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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
PER G.S. PANNU,AM:
The captioned are cross- appeals filed by the assessee and the Revenue, directed against the order of the CIT(A)-17, Mumbai dated 06/03/2012, pertaining to the assessment year 2007-08, which in turn has arisen from an order passed by the Assessing Officer dated 16/12/2012 under section 143(3) of the Income Tax Act 1961 ( in short “the Act”). 2. The main Grounds of appeal raised by the assessee and Revenue read as under:
Grounds of Assessee’s Appeal:-
On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that non- compete fees received by the Appellant on divesture of 'Leader' business is taxable as "Short Term Capital Gains" instead of "Long Term Capital Gains" as considered by the appellant in the return of income.
On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that the disallowance under section 14A of the Act be made at the rate of 2% of the dividend income earned over and above the amount of Rs 20,39,893 disallowed suo moto by the appellant in the return of income.
On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to re-compute the value of closing inventory in accordance with the provisions of section 145A of the Act.
3 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) Grounds of Revenue’s Appeal:- 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of RsJ,00,44,000/- made u/s.14A of the Act r.w. Rule 8D to Rs.18,58,789/- without appreciating that in the case of M/s. Godrej and Boyce Manufacturing Co. Ltd. vs DCIT (328 ITR 81)(supra), their Lordships had upheld the contentions of the Union of India that Rule 8D is reasonable in its nature." 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of Rs.1,00,44,000/- made u/s.14A of the Act r.w. Rule 8D to Rs.18,58,789/-, in the light of the judgment of Jurisdictional High Court in the case of M/s. Godrej and Boyce Manufacturing Co. Ltd. vs DCIT (328 ITR 81) which has not been accepted by revenue." 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in holding that income of Rs.45,05,07,984/- derived by the assessee from growing and sale of hybrid seeds is to be treated as agricultural income falling u/s.2(1)(a) and directing the AO to allow deduction u/s.10(1) of the I.T.Act, 1961 ignoring the Hon. Karnataka High Court's decision in the case of CIT vs Namdhari Seeds (P) Ltd. (2011) 203 Taxman 565 (Kar), in which on the same facts and circumstances, the revenue's view and action have been upheld. 4. ""On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating the non-compete fees of Rs.2 crores received by the assessee is not taxable as business income in terms of sec. 28(va) of the I.T, Act." 5. "On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating gains of Rs.7,61,20,585/- arising from the transfer of assets such as distribution network, Registration & Licenses, Copy Rights & Goodwill on sale of Leader Business are not short term capital gains as per provisions of sec.50 of I.T.Act." 6. "Without prejudice to the above, the CIT (A) has erred in holding that gains of the appellant on transfer of distribution network, Registration & Licenses, Copy Rights & Goodwill on sale of Leader Business are not business income, without appreciating the fact that entire expenditure incurred for generating these assets as deduction u/s. 37(1) of the I.T. Act in earlier years."7
4 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) 3. The assessee before us is a company incorporated under the provisions of the Companies Act, 1956 in the year 1949, and is inter- alia engaged in the growing and selling of hybrid seeds, besides being engaged in the business of manufacturing and selling of agro-chemical based products. For the assessment year under consideration, it filed a return of income declaring total income of Rs.20,19,03,596/-, which was subject to scrutiny assessment, whereby total income was assessed at Rs.66,58,34,410/- after making certain additions/ disallowances. The CIT(A) has allowed certain reliefs to the assessee company, and accordingly the Revenue as well as the assessee company are in appeal before us.
