THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1),, VISAKHAPRTNAM vs. FLUENTGRID LIMITED, VISAKHAPATNAM

PER S. BALAKRISHNAN, Accountant Member :

This appeal filed by the Revenue is against the order of the Ld. Commissioner of Income Tax (Appeals)-1, Visakhapatnam [Ld. CIT(A)] in ITA No. 10500/2019-20/CIT(A)-1/VSP/2020-21, dated 15/09/2020 arising out of the order passed U/s. 143(3) of the Income Tax Act, 1961 [the Act] vide DIN & Order No.

2 ITBA/AST/S/143(3)/2019-20/1022980796(1), dated 24/12/2019

for the AY 2017-18.

engaged in software products filed its return of income for the AY

2017-18 on 30/11/2017 admitting a total income of Rs.

3,58,43,420/-. Subsequently, the case was selected for complete

scrutiny under CASS and notice U/s. 143(2) was issued and

served on the assessee. Due to change in the incumbency, a

fresh opportunity of being heard was accorded to the assessee

vide letter dated 06/08/2019. Subsequently, notice U/s. 142(1)

was issued on 30/08/2019 along with the detailed questionnaire.

Further, certain information was called for vide letter dated

28/11/2019 and show cause notice dated 22/12/2019. The Ld.

AO after examining the information furnished by the assessee

noticed that the assessee made non-current (Long Term)

investments in associate companies and other companies to the

extent of Rs. 12,17,41,913/-. The Ld. AO observed that the

assessee has term loans from banks and short term borrowings

from banks. On perusal of the computation of total income, the

Ld. AO found that the assessee has not attributed any portion of

the interest expenditure towards investment yielding exempt

3 income. The Ld. AO ignored the submissions of the assessee that

no dividend income has been received during the impugned

assessment year. The Ld. AO therefore proceeded to compute the

interest expenditure to be disallowed U/s. 14A r.w.r 8D of the Act

and disallowed a sum of Rs. 53,51,121/-. Further, the Ld. AO

noticed from the ITR and Form 3CD filed for the AY 2017-18 that

there is a opening balance of intangible assets at Rs.

12,85,10,250/- whereas the ITR and Form 3CD for AY 2016-17,

the closing balance of intangible assets was shown at NIL. In

response to the letter dated 28/11/2019 of the Ld. AO, the

assessee explained that the difference in reporting the WDV for

the FY 2015-16 and opening balance for the FY 2016-17 is due to

change in the accounting policy whereby the expenditure of

intangible assets has been re-classified as intangible as per the

provisions of the IT Act, 1961. Further, the assessee also

submitted that it has erroneously considered Rs. 12.85 Crs as

opening WDV instead of Rs. 6.94 Crs. The assessee therefore

requested the Ld. AO to consider this fact and has submitted the

revised calculation of depreciation accepting the disallowance to

the extent of Rs. 1,47,66,708/- arising out of the adoption of

wring WDV. The Ld. AO not convinced with the replies of the

assessee concluded that the assessee did not report the change

in the accounting policy in Form 3CD or through filing the

revised return of income and therefore disallowed the claim of

depreciation for Rs. 3,66,34,569/- claimed by the assessee.

Aggrieved by the order of the Ld. AO, the assessee filed an appeal

before the Ld. CIT(A).

in the absence of exempt income, the provisions of section 14A

cannot be invoked. Further, he also submitted before the Ld.

CIT(A) that the assets have been re-classified as intangible from

the impugned assessment year and accordingly depreciation

calculation has been reworked. The Ld. AR also accepted the fact

that there is a bonafide mistake in Form 3CD while adopting the

WDV. Considering the submissions made by the Ld. AR, the Ld.

CIT(A) partly allowed the appeal. Aggrieved by the order of the

Ld. CIT(A), the Revenue is in appeal before us by raising the

following grounds of appeal:

“1. The order of the Ld. CIT(A)-1, Visakhapatnam is partly erroneous both on facts and in law. 2. The Ld. CIT(A) has erred in allowing disallowances U/s. 14A of the Act one common P & L A/c was filed for all the activities of the assessee and the expenses incurred for all the activities are debited to the common P & L account and the assessee has not incurred any expenditure at all in deploying huge funds to make tax free investments in associate concern is not tenable.

adjudication.

