THE DCIT, CIRCLE-2(1)(1), AHMEDABAD vs. M/S. FLAX APPARELS PVT. LTD.,, AHMEDABAD

आयकर अपीलीय आयकर अपीलीय अिधकरण अिधकरण, अहमदाबाद�यायपीठ अहमदाबाद�यायपीठ ‘‘‘बी बी’’’ अहमदाबाद अहमदाबाद । आयकर आयकर अपीलीय अपीलीय अिधकरण अिधकरण अहमदाबाद�यायपीठ अहमदाबाद�यायपीठ अहमदाबाद अहमदाबाद बी बी IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD BEFORE SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER & SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No. 1693/Ahd/2019 िनधा�रणवष�/Assessment Year: 2013-14 The DCIT Vs. M/s. Flax Apparels Pvt. Ltd., Circle-2(1)(1) 70, Balaji Estate Ahmedabad Nr.Budhalal Tamaku B/h. Hotel Moni Isanpur, Ahmedabad-382 443 PAN: AAACF 4058 N अपीलाथ�/ (Appellant) अपीलाथ� �� यथ� �� यथ�/ (Respondent) अपीलाथ� अपीलाथ� �� �� यथ� यथ� Assessee by : -None- Revenue by : Shri Alok Kumar, CIT-DR सुनवाई क� तारीख/Date of Hearing : 30/10/2023 घोषणा क� तारीख /Date of Pronouncement: 19/01/2024 आदेश आदेश/O R D E R आदेश आदेश PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER: This appeal filed by the Revenue is directed against the order of Learned Commissioner of Income-Tax (Appeals)-2, Ahmedabad [hereinafter referred to as “Ld.CIT(A)” for short] dated 14/08/2019 passed for Assessment Year (AY) 2013-14. 2. Earlier, this appeal was dismissed on account of low tax effect vide ITAT’s order dated 11/05/2022. Subsequently, Miscellaneous Application No.62/Ahd/2022 (arising out of ITA No.1693/Ahd/2019 for AY 2013-14) was filed by the Revenue pointing out that the present case fell in the exception No.10(c) of the CBDT Circular No.3 of 2018 dated 11/07/2018 for withdrawal of appeals on account of low tax effect involved. The Revenue had pointed out in its application to

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the ITAT that in cases where the Revenue audit objection had been accepted by the Department, adverse judgements relating to the same should be contested by the Revenue and not withdrawn even if the tax effect involved was below the limit specified by the CBDT for filing appeal by the lower authorities. Finding merit in the contention of the Department, the appeal of the Revenue was restored back to its original position, in MA No.62/Ahd/2022, vide order dated 09/08/2023. Hence, the appeal has come up for hearing before us today.

“1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs.11,68,847/- without appreciating the provisions of section 43B of the IT Act.”

3.1. The orders of the authorities below reveal that the disallowance/ addition related to Service Tax refund which was written off by the assessee during the year as waived and was disallowed by the Assessing Officer on account of the fact that as per law in terms of the provisions of section 43B of the Act, statutory dues like the present sales tax are to be allowed only in the year in which they are actually paid and since the impugned amount of service tax refund was paid in earlier years, it could not be allowed as expenditure of the impugned year.

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“3.3. I have carefully considered the facts of the case, the assessment order, statement of facts and written submission filed by appellant. The Assessing Officer has observed that appellant has claimed service tax refund waived for Rs.11,68,847/- on the ground that same was not claimed as expenses in the year of actual payment as appellant was entitled to receive refund of such taxes but same was not received hence expenses were claimed as revenue expenditure in year under consideration. The AO has stated that as per provisions of Section 43B of the Act, any duty, taxes, cess or fees by whatever name called, shall be allowed only in previous year in which such sum is actually paid and custom duty is paid in earlier year, hence cannot be allowed as expenditure under Section 43B of the Act. The AO has observed that as appellant is following mercantile system of accounting, expenditure claimed is prior period expenditure hence same is not allowable as deduction under Section 37 of the I. T. Act, 1961. Accordingly, he made disallowance of Rs. 11,68,847/-.”

