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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri Mahavir Singh, JM & Shri M. Balaganesh, AM]
ORDER Per Shri Mahavir Singh, JM:
This appeal of revenue and cross objection by assessee are arising out of order of CIT(A)-VI, Kolkata in Appeal No. 840/CIT(A)-VI/09-10/Cir-5/Kol dated 30.06.2010. Assessment was framed by ACIT, Circle-5, Kolkata u/s. 143(3) & 115WE(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2007-08 vide order dated 04.12.2009.
First we take up (Revenue’s appeal). The first issue in this appeal of revenue is against the order of CIT(A) deleting the disallowance made by AO of provisions for write off of spares at Rs.10 lacs. For this, revenue has raised following ground no.1: “1. That Ld. CIT(A)-VI, Kolkata has erred in law as well as on facts of the case in deleting the addition on account of disallowance of provision for write off of spares of Rs.10 lacs without going into the merit of the case.”
3. Briefly stated facts are that the assessee has debited a sum of Rs. 10 lac under the head loss on account of diminution in value of stores and spares. The AO required 2 & CO No.19/K/2011 Hindusthan Paper Corpn. Ltd. AY 2007-08 the assessee to explain the same. The assessee explained vide reply dated 26.10.2009 but the AO has not accepted the reply of the assessee and hence, he disallowed the provision for write off of stores and spares as not allowable expenditure. Aggrieved, assessee preferred appeal before CIT(A), who allowed the claim of the assessee by relying on the order of AY 2004-05 and also observing that even the AO has not made any addition on the same issue for AY 2006-07. For this, he observed as under: “I have considered the submissions of the appellant and also the details furnished by the appellant. The AO made the disallowance since the “provision for write off of stores and spares” is not an allowable expenditure, stores and spares are consumable items of a manufacturing business and, therefore, consumption of stores is an ordinary incidence of manufacturing business. I agree with the decision of CIT(A)-V, in ITA No. 262 in the appellant’s own case for the AY 2004-05, based on which the AO has not made any addition on the same issue for the AY 2006-07. Since facts and circumstances of the present appeal are the same, AO is directed to allow the sum of Rs.10,00,000. This ground is allowed.” Aggrieved, revenue is now in appeal before us.
We have heard rival submissions and gone through facts and circumstances of the case. We find that assessee had written off in its Profit & Loss Account the value of obsolete stores and spares amounting to Rs. 656.36 lacs. The assessee deducted the provision created till 31.03.2006 for an amount of Rs. 646.36 lacs and the remaining sum of Rs. 10 lacs was debited to the profit and loss account for the year ended 31.03.2007. Assessee claimed that it carries substantial inventory of raw materials, stores and spares. According to the assessee, its plants are located in remote and inaccessible areas of Assam and hence these plants carry substantial inventory of raw material stores and spares. Due to heavy rains as also substantial use of water and chemicals in manufacturing process, there is high incidence of corrosion and damage. From the records, we find that the assessee regularly carries out physical inspection of materials, stores and ascertain the diminution in value of stores and also damaged and obsolete stock. It is also a fact that physical inspection is conduced both departmentally as also by external agencies. During the year under consideration M/s. Bandyopadhyay & Associates, Cost Accountants, carried out the valuation of spares at Nagaon and Cachar Paper Mills and identified items of obsolete and damaged stores and spares and furnished report on valuation of stores and spares. Based on the valuation report that assessee written off Rs.656.36 lacs in its profit and 3 & CO No.19/K/2011 Hindusthan Paper Corpn. Ltd. AY 2007-08 loss account for the year ended 31.03.2007. However, in respect of the very same items assessee had created provision in the earlier years to the extent of Rs.646.36 lacs and therefore adjusting such provisions, the net additional sum of Rs. 10 lacs only was debited in the profit and loss account. We futher find that similar write off were also made by the assessee in the financial year 2003-04 and 2005-06. The disallowance made by the AO in AY 2004-05, was deleted by the CIT(A) and thereafter COD refused permission to file appeal against the said appellate order. In AY 2006-07 also the assessee had written off Rs.184. 07 lacs. In the regular assessment u/s. 143(3) for A. Y. 2006-07 the same AO after due consideration of the explanation and the CIT(A)’s order for AY 2004-05, had refrained from making any disallowance. In view of the facts and circumstances of the present case, We are of the view that the claim of assessee, writing off in its Profit & Loss Account, the value of obsolete stores and spares, is a genuine claim and CIT(A) has rightly allowed the same.
5. The next issue in this appeal of revenue is against the order of CIT(A) deleting the disallowance made by AO by invoking the provisions of section 14A read with Rule 8D of the I. T. Rules, 1962 (hereinafter referred to as the “Rules”). For this, revenue has raised following ground no.2:
2. That Ld. CIT(A)-VI, Kolkata has erred in law as well as on facts, in deleting the entire addition u/s. 14A and not restricting it to certain amount applying the provision of Rule 8D, in view of the decision of the ITAT, Special Bench, Mumbai, pronounced in the case of Daga Capital Management Ltd.”
6. Briefly stated facts are that the assessee has earned dividend income of Rs.907.94 lacs and claimed the same as exempt u/s. 10(34) of the Act. The AO made disallowance of average of investment at 0.5% after taking calculation from assessee in view of Rule 8D of the Rules. Accordingly, the AO made disallowance of Rs.98.23 lacs as expenditure linked to earning of exempt income u/s. 14A of the Act read with Rule 8D of the Rules. Aggrieved, assessee preferred appeal before CIT(A), who deleted the disallowance only on the premise that the assessee has received dividend from a wholly owned subsidiary viz. Hinduthan Newsprint Ltd. and no new investment has been made after 1983. According to assessee, this dividend declared by subsidiary but had not actually paid though adjusted in view of the book entries passed in the accounts of the subsidiary as well as the assessee company. According to assessee,
4 & CO No.19/K/2011 Hindusthan Paper Corpn. Ltd. AY 2007-08 except passing of journal entry in the books of the assessee as well as the subsidiary, no expenditure is incurred for the purpose of this dividend. Aggrieved against deletion, revenue is in appeal before us.
7. We have heard rival submissions and gone through facts and circumstances of the case. We find that the AO made disallowance by invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. We find that the AO has made addition of Rs.98.23 lacs u/s 14A of the Act which is at 0.5% of Rs.1,96,46,30,000 being investment in shares of its wholly owned subsidiary Hindustan Newsprints Ltd. (HNL) from whom assessee had received dividend of Rs. 907.94 lacs. The facts are that in 1970s the assessee had set up a newsprint mill in Kerala and after the Newsprint Division started manufacturing, Government of India decided to corporatise the Newsprint Paper Division and accordingly directed the assessee to convert the said Newsprint Paper Division into a wholly owned subsidiary under the name and style of Hindustan Newsprint Ltd. Since 1983-84 the said HNL is functioning as an independent corporate entity. After 1983 the assessee has not made fresh investments in the said subsidiary. The dividend is declared by the subsidiary but is not actually paid but it is adjusted inter se by passing book entries in the accounts of subsidiary as well as the assessee company. No dividend is actually disbursed. The accounting entry of dividend declaration is passed only once, annually. Except for passing of the Journal Entry in the books, of both companies, no expenditure is incurred for the purpose of collection of the dividend. We fimnd that the AO in the impugned order has made the disallowance by invoking Rule 8D(2)(iii) of the Rules. Rule 8D(l) of the Rules provides that where an AO, having regard to the accounts of the assessee for the previous year is not satisfied with the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income; he shall determine the amount of expenditure in accordance with sub rule(2). Rule 8D(1), therefore, requires that before sub rule (2) is invoked the AO should have regard to the accounts of the assessee for the relevant previous year before resorting to sub rule(2). In the present case with reference to assessee's accounts for FY 2006-07; the assessee had proved that no expenditure was actually incurred by the assessee. The AO without dealing with or without having regard to assessee's accounts for the FY 2006-
5 & CO No.19/K/2011 Hindusthan Paper Corpn. Ltd. AY 2007-08 07, arbitrarily proceeded to make disallowance under Rule 8D(2)(iii) Rules. Having regard to the aforesaid facts, we are of the view that the AO was unjustified in making the disallowance of Rs.98.23 lacs merely by adopting an arithmetical formula prescribed in Rule 8D(2)(iii) of the Rules. We are of the view that disallowance u/s 14A of the Act can be made only if the facts of the case prove that at least some expenditure was actually incurred by the assessee for earning exempt income. If, however, the facts on record and the assessee's accounts for the relevant year establish that in fact no expenditure was incurred in relation to earning tax free income then no disallowance is permissible under the substantive provisions of Sec 14A of the Act. We, therefore are of the view that CIT(A) has rightly deleted the disallowance of Rs. 98.23 lacs, arbitrary made by the AO without bring on record any material which even suggested that same expenditure was in fact incurred by the assessee for earning dividend from its wholly owned subsidiary Accordingly, we confirm the order of CIT(A) and this issue of revenue’s appeal is dismissed.