Act. At the outset, the Ld. AR argued that the matter has been

settled with the decision of the Hon’ble Madras High Court in the

case of Redington (India) Ltd vs. Additional Commissioner of

Income Tax [2017] 392 ITR 633 (Madras). He therefore pleaded

that as per the proposition laid down by the Hon’ble Madras High

Court in the case of Redington (India) Ltd (supra) if there is no

exempt income during the impugned assessment year,

disallowance U/s. 14A r.w.r 8D of the IT Rules, 1962 cannot be

made.

Per contra, the Ld. DR relied on the order of the Ld. AO.

available on record and the orders of the Ld. Revenue Authorities

on this issue. Admittedly, from the submissions of the Ld. AR,

we find that the assessee has not earned any exempt income

during the impugned assessment year. In the absence of any

exempt income which does not form part of the total income of

the assessee, various judicial pronouncements have held that

disallowance U/s. 14A r.w.r 8D cannot be made. The reliance

placed by the Ld. AR in the case of Redington (India) Ltd (supra)

wherein the Hon’ble Madras High Court has held as follows:

“15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC). The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it. 16. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed.”

Benches of the Tribunal in the case of DCIT vs. M/s.

Radhakrishna Automobiles Pvt Ltd (ITA No. 511/Viz/2017, AY

2013-14), dated 22/11/2017 and ITAT, Hyderabad Bench

7 decision in the case of ACIT vs. Nekkanti Sea Foods Ltd., (ITA

No. 1738/Hyd/2017 and CO. No. 4/Hyd/2018, AY 2013-14),

dated 15/11/2018. Respectfully following the judicial

pronouncements, we hereby find no reason to interfere in the

order of the Ld. CIT(A) on this issue and hence the Ground No.2

raised by the Revenue is dismissed.

depreciation, the Ld. DR argued that the assessee has taken

opening WDV for intangible assets at Rs. 12.85 Crs instead of Rs.

6.94 Crs. Further, the Ld. DR argued that the closing WDV was

shown as NIL in the previous year. The Ld. DR also submitted

that the assessee has not mentioned the fact of re-grouping of

assets while filing Form 3CD for the impugned assessment year.

The Ld. DR further submitted that the assessee has also not filed

revised return of income for re-grouping of the assets.

Per contra, the Ld. AR submitted that the assessee has

changed the accounting policy and treated the software as

intangible asset. However, the Ld. AR also accepted that the

assessee has wrongly taken the opening WDV at Rs. 12.85 Crs

instead of Rs. 6.94 Crs. The Ld. AR further argued that the

assessee has been granted trademarks as per the Trademarks

8 Act, 1999 which is available in page 157 to 164 of the paper

book. The Ld. AR submitted that earlier these were grouped as

miscellaneous assets and were claimed as a deferred revenue

expenditure. Consequent to the granting of trademark, the

assessee re-grouped its assets as intangible and has reworked

the depreciation w.e.f 2011. We also find that the assessee has

worked out depreciation w.e.f 2011 only to arrive at the opening

WDV for the impugned AY. The Ld. AR further submitted that as

per the definition of intangible assets as per AS-26 issued by the

Institute of Chartered Accountants of India [ICAI], the re-

grouping of miscellaneous assets as intangible assets is correct

in law. The Ld. AR further submitted that the assessee has

recalculated the depreciation from 2011 onwards and arrived at

the opening WDV for the impugned assessment year. However,

while filing the ITR, the assessee has inadvertently made an error

in adopting the opening WDV at Rs. 12.85 Crs instead of Rs. 6.94

Crs. The Ld. AR also conceded that this is a bonafide mistake

resulting of the reduction in claim of depreciation for an amount

of Rs. 1.47 Crs and pleaded to allow the balance of Rs.

2,18,67,861/-. The Ld. AR further also submitted that the Ld. AO

has allowed depreciation on the same intangible assets in the

subsequent assessment years.

available on record and the orders of the Ld. Revenue Authorities

on this issue. It is the case of the Ld. AO that the assessee has

changed the method of accounting but has not mentioned the

same while filing Form 3CD for the impugned assessment year.

The Ld. AO erred in understanding the difference between the

method of accounting which is reported in Form 3CD and

changes in the accounting policies. Admittedly, the assessee has

re-grouped its assets during the AY 2017-18 and has arrived at

the opening WDV for the FY 2016-17 after computing the same

from the year 2010 onwards. However, as accepted by the Ld.