4.1 The order of the Ld. CIT(A) further reveals that it was explained to him that the assessee had made the payment of this service tax on purchases made in earlier years and being an exporter of goods, it was entitled to refund of the entire service tax as per the scheme of the Government. That, accordingly, it had not debited or claimed any expenditure on account of service tax so paid but treated as an asset in its balance-sheet, showing it as recoverable as refund from the Government. That, in the impugned year since the possibility of receiving the refund had exhausted, the assessee accordingly wrote off the entire amount in its books of accounts claiming it as business loss. These submissions of the assessee find mentioned at paragraph No.3.4 of the order of the Ld.CIT(A), as under:

“3.4 The appellant has claimed that it is exporter of readymade garments and being exporter, various incentive schemes are provided by Central Government and one of the scheme was in the form of refund of service tax paid by Assessee to its suppliers on account of services received for the purpose of carrying out business operation. It was contended that appellant was making payment to suppliers inclusive of service tax but expenditure was claimed excluding service tax component included in bills raised by suppliers as it was entitled to refund of service tax from Central Government. Such refund was shown as service tax receivable in balance sheet. As per normal practice, assessee receives refund of service tax when

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export of goods are completed, but it could not receive refund of service tax of Rs. 11,68,847/- out of total receivable of Rs. 13,43,732/- outstanding in annual accounts as on 31st March, 2012. As such benefits were not received, appellant has written off balance lying in service tax refund receivable account in Profit & Loss Account in current year and claimed it as revenue expenditure under Section 37 of the I. T. Act, 1961. The appellant has contended that service tax is already paid in earlier years, provisions of Section 43B would not apply when expenditure is claimed as revenue expenditure in current year. It was contended by appellant that this expenditure cannot be considered as prior period expenditure as it has not received refund of service tax, hence same was written off as expenditure in Profit & Loss Account. The appellant has relied upon decision of Hon'ble Supreme Court in the case of Excel Industries Limited [38 taxmann.com 100] in support of its contention that entire exercise of allowability of such expenditure either in current year or in earlier year is tax neutral. The appellant in its alternate contention has stated that if such expenditure is not allowable expenditure, same may be allowed in earlier assessment year as revenue expenditure.”

4.2 Appreciating the same, the Ld.CIT(A) agreed with the assessee that the provisions of section 43B of the Act are not attracted since the claim of the assessee pertains to the waiver/write off of sales tax refund by the assessee, the payments having already been made by the assessee in the earlier years. The Ld.CIT(A) noted that section 43B of the Act does not stipulate that expenditure is allowable only in the year of payment and he held that if payment has preceded the year of claiming such expenditure, disallowance cannot be made. He further noted that in an identical case, Hon’ble ITAT in the case of ACIT vs. Rangoli Industries Pvt. Limited in ITA No.1936/Ahd/2010 vide order dated 11/01/2013 allowed the identical claim of the assessee. His findings in this regard contained at paragraph No.3.5 of its order, read as under:-

“3.5 Appellant has paid service tax on bill raised by suppliers in earlier assessment years but same was not claimed as revenue expenditure in the year of payment but was shown as "service tax refund receivable account" in balance sheet. As above amount is not received from concerned authority as per relevant schemes, such amount is written off as business loss/expenditure in year under consideration. The provisions of Section 43B

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relied upon by AO are not applicable because payment of custom duty is already made by appellant which is not in dispute. The provision of Section 43B does not envisage that expenditure is allowable only in the year of payment and if payment has preceded the year of claiming of such payment as expenditure, disallowance of expenditure cannot be made under this provision. So far as allowability of such expenditure as revenue expenditure is concerned, it is found that Hon'ble Ahmedabad ITAT in the case of ACIT V/s Rangoli Industries Pvt. Limited in ITA No. 1936/Ahd/2010 vide order dated 11th January, 2013 has held as under:

"Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) r.w.s. 147 dated 22.12.2009 were that the assessee company is following the 'Mercantile" system of accounting. It was noted by the Assessing Officer that for the year under consideration an amount of Rs.65 ,24,121/ - was written off by debiting the profit & loss account pertaining to Excise Duty. According to him, Government had declared the scheme wherein the assessee has been given an option to continue with the present rate of Excise Duty or to avail a route of exemption. After going through the submissions of the assessee, the Assessing Officer was not convinced and held that there was no evidence from the Excise Department through which the assessee could establish that the assessee was entitled to write off the amount in the year under consideration.... 4. Having heard the submissions of both the sides and considering the facts of the case as narrated before the lower authorities, it was observed that the aforesaid amount of the Excise Duty was written off at the time of surrender of Excise Registration Certificate. On this issue, the Respected Coordinate Bench Chandigarh in the case of M/s.Mohan Spinning Mills (supra) has opined as under:-

"7. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in respect of the deduction claimed on account of CENVAT amounting to Rs.35,94,577. The assessee was engaged in the business of manufacturing and trading of yarn and fibre. The yarn manufactured by the assessee was an excisable item. The assessee was paying excise duty on the raw material purchased i.e. acrylic yarn/fibre and polyester yarn/fibre. In turn, assessee was liable to pay duty on its manufactured items. The rate of excise duty payable on the raw material was higher and the assessee was depositing the excise duty in PLA account which in turn was adjustable against the excise duty payable on the finished products. The excise duty payable on the finished products was on the lower side and consequently over period of years the assessee had credit of excise duty resulting in accumulation of CENVAT.”

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“10. Various tests have been laid down by various High Courts and the Apex Court in relation to the allowability of expenditure under section 37(1) of the Act while computing the income from profits and gains of business or profession. In the facts of the present case, the assessee had paid CENVAT on purchase of raw material which was deposited in its PLA account for claiming the benefit of set off against the excise duty payable on the manufactured items i.e. branded yearn. The assessee was paying higher rate of excise duty on the raw material purchased by it as against the rate of excise duty applicable on the manufactured items, consequently credit of excise duty was available with the assessee. The said excise duty paid from year to year was not claimed as an expenditure but was carried forward from year to year to be adjusted against the excise duty payable by the assessee on its manufactured items. However, during the year under consideration the assessee closed down its manufacturing unit and consequently the benefit of the CENVAT credit remained un-adjusted. Once the manufacturing unit of the assessee is closed down, admittedly the benefit of CENVAT credit not availed of against the excise duty payable on manufactured items, cannot be utilized by the assessee and the said write off of CENVAT credit, is allowable as an expenditure in the year under consideration on the closure of the business. The write off of CENVAT credit by the assessee in its books of account is thus allowable as business expenditure under the provisions of section 37(1) of the Act relatable to the year, in which the manufacturing activities are closed down by the assessee. Accordingly, we direct the Assessing Officer to allow the claim of the assessee in respect of write off of CENVAT credit of Rs.35,94,577/-. Ground No.1 raised by the assessee is thus allowed." 4.1. We have also noted that Respected Coordinate Bench "A" Ahmedabad in the case of Girdhar Fibres Pvt.Ltd. (supra) has also opined as under:- "9. We heard both the sides. Before us, Form E.R.1, i.e. Return of Excisable goods and availment of CENVAT credit has been placed. The explanation of the assessee was that the impugned two amounts were part of the duty which was paid by the assessee at the time of purchase of raw-material, however, the assessee had maintained exclusive system of accounting, therefore the duty paid was not debited as a part of the purchases but a separate account was maintained and carried to the balance-sheet. The AED and NCCD were applicable on POY, i.e. raw-material. When the finished goods, i.e. texturized yarn is manufactured, the excise is levied in the form of basic duty. The assessee has adopted exclusive method of accounting. therefore debited the net purchases and those were separately recorded in the books of accounts. We find force in this argument of the assessee

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because while maintaining the exclusive method of accounting the assessee had a choice to increase the value of the purchases in respect of the duty paid in the form of AED & NCCD. In other words, an expenditure was incurred but that expenditure could not be adjusted against the CENVAT Rules because on the finished goods, i.e. texturized yarn only the basic duty is leviable. We, therefore, hold that the amount which is now written off being part of the business expenditure, hence allowable under the provisions of the Act. In the result, we hereby reverse the findings of the authorities below and allow the ground raised by the Assessee." 5. In the light of the above decisions, once on identical facts, a view has already been taken in favour of the assessee on this issue, therefore respectfully following that view, we hereby hold that Id. CIT(A) has rightly allowed the claim. In the result, ground raised by the Revenue is hereby dismissed." Replying upon the decision referred supra and the facts of the case, addition made by Assessing Officer for Rs.11,68,847/- pertaining to service tax is allowed as revenue expenditure.”