The first substantive dispute in the cross-appeals relates to the taxability of profit earned by the assessee company on the sale of its business of trading and manufacture of Selective Wheat herbicide containing the active ingredient known as Sulfosulfuron under the trademark LEADER (hereinafter referred to us ‘Leader Business’ to Sumitomo Chemical India Private Limited (hereinafter referred to as ‘Sumitomo’) vide a Business Transfer Agreement dated 31/08/2006 for a total consideration of Rs.30,13,65,096/-. The Business Transfer Agreement envisaged itemised break-up of the capital assets transferred, and in the return of income filed, assessee treated the gain on sale of ‘Leader business’ as under:-
Particulars Cost of Sale Profit Acquisition Consideration (Rs.) (Rs.) (Rs.) (i) Non-compete Fees - 2,00,00,000 2,00,00,000 (ii) Technical Know- 1,06,07,280 4,27,30,755 3,21,23,475
5 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) How (iii) Trade mark and 1,06,07,280 4,27,30,755 3,21,23,475 Goodwill (iv) Distribution - 3,01,66,336 3,01,66,336 Network (v) Registration and - 3,49,07,433 3,49,07,433 licenses (vi) Copyrights - 78,97,585 78,97,585 (vii) Goodwill - 31,49,231 31,49,231 (viii) Plant and Machinery - 48,97,905 48,97,905 (ix) Inventory 11,53,90,709 11,48,85,095 -5,05,614 Total 13,66,05,269 30,13,65,095 16,47,59,826
4.1 In so far as the profit in sale proceeds received on account of Non-compete Fees, Distribution Network, Registration and licenses, Copy- rights, and Goodwill is concerned, it was treated as ‘Long Term Capital Gain’; the profit in relation to Technical know-how and Trademark was declared as Short Term Capital Gain; the sale consideration received in relation to ‘Plant & Machinery’ was reduced from the ‘block of assets’; and, the loss incurred on transfer of inventory was charged to the Profit & loss account. The Assessing Officer disagreed with the assessee-company with respect to the treatment of- (a) Non-Compete fees, which was held to be taxable as ‘business income’ under section 28(va) of the Act; (b) gain on transfer of Distribution Network, Registration and licenses, Copyright, and Goodwill, which was held to be a Short Term Capital Gain instead of Long term Capital Gain treated by the assessee.
6 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) 5. On an appeal by the assessee, the CIT(A) accepted the claim of the assessee company that the gain on transfer of Distribution Network, Registration and licenses, Copyrights and Goodwill was a Long term Capital gain. This decision of the CIT(A) is in challenge by Revenue before us by way of Ground of appeal No.5.
5.1 Further, the CIT(A) held that the Non-Compete fee received was taxable as a Short-term Capital gain. This stand of the CIT(A) is in challenge before us, in as much as the assessee company contends that the Non-Compete Fee received is taxable as Long term Capital gain (Ground of appeal No.1 in assessee’s appeal), whereas the Revenue contends that such receipt is taxable as business income under section 28(va) of the Act(Ground of appeal No.4 in Revenue’s appeal).
In the above background, we have heard the rival Counsels. The Ld. Counsel for the assessee defended the treatment made by the assessee in the return of income with respect to the gain on transfer of ‘leader business’. It was pointed out that the non-compete fee was received for agreeing not to engage in or carry on any business which could compete directly or indirectly with the herbicide business carried on by the buyer, and since such restrictions was for a period of ten years, the consideration was rightly offered to tax under the head capital gains as a long term capital gain. In support, reliance was placed on the following decisions:-
(i) Lyka Labs Ltd., 116 ITD 457 (Mum). (ii) ACIT vs. Dr. B.V.Raju (2012), 14 ITR (Trib) 387 (Hyd) (iii) ACIT vs. M/s. Track Chemicals Pvt. Ltd.,ITA No.4131/Mum/2008& Others order dated 30/12/2011.
7 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) (iv) Delhi Bench decision in the case of Mediworld Publications P. Ltd., ITA No.4086/Del/09 dated 2/07/2010.
On the otherhand, the Ld. Departmental Representative has defended the action of the Assessing Officer in treating the non- compete fee as business income on account of application of section 28(va) of the Act.
On the aspect of taxability of non-compete fee, we have considered the rival submissions. As per the Business Transfer Agreement with ‘Sumitomo’, the entire ‘Leader Business’ has been transferred lock, stock and barrel, which inter-alia, contained a covenant to the effect that assessee-company would not engage in or carryon any business for a period of 10 years, which competes directly or indirectly with whole or part of the herbicide business carried on by the buyer. Clause -13 of the Business Transfer Agreement, placed in the Paper Book, is relevant, which reads as under:-
“13. Non Competition and Non Solicitation.
13.1 Monsanto India shall not, and shall ensure that its Affiliates do not, for a period of ten(10) years from the Closing Date, directly or indirectly whether through partnership or a distributor or as a shareholder, joint venture partner, collaborator, employee, consultant or agent or in any other manner whatsoever, whether for profit or otherwise: 13.1.1 Engage in or carry on any business which competes directly or indirectly with the whole or any part of the Herbicide Business carried on by Sumitomo in the Territory.” 8.1 On the basis of the aforesaid, assertion of the assessee-company is that it had discontinued the wheat herbicide manufacturing activity being carried on by it, and the non-compete fee has been received for
8 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) giving up the right to carry on such business, which gives rise to capital gain and not business income as per section 28(va) of the Act in terms of the proviso (i) thereof. The Revenue, on the other hand, strongly contended that such receipt is treated as business income by application of section 28(va) of the Act. Relevant portion of Section 28(va) alongwith the proviso reads as under:-
“28 The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”:
va) any sum, whether received or receivable, in cash or kind, under an agreement for- (a) not carrying out any activity in relation to any business; or (b)........................
(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head “Capital gains”;
Section 28(va) of the Act has been inserted by the Finance Act, 2002 w.e.f. 1.4.2003, and seeks to provide that any sum received under an agreement for ‘not carrying out any activity in relation to any business income’. Pertinently, all and any kind of non-compete fee is not to be treated as business income by application of section 28(va) of the Act, because proviso (i) prescribes an exception to cases where sum is received on account of “transfer of the right to manufacture,.......... or right to carry on any business.....”, which is taxable under the head capital gains. In the context of the controversy before us, it has to be understood that, given the phraseology of section 28(va) read with proviso (i) thereof, non-compete fee paid to the transferor for giving up
9 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) the right to carry on business is to be regarded as capital gain, in contrast to a situation where it is paid for ‘not carrying out any activity in relation to business, then it is to be taxed as business income. The subtle difference has also been explained by the Special Bench of the Tribunal in the case of Late Dr.B.V. Raju (supra), wherein the relevant discussions is as under:-
“If a payment is in the nature of non-compete fee received by the transferor when he sells his business and agrees not to carry on the business which he transfers then that would fall for consideration under (category (b) referred to earlier) section 55(2)(a) “right to carry on business” If the non-compete fee is paid to persons associated with the transferor then the same would fall for consideration only under section 28(va)(a) of the Act are “not carrying out any activity in relation to any business”, Proviso (i) to section 28(va)(a) provides for exception to cases where such receipts are taxable as capital gain, viz., where any sum is received for transfer of a right to carry on any business which is chargeable to tax as capital gain. When the transferor is already carrying on business and agrees not to carry on business transferred, then the same would fall for consideration only under section 55(2)(a) of the Act. With the change in law receipts on account of giving up right to carry on business even if it is capital receipt would now be chargeable to tax as income from business. The difference would be that if it is paid to the transferor for giving up right to carry on business, it would be regarded as capital gain, the cost of acquisition of right to carry on business being determined in accordance with the provisions of section 55(2)(a) of the Act. If it is compensation paid for “not carrying out any activity in relation to any business”, which the transferor is not carrying on, the same would be chargeable under section 28(va)(a) of the Act. If a receipt is considered as payment for not carrying on business which the transferor is already carrying on then it would be regarded as capital gain, being transfer of a capital asset, viz, right to carry on business. Thus for the provisions of section 55(2)(a) of the Act to apply the transferor must be carrying on a business which he agrees not to carry on. If the transferor is not already carrying on business then he receives consideration only for “not carrying out any activity in relation to any business.” In that case the provisions of section 28(va)(a) of the Act would apply and not the proviso thereto.” 8.2 Factually speaking, in the present case, we are dealing with a situation where the non-compete fee has been received by the assessee-company for not carrying on the business of what herbicide
10 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) manufacturing (i.e. Leader business), which it was hitherto carrying on. Thus, what is transferred is right to carry on business, which is a capital asset. Thus, such sum is to be regarded as Capital gain, the cost of acquisition being determined in accordance with section 55(2)(a) of the Act. Accordingly, we are unable to uphold the stand of the Assessing Officer that non-compete fee is taxable as business income on account of section 28(va) of the Act.
The next aspect of the dispute is as to whether such capital gain is a long term capital gain or short term capital gain. As per section 2(29A) of the Act, long term capital asset means a capital asset which is not a ‘short term capital asset. Section 2(42A) of the Act further defines ‘short term capital asset as a capital asset held for not more than 36 months immediately preceding the date of transfer. Therefore, the incidence of tax on transfer of a capital asset depends on the period for which the capital asset was held prior to its transfer. While holding that non-compete fee was taxable as capital gain, the CIT(A) further held that the right of non-compete came into existence at the time of divesture of the Leader business and therefore, the period of holding being less than 36 months, the consideration received would be taxable as short term capital gains. The contention of the assessee before us is that since the consideration has been received for transfer of business alongwith right to not carry on business for a period of 10 years, being a fairly long period, the consideration for non-compete fees is liable to be treated as long term capital gain. The Ld. Departmental Representative has reiterated the stand of the CIT(A) on this aspect.
11 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) 10. Having considered the rival stands on this aspect, in our view, the CIT(A) has erred in treating the non-compete fee as a short term capital gain. In our considered opinion, the CIT(A) misdirected himself in considering as to when the “……. Right of not to compete came into existence….”; and, not taking into consideration the fact that the covenant of not to carry on business was (i) attached alongwith the transfer of leader business, which was being carried on by the assessee since 1997; and, (ii) for a period of 10 years, which is a fairly long period. Under these circumstances, the non-compete fee is to be assessed as long term capital gain. Thus, on this aspect, assessee succeeds, and Ground No.1 is assessee’s appeal is allowed.
Next, we may take-up Ground No.5 in Revenue’s appeal, which seeks to challenge the action of the CIT(A) in accepting the gain on transfer of Distribution Network, Registration and Licenses, Copyrights and Goodwill as long term capital gain, instead of short-term capital gain held by the Assessing Officer. Notably, the Business Transfer agreement entailed transfer of Leader business to Sumitomo lock, stock and barrel, which inter-alia, also included the transfer of Distribution Network, Registration and licenses, Copyrights and Goodwill as per the Tabulation in para -4 of this order. The assessee company submitted that the gain on transfer of the aforesaid capital assets was long term capital gain because it has been carrying on the Leader business for a period exceeding three years, and thus gain was on account of transfer of long term capital assets. The Assessing Officer treated such gain as short term capital gain by applying the provisions of section 50 of the Act. As per the Assessing Officer, the aforesaid assets formed a part of the block of intangible assets, and thus gain arising on the transfer of
12 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) the aforesaid assets should be taxed as deemed short term capital gain. The Assessing Officer further held that the fact that depreciation was not claimed on these assets would not come in the way of applying section 50 of the Act because of the provisions of Explanation-5 to section 32 of the Act, whereby depreciation is deemed to be allowed to the assessee irrespective of the fact whether it had claimed depreciation or not. Thirdly, as per the Assessing Officer, since the assessee company had treated the gain on sale of two intangible assets, namely, Technical know-how and Trademarks as short term capital gain, then the gain on transfer of the impugned intangible assets should also be taxed as short term capital gain.
11.1 The CIT(A) has considered each of the objections raised by the Assessing Officer and upheld the stand of the assessee company that the gain on the sale of the aforesaid assets is to be taxed as long term capital gains. On the issue of the applicability of section 50 of the Act, the conclusion of the CIT(A) is as under:-
“The crucial words in the said section are that depreciation should have been allowed under the provisions of the Act in order that section 50 comes into play. Now, the AO is of the view that by virtue of Explanation -5, to section 32, even if the appellant has not claimed depreciation the same is deemed to have been allowed . The argument of the AO suffers from the following anomalies. First, Explanation -5 is a legal fiction incorporated in the computation of business income and section 50 is a legal fiction for the purpose of computing capital gains. It is trite law that a legal fiction cannot be extrapolated to a subject other than for which it has been legislated. In other words, a legal fiction meant for the purposes of computing business income cannot be extrapolated for the purpose of computing capital gains and vice –versa. Second, in the case of goodwill, distribution network, registration and permits and copyright, the cost of acquisition of these assets has been taken to be nil by virtue of section 55(2)(a). The question of allowing depreciation under Explanation 5, to section 32, therefore, does not arise.”