AR, the assessee has wrongly reported the opening WDV at Rs.

12.85 Crs instead of Rs. 6.94 Crs. The assessee has mentioned

this fact in its reply before the Ld. AO on 10/12/2019 and has

accepted the reduction in claim of depreciation to the extent of

Rs. 1,47,66,708/- arising out of the wrong WDV taken by the

assessee while filing the ITR. While considering these

submissions, the Ld. CIT(A) relied on the Board Circular No.

14/1955 and also the decision of the Coordinate Bench of

Mumbai Tribunal in the case of Sonata Reality (7591/MB/2013)

which is reproduced below:

“The taxes can only be collected as per the authority of law and if any mistake has crept in the tax audit report and the assessee comes forward with a bonafide reply it is the burden duty of the amounts to consider such reply on merits so that taxes can be collected assessee.”

assessee has rightly re-worked the WDV from the year 2010

onwards and has arrived at the opening WDV for the FY 2016-17

for the purpose of calculation of depreciation for the FY 2016-17.

The assessee has also filed in page 66 of the paper book the

revised computation as per the Income Tax Act, 1961 for the

purpose of arriving at the opening balance at Rs. 6.94 Crs.

Further, at page 76 of the paper book, the Ld. AR also submitted

the excess amount reported as WDV by the assessee at Rs. 12.85

Crs and the difference depreciation arising out of the excess

opening WDV. These facts have already been submitted before

the Ld. AO who has failed to consider the same. However, the Ld.

CIT(A), in our opinion, has rightly considered these facts and

held as follows:

“4.2.4. Regarding AS-26, the AO is of the opinion that expenditure on an intangible item that was initially recognized as an expenses should not be recognized as part of cost of an eligible asset at a later date. The appellants submission that the current intangible asset as on 31/3/2016 as per companies Act was at Rs. 7.76 Crs as against the asset of Rs. 6.94 Crs as per IT Act. This closing balance was never recognized as an expense in the previous year and recognized in balance sheet item. It was further explained that the appellant is constantly following the method of initially capitalizing the expenditure incurred as its

11 products year after year and writing off of a fixed percentage to P & L A/c from the year in which the first was raised during the year. The write off was not recognized as expenditure in the P & L Account on the particular product. It is claimed that such expenditure was capitalized and classified as intangible asset from 2014-15 onwards. In the impugned assessment year, the appellant had regrouped the asset to correct portion. Thus the appellant has claimed 25% as against 20% which was earlier claimed under the head “miscellaneous asset”. Thus, the balance of assets as on 31/3/2016 stood at Rs. 7.76 Crs as per books of account. After reclassifying the assets, as per IT, the balance as per block was only Rs. 6.94 Crs after writing off 25% retrospectively from 2011-12. In fact, in the process, the appellant had foregone some part of the claim in order to correct the portion as per IT provisions. In view of the facts of the case, the disallowance of depreciation at Rs. 3.36 Crs is not correct. The Assessing Officer is directed to restrict the disallowance at Rs. 1,47,66,708/- and also allow the claim of Rs. 2,18,67,861/- as it is mandatory claim.”

therefore find no infirmity in the order of the Ld. CIT(A) on this

issue and are inclined to dismiss the ground raised by the

Revenue.

Pronounced in the open Court on the 15th June, 2023.

Sd/- Sd/- (दु�वू� आर.एल रे�डी) (एस बालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

Dated :15.06.2023

OKK - SPS

आदेश क� ��त�ल�प अ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee – M/s. Fluentgrid Limited, 9-29-19/A, 1. Level-5, Waltair Heights, Balaji Nagar, Visakhapatnam, Andhra Pradesh – 530003. राज�व/The Revenue – Dy. Commissioner of Income Tax, Circle-3(1), 2. Income Tax Office, Infinity Tower, Shankaramatham Road, Santhipuram, Visakhapatnam, Andhra Pradesh – 530016. 3. The Principal Commissioner of Income Tax, आयकर आयु�त (अपील)/ The Commissioner of Income Tax 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, �वशाखापटणम/ DR, ITAT, 5. Visakhapatnam गाड� फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam