee has furnished the breakup of aforesaid loss which is as under:- AY 2000-01 : Long Term Capital Loss Rs.16,43,71,565/- AY 2001-02 : Long Term Capital Loss Rs. 79,65,164/- AY 2000-01 : Business loss Rs. 6,25,00,000/-
The AO during assessment proceedings found that the assessment order u/s. 143(3) for the AY 2000-01 has been set aside by the CIT, Kolkata-IV by an order u/s 263 dated 21.12.2004 and has directed to complete fresh assessment after making proper investigation. The fresh assessment has not been made so far and hence at this stage, it is not proper to allow set off of a long term capital loss of Rs.16,43,71,565/- and business of Rs. 6.25 crores. Further on perusal of record of AY 2001-02, it is found that there is no assessed long term capital loss. In the result, entire set off of Rs.17,23,36,729/- is disallowed. Similarly the assessee in its computation has deducted brought forward loss of the business amounting to Rs.6,25 crores. However, on perusal of assessment order for AY. 2000-01, it is found that there is income of Rs.30.39 crores under the head ‘business’. Hence, there is
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 17 no question of carry forward and set off of such loss. Accordingly the AO disallowed the capital loss and business loss.
Aggrieved assessee preferred an appeal to ld. CIT(A) who directed the AO to allow set off of admissible brought forward business loss and capital loss as per law after verification of relevant assessment records.
Being aggrieved by the of order of ld. CIT(A) the assessee is in 2nd appeal before us.
At the outset we find that the ground raised by the assessee is consequential in nature and will have the effect as per the order of the AO of the relevant years. Hence, we allow assessee’s ground for statistical purposes.
The last ground raised by assessee in this appeal is against the levy of interest 234B & 234C. At this stage, it is consequential in nature and does not require any adjudication.
In the result, assessee’s appeal partly allowed.
Coming to Revenue’s appeal in ITA No. 2613/Kol/2005 for A.Y.02-03. 31. The first issue raised by Revenue in this appeal is that ld. CIT(A) erred in deleting the addition made by the AO for Rs. 138.09 lacs on account of custom duty paid before filing income tax return by virtue of the provisions of section 43B of the Act which was not included in closing stock of finished goods in terms of provision of Sec. 145A of the Act.
The assessee has not included customs duty estimated at Rs.138.09 lacs in the value of the closing stock at the yearend lying in bonded
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 18 warehouse. The assessee claimed that this method has been followed consistently for the valuing of the closing stock. However the assessee claimed the deduction of the custom duty by virtue of the provisions of section 43B of the Act on the payment basis. However the AO disregarded the claim of the assessee on the ground that the custom duty is liable to be included in the closing stock in terms of the provisions of section 145A of the Act. The AO also observed that in A.Y. 2001-02 addition on same issue was made which has been confirmed by the CIT(A). Accordingly the AO has made the addition of the custom duty to the total income of the assessee.
Aggrieved, assessee preferred an appeal to ld. CIT(A) and submitted that the act of non-inclusion of custom duty estimated at Rs.1.38 crores has no effect on the profit and loss account as the same becomes the opening stock of the following year. The assessee has been consistently regularly following the system of stock valuation. The company has been valuing its closing stock of chemical products at its actual cost excluding customs duty on stock lying in the bonded warehouse or realizable value whichever is lower. Accordingly the ld. CIT(A) allowed the ground of appeal of assessee by observing as under : “The submission and facts of the case have been carefully considered. On the basis of consistent and regular method of accounting adopted by the appellant company, the appellant has not included the element of custom duty liability in the valuation of closing stock. If at all the custom duty is included in the valuation of closing stock the opening stock of the next year will have to be increased by the same amount and figure this will only result in distortion of the accounting system regularly followed by the appellant company without bringing in any revenue. As per the amended provision of section 43B statutory liability is allowable deduction if actually paid on or before due date for filing of the return of income u/s. 139(1) of the IT Act. In the case of Allied Motors Pvt. Ltd. vs. CIT, 91 taxman 205 / 224 677 the Supreme Court has held that the proviso which was inserted by the accounting Finance Act, 1987 should be given retrospective effect. Similar view was held earlier by the Calcutta High Court in the case of CIT vs. Jagannath Steel Corporation 191 ITR 676. In my view, the insertion made by the Finance Act, 1987 was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee. I find
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 19 reinforcement from the decision of Madras High Court in the case of CIT vs. Dynavision Ltd., reported in 267 ITR 600. The AO is accordingly directed to allow deduction on actual payment basis made on or before due date for filing of the return of income after verification of payment details. This ground is accordingly decided in favour of the appellant company.”