13 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) 11.2 In the background of the aforesaid findings of the CIT(A), the Ld. Departmental Representative has not made any credible argument except reiterating the stand of the Assessing Officer . In our considered opinion, the aforesaid assets are intangible assets, being Distribution Network, Registration and Permits, copyrights, constitute business right/information and partake the character of asset defined in section 55(2)(a) for which also the cost of acquisition is required to be considered as ‘Nil’. Accordingly, the entire consideration received on transfer of Distribution Network, Registration and Licenses, Copyrights and Goodwill was rightly offered to tax as long term capital gains.
11.3 Another objection of the Assessing Officer was that assessee company had given a different treatment to the same class of assets, in as much as the intangible assets, being Technical know-how and Trademarks have been treated as short-term capital gains. In this context, the Ld. Representative for the assessee had pointed out that the Technical know-how and Trademark of the leader business was owned by the parent company and the assessee company acquired them during the year under consideration and were capitalized in the books of account at their respective costs of acquisition. Notably, the aforesaid factual matrix has been affirmed by the CIT(A) in para 7.3 of his order and before us the same has not been controverted by the ld. DR also.
11.4 In the case of the impugned assets, the same were claimed to be self-generated in the ordinary course of business and there was no actual outflow of resources for the purpose of their acquisition. Before us also, it has been contended by the assessee that it was not required
14 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) to incur any cost for development of Distribution Network, Registration & licenses, Copyrights, Goodwill etc. Only in respect of Registration and Permits, the assessee company had submitted that the cost incurred for obtaining registration and permits were claimed u/s 37(1) of the Act, since the expenses were not incurred for the purpose of appreciating he capital assets but were incurred for the purpose of producing profit in the conduct of business and were attributable to business operations. The expenditure incurred by the assessee-company on a year to year basis was only for renewal of registrations and permits. Since these assets were not acquired for any consideration, but were self-generated having NIL cost, the question of claiming depreciation under section 32 and applying Explanation 5 to section 32 of the Act and offering resultant gain as taxable under section 50 would not arise.
11.5 On each of the aforesaid assets, it has been sought to be justified that the gain was a long term capital gain, on facts also. Regarding Distribution Network it has been explained that the sales of ‘Leader’ products were being made by the assessee-company through a dealer Distribution Network. The assessee company had entered into contracts/ arrangements with several distributors for sale and distribution of their products covered under Leader business. On transfer of leader business to Sumitumo, all the rights of the assessee company under such contracts/businesses arrangements in relation to leader business were transmitted in favour of Sumitomo as per the Business Transfer agreement. Since the Distribution Network was in the nature of business right existing for more than three years, in our view, the same has been rightly held by the CIT(A) to be taxable as long term capital gain.
15 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) 11.6 Regarding “Goodwill”, it was quite clear that the same is inseparable from business, which was in existence for more than three years, and it gets automatically transferred alongwith the business. Thus, the gain on transfer of Goodwill has to be assessed as long term capital gain. The stand of the CIT(A) is affirmed on this aspect also. Similarly, in relation to the gain on transfer of Registration and licenses and copyrights are concerned, the same have also been rightly treated by the CITA) as long term capital gains.
11.7 In view of the aforesaid discussion, we find no merit in Ground No.5 in the appeal of Revenue, which is hereby dismissed.
Ground No.6 in appeal of the Revenue seeks to canvass that the gain on transfer of Distribution Network, Registration and Licenses, copyrights and Goodwill is taxable as business income. The aforesaid ground is misconceived because the same does not arise from the orders of the authorities below because, even the Assessing Officer had at no stage treated such gain as ‘business income’. Accordingly, Ground of appeal No.6 is dismissed.