8. The next issue in this appeal of revenue is against the order of CIT(A) directing the AO to allow rebate u/s. 88E of the Act while computing book profit u/s. 115JB of the Act. For this, revenue has raised following ground no.3:
3. The CIT(A)-VI, has erred in law in directing to compare Tax on normal income before rebate u/s. 88E with 10% of Book profit for applying Sec.115JB.”
9. At the outset, Ld. Counsel for the assessee stated that the above ground is not arising out of the order of CIT(A). When this was confronted to Ld. Sr. DR he fairly conceded the issue and even we have gone through the order of CIT(A) and noticed that no such issue be raised before CIT(A), hence the same is dismissed as infructuous.
Now, we are coming to Assessee’s CO No. 19/Kol.2011. At the outset, it is noticed that the CO of the assessee is barred by limitation for 164 days but assessee has filed one condonation petition along with affidavit stating the reason that this appeal was not filed on the advice of the counsel that the revenue’s appeal is liable to be dismissed as not maintainable as revenue’s appeal was filed for obtaining approval of COD at that time the same was mandatory in all cases involving undertakings owned by the Central Government. The assessee has stated the reasons in its affidavit at para 4 to 9, which reads as under:
6 & CO No.19/K/2011 Hindusthan Paper Corpn. Ltd. AY 2007-08 “4. On receipt of the intimation regarding filing of second appeal the Counsel of the Respondent company advised that the appeal of the Revenue was liable to be dismissed as it was filed without obtaining prior approval of COD which was then mandatory in all cases involving Undertakings owned by the Central Government.
The Respondent company was advised that a Cross Objection can be filed only where an appeal was validly filed and therefore no useful purpose would be served since the appeal filed without obtaining COD approval was liable to be dismissed.
Based on the advice received from the Counsel at the relevant time the Cross Objections for the AY 2007-08 was not filed on or before 03.10.2010.
In first week of March 2011 the company’s counsel informed the Respondent company about the judgment of the Supreme Court in which requirement of obgtaining COD approvals was dispensed with and accordingly Respondent company was informed that the appeal filed by the Revenue AY 2007-08 would be admitted for hearing by the ITAT.
The Respondent company was also advised that in respect of issues decided against by the CIT(A) Cross Objections should now be filed since the appeal filed by the Revenue authorities would be admitted even though the same was filed without obtaining prior COD approval.
Immediately on receipt of the advice from the counsel the Respondent Company took immediate steps for filing of cross objections and the same was filed on 16.03.2011.”
In view of the above reasons, the bench required the Ld. Sr. DR as to why the delay be not condoned. The Ld. Sr. DR although objected for condonation of delay but he also conceded that the cause is reasonable. We find that the causes shown by the assessee are reasonable, hence, we condone the delay and admit the assessee’s CO.
The first issue in the Cross Objection of the assessee is as regards to the order of CIT(A) confirming the addition of prior period adjustment. For this, assessee has raised following three grounds: “1. For that on the facts and in the circumstances of the case, the CIT(A) erred in law in upholding the addition made in the assessment order in respect of Prior period adjustments. 2. For that on the facts and in the circumstances of the case, the CIT(A0 failed to appreciate that the amount disallowed inter alia included CENVAT actually paid during the relevant year amounting to Rs.198.09 lacs, for which deduction was permissible u/s. 43B. 3. For that on the facts and in the circumstances of the case, the authorities below be directed to allow deduction for Rs.172.05 lacs debited under the head Prior period adjustments as the liability to pay the expenditure had crystallized during the year under consideration.”