Being aggrieved by this order of ld. CIT(A), the Revenue is appeal before us.
Both the parties are relied on the orders of Authorities Below as favourable to them. We have heard the rival parties and perused the materials available on record. From the aforesaid discussion, we find that assessee has incurred an expense of Rs.138.09 lakhs towards the custom duty on the import of the finished goods which was lying in the bonded warehouse at the yearend. The AO during the course of assessment proceedings observed that the amount of custom duty has not been included in the valuation of the closing stock as required u/s. 145A of the Act. So the AO has made the disallowance. However Ld. CIT(A) has deleted the addition made by AO on the ground that assessee has been following the valuation method for its closing stock consistently without the inclusion of custom duty. Ld. CIT(A) also observed that the closing stock of one year becomes of the opening stock of the next year and therefore, if custom duty included in the valuation of the closing stock then this will only result in distortion of accounting system regularly follows by the assessee. Now the question before us for our consideration arises so as to whether custom duty incurred by assessee on the finished goods which are lying as closing stock in the bonded warehouse is to be included. At this juncture, we find important to reproduce the provision of section 145A of the Act which reads as under : “[Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145,- (a) The valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be –
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 20 (i) In accordance with the method of accounting regularly employed by the assessee; and (ii) Further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.
Explanation.- For the purposes of this section*, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment;”
From the provision of the section we find the amount of any tax duty cess or fee which is actually paid or incurred to bring the goods to the place of its location and condition as on the date of valuation needs to be included in the valuation of closing stock. In the instant case, the goods had not reached to the location of the assessee but are lying in the bounded warehouse, which means that the liability for the custom duty has not accrued on the date of valuation. Therefore, in our considered view such duty is not liable to be included in the value of the closing stock. In this connection, we are also putting our reliance of Hon’ble Bombay High Court in the case of CIT v. Loknete Balasaheb Desai S.S.K. Ltd., reported (2011) 12 taxmann.com 40 (Bom) where the head notes:- Section 145A of the Income-tax Act, 1961 – Method of accounting – In certain cases – Assessment year 2001-02 – Whether in respect of excisable goods manufactured and lying in stock, excise duty liability would get crystallized on date of clearance of goods and not on date of manufacture and, therefore, till date of clearance of excisable goods assessee cannot be said to have incurred excise duty liability – Held, yes – Whether therefore where manufactured sugar was lying in stock and same was not cleared from factory, excise duty element cannot be added to value of unsold sugar lying in stock on last day of account year – Held, yes
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 21 Respectfully following the same analogy of the judgment of Hon’ble Bombay High Court in the case of Loknete Balasaheb Desai S.S.K.Ltd. (supra) we dismiss the Revenue’s ground.
The 2nd issue raised by Revenue in this appeal is that ld. CIT(A) erred in 35. deleting the addition made by AO on account of interest paid on borrowed fund which was diverted for the purchase of shares.
The assessee has made investment of Rs.151,97,61,000/- in the shares of Quest International India Ltd. which is a subsidiary of the assessee company and claimed that the investment was made out of the operating activities amounting to Rs.143.58 crore plus opening cash and bank balance was utilized for this purpose. The assessee has further submitted that no dividend has been received during the year from this investment. However the AO during assessment proceedings observed that the assessee was having the borrowings in the year ended 31.3.2001 of Rs.35.66 crores which also found place in opening cash and bank balance. Hence the diversion of borrowed fund for aforesaid purpose is apparent even if the investment was partially met by opening cash and bank balance. It is agreed that Rs.143 crores has been invested out of own source. However, the assessee has not been in a position to explain and substantiate regarding balance Rs.8 crores (approx.). Hence, corresponding interest taking rate of 10% amounting to Rs.80,00,000/- is disallowed u/s. 36(1)(iii).
Aggrieved assessee preferred an appeal to ld. CIT(A). whereas Ld. AR stated that this investment is out of the cash generated from the cash flow during the year and the opening balance of Rs.181.81 crores. This opening balance in turn has been built up with the cash generated from own operations of Rs.137.05 crores during the financial year 2000-01 including the consideration from the sale of Poly Urethane business on 31.3.01 as a going concern for a slump price of Rs.75 crores. Hence, it clear that the investment
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 22 in the said company has come entire out of own funds of the company and not from, any borrowing. Therefore, the disallowance of a notional expense of Rs.80 lakhs by the AO for the above investment as expense of diversion of funds for non-business purpose is not correct. Accordingly the CITA deleted addition made by AO by observing as under:- “I have carefully perused the submission of the AR of the company along with the observation made by the AO in the impugned order. The company has invested in the shares of the said subsidiary company out of it own generated fund. Section 36(1)(iii) speaks about the amount of interest paid in respect of capital borrowed for the purpose of business or profession. There is no material finding on record to indicate that the appellant has diverted it borrowed fund for non-business purpose. In CIT vs. Infotex Pvt. Lt., 150 ITR 195 (Kar.) / Calico Dyeing and Printing Works vs. 341 ITR 26 it was held that for giving the benefit of section 36(1)(iii) to the assessee, what is necessary to examine is whether the assessee has used the borrowed capital for the purpose of business, if that is found to be true, then, one need not examine further as to whether the asset purchased with borrowed capital has been in fact used by the assessee. In the instant ground there was no any indication on record to show that the company has diverted borrowed fund for the purpose of non-business purpose. The appellant company has invested in the shares of the said company out of its own sources of fund and there is no valid ground to disallow interest at the notional rate of 10% by invoking section 36(1)(ii) of the IT Act. I therefore, find the disallowance of Rs.80 lakhs is without any sustainable material ground and the same is deleted.”
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
Both the parties relied on the orders of authorities below as favourable to them. Before us Ld. AR drew our attention at pages 31 of the paper book where cash flow statement of the assessee was placed. Ld. AR also submitted that assessee has earned profit of Rs.79 crores during the year under appeal. Ld. AR further demonstrated that the investment was made out of the own funds and no borrowed funds was investment in that investment, as such Ld. AR prayed for the disallowance of the addition made by AO on account of borrowed fund. From the aforesaid discussion, we find that AO has disallowed the interest expenses on account of holding that the investment was made out of the borrowed fund, however, Ld.AR before us
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 23 has demonstrated that no borrowed fund was utilized in making such investment. In rejoinder, Ld. DR has not raised any objection to controvert the argument of Ld. AR. Now the question before us arises for adjudication so as to whether the borrowed fund has been utilized to make the investment in the sister concern. We find force from the submission of Ld. AR that there are sufficient funds available for the investment and as such no borrowed fund was utilized for the aforesaid investment. Therefore, in our considered view no disallowance of interest on the borrowed fund required to be disallowed as contemplated u/s 36(1)(iii) of the Act. In this connection, we are putting our reliance on the judgment of Hon’ble Bombay High Court in the case of CIT v. Reliance Utlities & Power Ltd. (2009) 178 taxman 135 (Bom), wherein the head note:- Section 36(1)(iii) of the Income-tax Act, 1961 – Interest on borrowed capital – Assessee-company was engaged in business of generation of power – It had made investments in its sister concern from January, 2000 to March, 2000 – Assessing Officer was of view that sum of Rs.213 crores was invested out of assessee’s own funds and Rs.147 crores was invested out of borrowed funds – Accordingly, Assessing Officer disallowed a part of interest claimed – On appeal, assessee- company contended that it had interest-free funds worth Rs.398 crores comprising of share capital, reserves and surplus and depreciation reserves and, thus, entire investment had been made in sister concern out of interest-free funds – Commissioner (Appeals) accepted assessee’s contention and directed Assessing Office to allow entire amount of interest under section 36(1)(iii) – Tribunal upheld order of Commissioner (Appeals) – On instant appeal, it was seen that Commissioner (Appeal) as also Tribunal had record a clear finding that assessee had interest-free funds of its own which had been generated in course of year commencing from 1-4-1999 – Further, in terms of balance-sheet there was an availability of Rs.398.19 crores including Rs.180 crores of share capital – Whether if there are funds available, both, interest-free funds generated or available with company, provided said funds are sufficient to meet investments – Held, yes Whether since, in instant case, said presumption was clearly established in view of findings recorded by Commissioner (Appeals) and Tribunal, impugned order passed by said authorities was to be affirmed – Held, yes.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 24 Respectfully following the judgment of Hon’ble Bombay High Court in the case of we uphold the order of Ld. CIT(A) and this ground of Revenue’s appeal is dismissed.
The 3rd issue raised by the Revenue in this appeal is that ld. CIT(A) 39. erred in deleting the disallowance made by AO on the ground that organization to which the assessee has made the payment was not notified by the Director General exemption in official gazette. 40. The assessee has claimed further deduction in computation u/s.35 as under: a) Capital expenditure on scientific research u/s 35 Rs.12,96,737/- b) Weighted deduction on sums paid to scientific Research Association Rs.20,16,598/- The assessee submitted that the deduction for capital expenditure on scientific research u/s 35(1) does not require any certificate other than tax audit report. The assessee submitted that the contribution was made to ICI R & T Centre, Thane. The extension of exemption has been forwarded to CBDT with the recommendation for extension by DIT(East), Mumbai and DGIT (East), Kolkata, however, notification for exemption is still awaited. However the AO has disallowed for the reason that the research centre is not approved for the period by the Central Govt. by notification in the Official Gazette which is a pre-requisite for weighted deduction as per Sec. 35(1)(ii) of the Income Tax Act.
Aggrieved assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under : I have also duly considered the AO's observation and finding in the impugned order. The AO has disallowed the weighted deduction of Rs.20,16,598/- on the ground that the prescribed authority has approved ICI Research & Training Centre u/s. 35(2) for the period 1.4.97 to 31.3.97. in the case of CIT vs. Keen Pesticide Pvt. Ltd. 97 Taxman 306, the Hon'ble Kerala High Court has laid down the principle that in order to give benefit of deduction in respect of capital expenditure on scientific research u/s. 35 it is sufficient that the capital expenditure is incurred in the previous year as provided in that section.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 25 In K.M. Scientific Research Centre vs. Laksman Prasad (1977) Tax I R 426, Allahabad High Court has held that the language in section 35(1)(ii). The Hon'ble Mumbai High Court also has held in the case of National leather Mfg. Company vs. Indian Council of Agricultural Research reported in 241 ITR 482 / 110 taxman 511 that retrospective withdrawal and / or cancellation of certificate will have no effect upon the assessee which has acted upon it when it was valid and operative. In the instant case, on the basis of valid certificate issued by the appropriate authority the ICI R & T Centre, Thane has continued the research work and the appellant company has contributed the said amount towards such research and training programme and accordingly the company will be entitled to get weighted deduction of Rs.20,16,598/- as deduction in terms of the provisions of section 35 of the IT Act. I therefore, find the disallowance made by the AO is not based on justifiable material ground and hence, the AO is directed to allow weighted deduction of the said amount accordingly.”
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
At the outset it was observed that deduction u/s. 35 of the Act is available if the donation is made to the notified organization by the Central Govt. of India in the Official Gazette. In the instant case, assessee failed to provide the copy of the Notification to justify that the institution was approved. In view of this, we reverse the order Ld. CIT(A) and ground of Revenue’s appeal is allowed.
Next issue in this appeal of Revenue is that Ld. CIT(A) erred in deleting the addition made by AO on account of delayed payment towards PF contribution. The only date is allowable under the PF Act.
We have heard both the parties and perused the materials available on record. We find that the AO has made the addition of the amount of the employee contribution as there was a delay in payment to PF authorities. However, from the assessment order we find that all the payment of employees contribution were made before the due date of filing of Income Tax Return as specified u/s.139(1) of the Act. Now, this issue stands covered in favour of assessee and against the Revenue by the decision of Hon’ble jurisdictional High Court in the case of CIT v. M/s Vijay Shree Limited vide
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 26 ITAT No.245 of 2011 in GA No.2607 of 2011 dated 7th September, 2011, wherein it has been held as under:- “After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the income Tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988. Such being the position, the deletion of the amount paid by the Employees’ contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act. We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appeal.”
From the above, we find that the issue is squarely covered in favour of assessee by the jurisdictional High Court in the case of M/s Vijay Shree Limited (supra). As the issue is covered, hence, we dismiss Revenue’s ground of appeal.
Next issue in this appeal of Revenue is that Ld. CIT(A) erred in restricting the disallowance u/s. 14A of the Act to the extent of 1% of the exempted income.
This issue has already been discussed in assessee’s appeal in ITA No.488/Kol/2006 for AY 02-03 and taking a consistent view, we allow Revenue’s ground.