6.1 It is not in dispute that the assessee has claimed the service tax in the impugned year not as expenditure but as business loss on account of waiver of refund of the same to which assessee was entitled since preceding years. The assessee admittedly had paid all the

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service tax in the preceding years and was entitled to refund of the same and accordingly had reflected all the service tax paid in the preceding years as its assets. It had not claimed any expenditure on account of the same in the year in which it was incurred since as per the assessee the scheme of the Government entitled it to refund of the entire amount. That, in the impugned year, when the possibility of getting the refund was extinguished the assessee wrote off the entire amount in its books of accounts. We agree with the Ld.CIT(A) that the provisions of section 43B of the Act apply only in circumstances where the assessee claims expenditure of statutory dues on incurring the same, which as per the section is to be allowed only when the payment is actually made. Section 43B of the Act does not envisage or apply to the situation where the payment precedes the claim of the expenditure as in the present case. It only applies to the situation, where the claim precedes the incurrence of the expenditure and holds allowability of the claim only on payment of the due. In a situation, where the payment precedes the claim of expenditure as in the present case, the provisions of section 43B of the Act are not attracted, since the purpose & objective of section 43B of the Act is to ensure that all dues to the state or other bodies as identified in the section are paid in time. In the fact situation, whether dues are actually paid but the claim of expenditure is made subsequently, there can be no question of invoking section 43B of the Act. We completely agree with the Ld.CIT(A) on this aspect.

6.2 The Ld.CIT(A) has applied the decision of the ITAT in the case of ACIT vs. Rangoli Industries Pvt. Limited (supra) for allowing claim of write off of sales tax refund. The Ld.DR was unable to distinguish the said decision nor was she able to point out any contrary decision

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of any higher judicial authority on the same. In view of the same, we do not see any reason to interfere with the order of the Ld.CIT(A) holding the assessee’s claim of sales tax refund waived during the year amounting to Rs.11,68,847/- as allowable expenditure. Ground of appeal raised by the Revenue is dismissed.

Order pronounced in the open Court on 19th January, 2024 at Ahmedabad.

Sd/- Sd/- Sd/- Sd/- (ANNAPURNA GUPTA) (T.R. SENTHIL KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 19/01/2024 टी.सी.नायर, व.िन.स./T.C. NAIR, Sr. PS आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1. अपीलाथ� / The Appellant अपीलाथ� अपीलाथ� अपीलाथ� 2. ��यथ� / The Respondent. ��यथ� ��यथ� ��यथ� 3. संबंिधत आयकर आयकर आयु� आयु� / Concerned CIT –concerned संबंिधत संबंिधत संबंिधत आयकर आयकर आयु� आयु� आयकर आयु� अपील 4. ( ) / The CIT(A), Ahmedabad 5. िवभागीय �ितिनिध , , /DR,ITAT, Ahmedabad, िवभागीय िवभागीय िवभागीय �ितिनिध �ितिनिध �ितिनिध अिधकरण अिधकरण अिधकरण अिधकरण अपीलीय अपीलीय अपीलीय अपीलीय आयकर आयकर आयकर आयकर 6. गाड� फाईल फाईल /Guard file. गाड� गाड� गाड� फाईल फाईल आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार आदेशानुसार TRUE COPY

सहायक पंजीकार पंजीकार (Asstt.. Registrar) सहायक सहायक सहायक पंजीकार पंजीकार आयकर अपीलीय अपीलीय अिधकरण अिधकरण आयकर आयकर आयकर अपीलीय अपीलीय अिधकरण अिधकरण ITAT, Ahmedabad