Briefly stated facts are that the AO noticed from Schedule -23 to the accounts forming part of Balance Sheet that it has debited net prior period expenses of Rs.172.05 lacs in its P&L Account. According to AO, the assessee is following mercantile system of accounting. Hence, prior period expenses is not allowable as an expenditure as per the provisions of the Act. Hence, he added back the prior period expenses at Rs.172.05 lacs. Aggrieved, assessee preferred appeal before CIT(A), who only directed the AO to allow only the item such as rebate and discount, salary and wages and other miscellaneous expenditure after verification but has not allowed basic of excise duty, education cess, statutory interest etc. Aggrieved, assessee is in appeal before us.
We have heard rival submissions and gone through facts and circumstances of the case. At the outset, Ld. Counsel for the assessee drew our attention to the details of prior period adjustment, given at assessee’s paper book page 32, which reads as under:
HINDUSTAN PAPER CORPORATION LTD. (TAX CELL) DETAILS OF PRIOR PERIOD ADJUSTMENT F.Y 2006-07 (AY 2007-08) (Rs. In LAKH) Particulars NPM CPM CHQ & MKT DEBIT DR CR DR CR DR CR Salaries, Wages & Others 1.66 Postage & Telegram 0.10 Chemical Consumed 0.84 Raw Material Consumed 8.65 Professional & Oth Charges 0.07 Security Expenses 6.98 Sales Return 6.16 Printing & Stationery 0.34 Rebate & Other Discount 40.27 Repairs & Maintenance 0.10 Cenvat Credit 198.09 Packing Materials 0.65 Other Misc 6.81 CREDIT R & Maintenance Plant 15.41 R & Maintenance Vehicles 0.69 Freight & Handling 0.43 1.04 Insurance 11.42 Service Tax 67.48 VAT Credit 2.20 TOTAL 204.25 11.85 18.71 83.58 47.76 3.24
NET BALANCE
Debit : 270.72 LAKH CREDIT: 98.67 LAKH NET 172.05 LAKH It also produced details of payment made to Excise Department i.e. basic excise duty and education cess as well as interest on education cess and interest on basic excise
HINDUSTAN PAPER CORPORATION LTD. (TAX CELL) DETAILS OF PAYMENT MADE TO EXCISE DEPARTMENT DURING THE F.Y 2006-07 DATE OF PAYMENT BASIC EXCISE DUTY(RS.) EDUCATION CESS(RS.) TOTAL (RS.) 04.12.2006 10,00,000.00 10,00,000.00 04.01.2007 20,00,000.00 20,00,000.00 05.02.2007 41,10,849.00 41,10,849.00 04.03.2007 30,00,000.00 30,00,000.00 21.03.2007 82,398.00 82,398.00 TOTAL 1,31,10,849.00 82,398.00 1,31,93,247.00 DATE OF PAYMENT INTEREST ON BASIC INTEREST ON TOTAL EXCISE DUTY EDUCATION CESS 24.03.2007 65,84,647.00 23,463.00 66,08,110.00 GRAND TOTAL 1,98,01,357.00 In view of the above facts of the case, we find that the assessee debited these amounts under the nomenclature prior period adjustment and not under prior period expenses. For taxation purposes expenditure can be considered to be prior period expenditure if and only if the liability to pay the expenditure was incurred or crystalised during the earlier accounting period but in relation to transaction conducted in earlier accounting period, if new liability accrues or crystallizes in the later year, than such liability cannot be regarded as prior period expenditure even though in accounting parlance the same may be considered to be prior period adjustment. The assessee being a government undertaking whose plants are situated in Assam and registered office at Calcutta besides administrative office at Delhi and its several office and depots in different part of the country. The accounting procedure prescribed by C&AG has institutionalized system of checks and balances and accordingly certain expenses required clearances from different authorities located at different locations and cities. This type of major expenditure debited under the head CENVAT credit wrongly claimed in earlier years, in which excess CENVAT credit was claimed on production of paper. During the year under consideration, on inspection of excise record by Central Excise Officials, certain procedural irregularities were detected while claiming CENVAT credit. On detection of irregularities the assessee was directed to pay basic excise duty of Rs.1,31,10,849/-, education cess of Rs.83,298/- and statutory interest of Rs.66,08,110/-. The assessee 9 & CO No.19/K/2011 Hindusthan Paper Corpn. Ltd. AY 2007-08 provided liability of CENVAT of Rs.198.09 cr. for the year ended 31.03.2007. This statutory liability was discharged during FY 2006-07 relevant to this AY 2007-08 and according to us, the same was allowable u/s. 43B of the Act. Accordingly, we are of the view that this liability is allowable liability and we direct accordingly.