Next issue in this appeal of Revenue is that Ld. CIT(A) erred in directing the AO to give the MAT credit in the same manner as in the case of TDS and Advance Tax for the purpose of calculation of interest u/s 234B and 234C of the Act.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 27 48. At the outset, it was observed that similar issue in assessee’s own case in ITA No.2612/Kol/2005 dated 01.09.2015 for AY 2002-03 was decided by the Co-ordinate Bench of this Tribunal by restoring to the file of AO for fresh adjudication. The relevant extract is reproduced below:- “8. After hearing the rival submissions and perusing the material available on record, we find that the Hon’ble Supreme Court in the case of Sage Metals Limited reported in (2012) 26 taxmann.com 258 (SC) has held as under:- ‘Entitlement of MAT credit is not dependent upon any action taken by the Department. However, quantum of tax credit will depend upon the assessment framed by the Assessing Officer. Thus, the right to set off arises as a result of the payment of tax under section 115JA(1) although quantification of that right depends upon the ultimate determination of total income for the first assessment year.’ Therefore, as righty pointed out by the ld. SR. counsel for the assessee, first the total income has to be determined for the assessment year 1999-2000 and 2000-2001. We, accordingly, restore the matter back to the file of Assessing Officer for fresh adjudication in accordance with law after providing reasonable opportunity of being heard to the assessee.” Respectfully following the decision of the Coordinate Bench of this Tribunal in assessee’s own case (supra), we remit back this issue to the file of AO for fresh adjudication. We hold accordingly.
In the result, Revenue’s appeal is partly allowed for statistical purpose.
Coming to assessee’s appeal in ITA No.852/Kol/2007 for AY 03-04 50. First issue raised by assessee in Ground No.1(a) in its appeal is that Ld. CIT(A) erred in confirming the order of AO by disallowing the expenses incurred on the basis of reorganization in the form of salary and overhead cost. 51. This ground is covered in assessee’s appeal in ITA No.488/Kol/2006 for AY. 2002-03, where the same issue was decided in favour of assessee, hence, we apply same view. This ground of assessee’s appeal is allowed accordingly.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 28 52. At the time of hearing Ld. AR for the assessee not pressed ground No.1(b), hence, same is dismissed as not pressed.
Next issue raised by assessee is that Ld. CIT(A) erred in confirming the order of AO by holding that the premium paid for premature redemption of debenture is to be capitalized.
The AO during the course of assessment observed that the assessee has paid premium on redemption of debenture. These debentures were issued/ allotted to meet the company’s requirements of capital expenditure. The assessee had paid premium of Rs.1,28,26000/- to the Debenture Holders during this assessment year and the same has been claimed as deduction in computing the business income. In compliance to the notice issued by the AO for treating the same as capital expenditure, the assessee submitted that the expenditure was incurred wholly and exclusively for the purpose of business. However the assessee had not produced any agreement with the lenders as to how the rate was agreed for the payment of premium. The AO also observed that there was no stipulation in the Debenture Trust Deed for the payment of such premium on redemption and the debenture was issued to meet the capital expenditure of the assessee. In view of the above, the AO disallowed the expenditure of Rs.1,28,26,000/- by holding as capital expenditure and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who after hearing the contentions of the assessee directed the AO to examine the purpose for which the debentures were issued by the appellant. In case the borrowed is utilized for acquisition of capital assets, the premium paid for premature redemption of the debentures is required to be treated as capital expenditure and consequently depreciation is allowed to the appellant. In case the debentures are raised for the working capital requirements of the appellant company, the premium paid being in the nature of interest for premature
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 29 redemption is allowable as revenue expenditure. The AO is directed to verify and allow accordingly.
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
At the outset, it was observed that issue is covered by the judgment of Hon’ble Supreme Court in the case of DCIT v. Core Health Care Ltd. (2008) 298 ITR 194 (SC), wherein the head note:- Business expenditure – Interest on borrowed capital-Acquisition of new machinery for existing business – Expression “for the purpose of business" occurring in s. 36(1)(iii) indicates that once the test of "for the purpose of business" is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under s. 36(1)(iii)—This provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset—What sub-cl. (iii) emphasizes is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital— Sec. 36(1)(iii) is a code by itself—Determination of actual cost in s. 43(1) has relevancy in relation to ss. 32, 32A, 33 and 41—"Actual cost" of an asset has no relevancy in relation to s. 36(1)(iii)—Hence, Expln. 8 to s. 43(1) has no relevancy to s. 36(1)(iii)—Proviso to s. 36(1)(iii) inserted by the Finance Act, 2003, w.e.f. 1st April, 2004, is only prospective and would not apply to assessment years in question”
Respectfully following the judgment of Hon’ble Supreme Court in the case of Core Health Care Ltd. (supra) we allow assessee’s ground.
Next issue raised by assessee is that Ld. CIT(A) erred in confirming the order of AO by disallowing the entrance fee paid to the club.
The AO during the course of assessment proceeding observed that the assessee has paid Rs.1,00,000/- to Bombay Gymkhana Club and claimed as revenue expenditure incurred wholly for the purpose of the business but failed to provide the details of member in whose favour the payment was made to the said club. The AO observed that entrance fee is generally paid for the personal benefit of an individual who enjoys the same even after leaving the
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 30 job of the company. Accordingly the AO held that payment of entrance fee is for the personal benefit of the employee/member, the sum of Rs.1,00,000/- is disallowed being not for the purpose of the business.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who after the contentions of the assessee has upheld the action of the AO.
Being aggrieved by the order of ld. CIT(A) the assessee is in 2nd appeal before us :
At the outset, we find that this issue is squarely covered in favour of assessee by judgment of Hon’ble jurisdictional High Court in the case of Assam Brook Ltd. v. CIT (2004) 139 taxmann. 229 (Cal), wherein the Hon’ble Court has held:
“There was a subscription to the extent of Rs. 5,00,000 by the company for the renovation/repair of the club in question. It has been claimed that the employees of the company are the members of the club and as the company is situated in a remote place, that is the only source of recreation of its employees. Naturally, if the management pays some amount for the upliftment/running of the club in question in an effective way then it must be held that the said payment was made in the interest of the company so that its employees remained happy and consequently the work of the company is not hampered in any way due to dissatisfaction on the part of its employees. As this payment of Rs. 5,00,000 was made by the company to the club keeping its business interest in mind, the said payment must be held to be business expenditure and accordingly as per s. 37 the assessee-company is entitled to get deduction. The reason for rejecting such prayer by the Tribunal was that the assessee-company was not the owner of the said club. In effect, this argument of the Tribunal practically makes the case of the assessee-company stronger. By making such payment to a club there is no personal benefit to the company and as such, the absence of ownership more supports the contention of the assessee. So, Tribunal was not justified in disallowing this payment of Rs. 5,00,000.—CIT vs. Sundaram Industries Ltd. (2000) 158 CTR (Mad) 437 : (1999) 240 ITR 335 (Mad), CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) and CIT vs. Engineers India Ltd. (1999) 155 CTR (Del) 394 : (1999) 239 ITR 237 (Del) applied. Respectfully following the judgment of the jurisdictional High Court we allow the assessee’s ground.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 31
Next issue raised by assessee is that Ld. CIT(A) erred in confirming the order of AO by disallowing the expenses incurred in relation to transfer of catalyst business undertaking as a going concern for a slum price.
The AO during the course of assessment proceeding found the assessee sold its Catalyst business for a sale price of Rs.155,20,58,777/- from which the assessee has claimed deductions in respect of the following:- WDV of fixed assets Rs.16,97,74,925/- Book value of current assets Over current liability Rs.18,38,16,406/- Transactions cost Rs.24,30,00,000/- The AO sought clarification about the transaction cost. In reply to the said letter, it was stated that certain liabilities were taken by the assessee in connection with the sale of the aforesaid unit in terms of business transfer agreement dated 2/10/2002. These liabilities include that the assessee will make arrangement within five years from the sale of the said Catalyst business for transfer of Panki land to the purchaser and in the event of failure to do so, a sum of Rs.15 crore would be paid to the purchaser. Similarly, a provision of Rs.2.30 crore has been made for Panki soil contamination and ground water issues. Accordingly the AO observed that the liability for such expenditure did not crystallize in the previous year and furthermore, such liability is also contingent on the happening of some event (i.e. failure to transfer of land) in future. For this reason and in the circumstances stated hereinabove, the deduction for transactions cost of Rs.24.30 lacs is not admitted in computing the capital gain for sale of the said Catalyst business. The same was disallowed and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who after the contentions of the assessee has upheld the action of the AO by observing as under :
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 32 “On perusal of the expenses, it is indicated that these expenses have no nexus with the sale of the undertaking. They are not relatable to the transfer of the undertaking and hence, are not deductble from the sale consideration of these undertakings. Further, these are expenses to be incurred by the appellant and have not actually been incurred. The liability of Rs.10 crores towards land cost was to be incurred in case the land is not transferred to the purchaser. Further, the toll conversion cost of Rs.2.4 crores and sol contamination ground water matters of Rs.2.3 crores re not expenditure relatable to the transfer of the undertaking. Further, there is no evidence that this expenditure is incurred. On perusal of the expenditure, it is indicated that it is not an allowable expenditure while computing the capital gains from the sale of the catalyst business sand poly-urithine business. The AO is correct as per law in disallowing the appellant’s claim of deduction of these amounts from the sale consideration of the business undertakings. The AO's action is correct as per law and is upheld. The ground of appeal fails and is rejected.