The next issue in the Cross-appeals is in relation to disallowance u/s. 14A of the Act. In this context, brief facts are that the assessee- company had earned dividend income of Rs. 9,29,39,466/-, which was claimed exempt u/s. 10(35) of the Act. By application of Sec. 14A of the Act, assessee-company had suo-moto disallowed a sum of Rs. 20,39,893/- in the return of income. The Assessing Officer however made a disallowance of Rs. 1,00,44,000/-(interest expenditure-Rs. 9,36,000/- plus administrative expenses Rs. 91,08,000/-). On appeal, the CIT(A) has deleted the disallowance of Rs. 9,36,000/- pertaining to
16 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) interest expenditure, and the disallowance out of administrative expenses has been restricted to 2% of dividend income over and above the amount of Rs.20,39,893/- suo-motto disallowed by the assessee- company. The Revenue has challenged the part-relief allowed by the CIT(A), whereas assessee-company has challenged the sustenance of disallowance over and above the amount suo-motto disallowed.
With respect to the interest expenditure, the explanation of the assessee-company has been that no borrowings were made during the year under consideration, and there was no interest expenditure which was directly relatable to the earning of exempt income. In this context, the Learned Representative for the assessee pointed out that the entire interest expenditure of Rs. 24.22 lacs debited in the Profit & Loss Account was paid in relation to the Security Deposits received from the Distributors. The aforesaid factual assertions of the assessee-company have been accepted by the CIT(A) and accordingly the disallowance of Rs. 9,36,000/- out of interest expenditure has been deleted.
Before us, the Ld. Departmental Representative has not controverted the factual findings of the CIT(A). Rather, we find that the findings of the CIT(A) are fully borne out of the material on record. The balance sheet of the assessee- company reveals that the aggregate of the share capital and Reserves & Surplus at the beginning and closing of the instant year is Rs. 327.02 crores and Rs. 374.97 crores respectively, as compared to the total investment of Rs. 182.16 crores. Prima-facie, the assessee-company had sufficient own-funds at its disposal to make the investments. Further, the interest expenditure claimed is with respect to the security deposit obtained from the Distributors, which
17 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) has a nexus with assessee’s non-investment activity and thus cannot be considered for disallowance u/s. 14A of the Act. Considering the fact-situation, we affirm the action of the CIT(A) deleting the disallowance of Rs. 9,36,000/- out of interest expenditure.
In so far as the disallowance made by the Assessing Officer of Rs.91,08,000/- out of administrative expenses is concerned, the same was made by the Assessing Officer in the manner akin to that provided in Rule 8D of the Rules. This aspect of the matter did not find favour with the CIT(A), who has instead retained the disallowance @2% of the dividend income over and above the suo-moto disallowance of Rs.20,39,893/- made in the return of income. The assessment year before us is A.Y 2007-08 and the applicability of Rule 8D of the Rules is not feasible as the same is applicable for assessment year 2008-09 and onwards as laid down by the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT, 328 ITR 81(Bom).
In the return of income filed, the assessee suo-moto disallowed a sum of Rs.20,39,893/-, the detailed break-up of which has been placed in the Paper Book at page-245. The detail reveals that a portion of salaries and related employee benefits has been identified. Ld. Representative for the assessee explained that time spent by the employees in the Treasury Department towards investment activity was reflected by such expenditure and, therefore, on an estimate basis a sum of Rs.20,39,893/- was suo-moto disallowed under 14A of the Act. It was, therefore, contended that there is no justification for any further disallowance, as made out by the CIT(A).
18 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) 18. On the other hand, the Ld. Departmental Representative has contended that though Rule-8D of the Rules is not applicable for the instant assessment year, yet the disallowance can be made on a reasonable basis and that the action of the Assessing Officer was justifiable.
Having considered the rival stands on this aspect, at the threshold we are satisfied that the Assessing Officer has not complied with the jurisdictional prescription of section 14A(2) of the Act in as much as there is no objective satisfaction recorded by the Assessing Officer that the claim of the assessee made in the return of income was incorrect. Notably, in the present case assessee had suo-moto disallowed certain expenditure under section 14A of the Act and the Assessing Officer is empowered to disagree with it only after he was “not satisfied with the correctness of the claim…….” made by the assessee, having regard to the accounts of the assessee. Thus, in the absence of the recording of such satisfaction the disallowance over and above Rs. 20,39,893/- made out of administrative expenses is untenable and is hereby directed to be deleted. Apart therefrom we also find that even otherwise the disallowance estimated by the assessee at Rs.20,39,893/- is reasonable considering that the same was even more than the estimation of 2% of dividend income canvassed by the CIT(A). In this manner, we hereby set aside the order of CIT(A) and direct the Assessing Officer to restrict the disallowance under section 14A of the Act to Rs.20,39,893/- made in the return of income. Thus, Ground of appeal No.2 of the assessee is allowed and Ground of appeal No.1 & 2 in the Departmental appeal are dismissed.
19 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) 20. The only other ground in the appeal of the assessee is by way of Ground of Appeal No.3, which relates to the recomputing value of closing inventory in accordance with the provisions of section 145A of the Act.
In this context, the brief facts are that before the CIT(A), assessee submitted that while passing assessment order for the preceding Assessment Year of 2006-07, the Assessing Officer made an adjustment to the value of closing stock to the tune of Rs.4,13,28,639/- on account of adjustment under section 145A of the Act. The assessee explained that in the course of assessment proceedings it submitted a working of adjustment under section 145A of the Act based on the stand of the Department of the earlier assessment years, whereby the net effect of the adjustment in opening-stock as well as closing-stock was resulting in reduction of profit by Rs.1,57,02,765/-. The assessee pointed out that such relief was not allowed by the Assessing Officer. The CIT(A) in principle agreed with the assessee that merely because in the current year the effect of section 145A of the Act results in reduction in profit, the Assessing Officer would not be justified not to make similar adjustment. The CIT(A) further noticed that in the earlier years the CIT(A) had upheld the adjustment under section 145A of the Act and, therefore, he directed the Assessing Officer to recompute the disallowance under section 145A of the Act in the current year by taking the figure of opening stock as per the closing stock valued by him for the preceding assessment year of 2006-07.
Against such decision of the CIT(A), the assessee is in further appeal before us. Apart from pointing out that even after applying the
20 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) provisions of section 145A r.w. section 43B of the Act there would be no effect on profit, the assessee company has not substantiated the said plea. In any case we find that the direction of the CIT(A) to the Assessing Officer for adopting the value of opening stock in consonance with the value of closing stock adopted for the immediately preceding year does not require any interference, and is hereby affirmed. Thus, on this aspect assessee has to be failed.
In the result, the appeal of the assessee is partly allowed.
In the appeal of the Revenue, the only ground remaining is with regard to the action of the CIT(A) in holding that income of Rs.45,05,07,984/- derived by the assessee from growing and selling of Hybrid Seeds is to be considered as agricultural income so as to be eligible for deduction under section 10(1) of the Act.
On this aspect, it was a common ground between the parties that the said dispute is not unique to the Assessment Year under consideration but has been regularly occurring in the past assessments also. The Mumbai Bench of the Tribunal in assessee’s own case for Assessment Years 2000-01 vide ITA No.286&287/Bng/03 & Others dated 26/11/2007 had accepted the stand of the assessee that income arising from Seeds Division was entitled for deduction under section 10(1) of the Act.
Before us the Ld. Representative for the assessee pointed out that earlier to the assessment year 1993-94, the Department had accepted such claim of the assessee at the assessment stage itself. For the subsequent Assessment Years also the Mumbai Bench of the
21 ITA No. 3171&3743/MUM/2012 (Assessment Year : 2007-08) Tribunal has accepted the stand of the assessee following the aforesaid precedents. It has also been pointed out that the Hon’ble Bombay High Court vide its order dated 5/8/2011 for assessment year 1993-94 to 2004-05 (except A.Y 2003-04) has upheld the assessee’s claim for exemption under section 10(1) of the Act. Copies of such orders have been placed on record.
Following the aforesaid precedents, we find no merit in the ground raised by the Revenue as no fault can be found with the decision of the CIT(A), which is in consonance with the precedents in assessee’s own case. Thus, on this aspect, Revenue fails.
Resultantly, whereas the appeal of the assessee is partly allowed, that of the Revenue is dismissed.
Order pronounced in the open court on 30/10/2015.
Sd/- Sd/- (AMIT SHUKLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 30/10/2015 Copy of the Order forwarded to : 1. The Appellant , 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai Guard file. 6.
BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai Vm, Sr. PS