The next issue in this Cross Objection of the assessee is against the order of CIT(A) in disallowing the claim of write off of loose tools. For this, assessee has raised following ground nos. 4 and 5: “4. For that on the facts and in the circumstances of the case, the CIT(A) was unjustified in disallowing the claim for write off of loose tools amounting to Rs.23.63 lacs.
5. For that on the facts and in the circumstances of the case, the authorities below were unjustified in rejecting assessee’s claim for write off of loose tools ignoring the fact that assessee’s method of writing off cost of tools in five equal instalments was accepted by the department in all the past assessments.”
16. Briefly stated facts are that the AO noticed from Schedule 19 of the Balance Sheet and noted that the assessee has written off loose tools of rs.23.63 lacs. The AO required the assessee to explain as to why this write off of loose tools be not disallowed. The assessee explained that loose tools are used for maintenance of plant and machinery and these are depreciable items and accordingly diminution in the value of such items is charged to the P&L Account of the assessee and depreciated value of the loose tools are shown in the Balance Sheet. Accordingly, it was claimed as deduction. The AO was not convinced and he disallowed the claim of the assessee. Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of AY by observing as under: “I have gone through the submissions of the appellant and the order of the AO. The appellant admits that the life of these tools and consumables are written off in equal instalments. It is a fact that the assessee has shown the loose tools under the head inventories in the balance sheet and is amortising the expenses over a period of 5 years in equal instalments. As submitted by the appellant, the tools and consumables have a life of 5 years. They cannot be written off in equal instalments, since the expenditure is not in the nature of preoperative or preliminary in nature. I agree with the arguments given by the AO in the assessment order. The disallowance made by the Ao is confirmed. Taking into consideration the alternative plea of the appellant, after examination of the tools and consumables details furnished by the appellant, the AO is directed to allow the deduction for the tools and consumables purchased and consumed in the year under consideration, after necessary verification. These grounds are partly allowed.” Aggrieved, assessee is in second appeal before Tribunal.
10 & CO No.19/K/2011 Hindusthan Paper Corpn. Ltd. AY 2007-08 17. We have heard rival submissions and gone through facts and circumstances of the case. We find that assessee is following a consisting accounting practice of writing off of loose tools in five annual equal instalments in the past. The assessee has filed details before us for the Ay 2004-05, 2005-06 and 2006-07 as under: “Assessment year Amount 2004-05 Rs.25.65 lacs 2005-06 Rs.26.44 lacs 2006-07 Rs.25.94 lacs” The method adopted by the assessee and accepted by the department in all the past assessment years by the same AO. In the immediately three preceding years, while completing regular assessment the AO had allowed the regular deduction for the write off of loose tools on amortization basis. In view of the above, we are of the view that the CIT(A) has erred in not allowing the deduction. We reverse the order of CIT(A) and allow the claim of deduction of write off of loose tools. We order accordingly. This issue of assessee’s CO is allowed.
In the result, the appeal of revenue is dismissed and assessee’s CO is allowed.
Order is pronounced in the open court on 05.11.2015 Sd/- Sd/- (M. Balaganesh) (Mahavir Singh) Accountant Member Judicial Member
Dated : 5th November, 2015