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
From the aforesaid discussion we find that the provisions claimed by the assessee have not been crystallized during the year under consideration. All the provisions were depending on the outcome of the future event. There was a time limit of five years from the date of the agreement for the transfer of the undertaking and the period of five years have expired so in the interest of justice and fair play we are inclined to restore the issue to the file of AO for fresh adjudication as per law. Hence this ground of assessee appeal is allowed for statistical purpose.
Next issue in this appeal of assessee is that Ld. CIT(A) erred in confirming the order of AO by disallowing the deduction claimed u/s. 35(1)(ii)
This issue has already been decided by us in ITA No.2613/Kol/2005 for A.Y 2002-03 where the same is decided against the assessee. In terms of above, this ground of assessee’s appeal is dismissed.
Next issue regarding the deduction u/s.80HHC of the Act in this appeal of assessee is consequential in nature and does not require any adjudication.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 33 68. Next issue regarding the levy of interest u/s 234B in this appeal of assessee is consequential in nature and does not require any adjudication.
In the result, assessee’s appeal partly allowed.
Coming to ITA 1019/Kol/2007 for AY 03-04 of Revenue. 70. First issue in this appeal of Revenue is that Ld. CIT(A) erred in deleting the addition made by AO by disallowing the expenses incurred in connection with the business re-organization. 71. At the outset, it was observed that the issue has already been decided in favour of assessee in ITA No. 488/Kol/2006 for A.Y 02-03, same will be applied in this issue also. Hence, this ground of Revenue’s appeal is dismissed.
Next issue in this appeal of Revenue is that Ld. CIT(A) erred in confirming the order of AO by holding that sale of undertaking is to be adjusted from the WDV of the block of assets.
At the outset, it was observed that the issue has already been decided in favour of assessee in ITA No. 488/Kol/2006 for A.Y 02-03, same will be applied in this issue also. Hence, this ground of Revenue’s appeal is dismissed.
Next issue in this appeal of Revenue is that Ld. CIT(A) erred in deleting the addition made by AO on account of late payment towards the employer and employees of PF.
At the outset, it was observed that the issue has already been decided in favour of assessee in ITA No. 2613/Kol/2006 for A.Y 02-03, same will be applied in this issue also. Hence, this ground of Revenue’s appeal is dismissed.
ITA No.2613/Kol/05,488/Kol/06, 1019 & 852/Kol/07 AYs 02-03 & 03-04 ACIT Cir-10 Kol. v. AKZO Novel India Ltd. Page 34 76. Next issue in this appeal of Revenue is that Ld. CIT(A) erred in deleting the addition made by AO on account of disallowance u/s. 80IB of the Act.
At the outset, it was observed that the assessee has failed to furnish the prescribed certificate in Form No. 10CCB duly certified by Chartered Accountant for claiming the deduction u/s. 80IB of the Act. Hence, we allow this ground of Revenue’s appeal. 78. In the result, Revenue’s appeal is partly allowed.
In combine result, assessee’s appeals (ITA No. 488/Kol/2006 & 852/Kol/2007) and that of Revenue’s appeals (ITA No.2613/Kol/2005 and 1019/Kol/2007) are partly allowed. Order pronounced in the open court 10/06/2016 Sd/- Sd/- (N.V.Vasudevan) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp �दनांकः- 10/06/2016 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. आवेदक/Assessee-AKZO Novel India Ltd., 34, Chowringhee Road, Kolkata-71 2. राज�व / Revenue-ACIT Circle-10, 3, Gov. Place (West), Kolkata-01 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।