Ms. Adani Gas Ltd. Vs DCIT (ITAT Ahmedabad)
Conclusion: Assessee was justified in following exclusive method of accounting for valuation of closing stock as entire exercise was tax neutral and there was no impact on the profitability of assessee due to method of accounting followed.
Held: While it was a case of Revenue that the element of excise duty/CENVAT etc. would represent part of the closing stock of assessee in terms of Section 145A, it is the case of the assessee on the other hand that Section 145A had no application to the facts of the case. It was further case of assessee that assessee followed exclusive method of accounting for valuation of inventory and therefore, entire exercise would be tax neutral. CIT(A) had examined the issue on facts and binding judicial precedents and concluded the issue in favour of assessee. In the absence of any impact on the profitability of the assessee per se due to method of accounting followed, there was no error in the conclusion drawn by CIT(A).
FULL TEXT OF THE ITAT JUDGMENT
The captioned bunch of appeals concerning AYs 2009-10 & 2010-11 has been filed by the Revenue against the order of the CIT(A)-III, Ahmedabad (‘CIT(A)’ in short), dated 13.12.2013 arising in the assessment order dated 28.12.2011 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act). The assessee has also moved cross objection captioned above in the Revenue’s appeal. Likewise, the assessee as well as the Revenue have filed cross appeals against the order of the CIT(A)-1, Ahmedabad dated 15.05.2015 arising in the assessment order dated 30.03.2013 passed by the AO under s.143(3) of the Act concerning AY 2010-11.
2. The captioned appeals were heard on two different dates i.e. 07.2018 and 02.08.2018. Since, all these appeals pertain to same assesse and on almost similar issues, hence they are being disposed of by common order for the sake of convenience.
3. We shall first take up the appeal of the Revenue and Cross Objection of the assessee thereon concerning AY 2009-10 for adjudication purposes.
ITA No. 775/Ahd/2014-AY 2009-10-Revenue’s appeal
4. The grounds of appeal raised by the Revenue in the captioned appeal concerning AY 2009-10 reads as under:-
“1. The CIT(A) has erred in law and on facts in deleting the addition of Rs.5.04 Crores being undervaluation of closing stock despite the fact that the assessee had followed exclusive method of accounting in contravention of the provisions of section 145A which mandates inclusive method for valuation of inventory.
2. The CIT(A) has erred in law and on facts in deleting the addition of Rs.2.57 lacs u/s 40(a)(ia) overlooking the fact that during assessment proceedings the same was claimed as paid to Adani Power Ltd. without furnishing any reason for non deduction of TDS.
3. The CIT(A) has erred in law and on facts in deleting the addition of 39.77 lacs being disallowance of amortization of lease hold land despite the fact that there is no provision in the Income Tax Act under which such deduction can be claimed.”
5. When the matter was called for hearing, the learned AR for the assessee in Revenue’s appeal submitted at the outset that controversy as per the ground no.1 of the Revenue’s appeal revolves around applicability of Section 145A of the Act towards alleged under valuation of closing stock. The learned AR submitted that the assessee has followed exclusive method of accounting and therefore, the closing stock has not been loaded with the taxes and dues as contemplated under s.145A of the Act. The learned AR submitted that in view of the exclusive method of accounting consistently followed, the action of the assessee is revenue neutral. The learned AR submitted that the exclusive method of accounting postulates exclusion of tax, dues etc. embedded in purchases of raw material as well as in corresponding sale. Such taxes are accounted for separately for the purposes of discharging liabilities. The effect of such accounting does not ultimately have any impact on the ultimate profitability when followed year after year. The learned AR submitted that the issue is no longer res integra and covered in favour of the assessee by long line of judicial precedents, viz., CIT vs. Bell Granito Ceremica Ltd. (Guj.) Tax Appeal No.436-437 of 2011, judgment dated 13.06.2011; Narmada Chematur Petrochemicals Ltd. (2010) 327 ITR 369 (Guj.) and General Motors India (P.) Ltd. v. Deputy Commissioner of Income-tax [2013] 37 taxmann.com 403 (Ahmedabad) to name a few. The learned AR, thereafter, on facts, referred to the tabulated statement at the beginning of para no.2 of the assessment order and pointed out that as against Rs.5.04 Crore unutilized CENVAT credits in controversy merely Rs.9.19 Lakhs concerns raw material etc. and the remaining amount of CENVAT credit is attributable to capital goods item and input service which do not attract the provisions of Section 145A of the Act in any event. The learned AR accordingly submitted that the learned CIT(A) has rightly concluded the issue in favour of the assessee after detailed analysis of facts and law prevailing in this regard and interference thereof is not called for.
6. The learned DR for the Revenue, on the other hand, relied upon the order of the AO.
7. We have carefully considered the rival submissions on the issue towards applicability of Section 145A of the Act as well as perused the order of the lower authorities. While it is a case of the Revenue that the element of excise duty/CENVAT etc. would represent part of the closing stock of the assessee in terms of Section 145A of the Act, it is the case of the assessee on the other hand that Section 145A of the Act has no application to the facts of the case. It is further case of the assessee that assessee follows exclusive method of accounting for valuation of inventory and therefore, entire exercise would be tax neutral. The CIT(A) has examined the issue on facts and binding judicial precedents and concluded the issue in favour of the assessee. In the absence of any impact on the profitability of the assessee per se due to method of accounting followed, we do not see any error in the conclusion drawn by the CIT(A). In parity with judicial precedents cited, we decline to interfere with the order of the CIT(A) on the issue.
8. In the result, Ground no.1 of the Revenue’s appeal is dismissed.
9. The Ground no.2 concerns addition of Rs.2.57 Lakhs under s. 40(a)(ia) of the Act on account of non deduction of TDS. As pointed out on behalf of the assessee, the aforesaid payment made to Adani Power Ltd. was on account of re-imbursement of actual expenses, the details of which are provided at page no.226 of the paper book. In the absence of any income element in the payment made, the obligation to deduct tax at source on such payment do not arise and consequently, provisions of Section 40(a)(ia) of the Act do not come into play in view of the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Gujarat Narmada Valley Fertilizers Co. Ltd. [2013] 35 com638 (Guj). The law that a mere reimbursement does not require to deduction was also followed in CIT vs. ITD Cem India JV (2018) 405 ITR 533 (Bom) in respect of reimbursement of administrative expenses to a joint venture partner. Therefore, we do not find any error in the order of the CIT(A) and consequently decline to interfere.
10. In the result, Ground no.2 is dismissed.
11. Ground no.3 of Revenue’s appeal concerns addition of Rs.39.77 Lakhs towards amortization of lease hold land. In the scrutiny assessment, it was observed by the AO that the assessee has amortized an amount of Rs.39,77,765/- on account of lease hold land. It was submitted on behalf of the assessee that lease hold land of longer period (generally tenure of lease is 99 years) is required to construct CNG stations the expenses of which are required to be amortized. The claim of the assessee was not accepted by the AO on the ground that there is no provision of claim of the amount written off/amortized against the lease hold land in the Income Tax Act.
12. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time and hence it is nothing else than depreciation. The allowability of costs towards amortization of lease hold land is in question. Having heard the rival submissions on the issue, we find that the CIT(A) has rightly appreciated the facts in perspective and concluding the issue in favour of the assessee in the light of decision of Hon’ble Gujarat High Court in the case of DCIT vs. Sun Pharmaceuticals Industries Ltd. [2009] 227 CTR 206 (Guj). We do not see any infirmity in the reasoning given by the CIT(A) while deleting the aforesaid disallowance of amortization of lease hold lands. We thus decline to interfere.
13. In the result, Ground no.3 of the Revenue’s appeal is dismissed.
14. In the result, appeal of Revenue in ITA No.775/Ahd/2014 for AY 2009-10 is dismissed.
CO No. 17 1/Ahd/2014-AY 2009-10-As sessee’ s appeal
15. The grounds of appeal raised by the Revenue in the captioned cross objection concerning AY 2009-10 reads as under:-
“1. In law and in the facts and circumstances of the Respondent’s case, the learned CIT(A) has grossly erred in upholding disallowance of the Respondent’s claim for deduction of Rs.3,71,271 under Section 80G merely because the Receipt for the donation in question was in the name of Adani Energy Ltd. whose Division which had paid the donation had been merged (under a Scheme of Demerger) with the Respondent and for which reason the donation had been accounted in the appellant’s Profit and Loss Account along with other expenditure and that therefore, the said Adani Energy Ltd. had not claimed deduction for the same.
2. In law and in the facts and circumstances of the respondent’s case, the learned CIT(A) has grossly erred in dismissing Ground No. 14 of the Respondent’s appeal before him challenging initiation of penalty proceedings u/s. 271(1)(c) on the ground that no appeal lay against initiation of penalty proceedings. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the Respondent’s case, there being absolutely no warrant/justification for initiating the penalty proceedings, he ought to have ordered for their being dropped, thereby saving both the respondent and the Department from long drawn unnecessary litigation.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of preliminary expenses amounting to Rs.10,28,028/- claimed u/s.35D of the Income Tax Act, 1961, made by the Assessing Officer.”
Additional Ground
“1. On the facts and in the circumstances of the respondent’s case, and in view of Ld. Assessing Officer’s own contention while passing assessment order u/s 143(3) for A. Y. 2012-13, that depreciation on goodwill arising on demerger ought to have been claimed by respondent from appointed date 01.01.2007 i.e. A.Y. 2007-08 as against effective date i.e. A.Y. 2010-11 (year in which respondent has claimed depreciation), and in view of the fact that depreciation for subsequent years has been granted after computing notional depreciation for A.Y.2007-08, 2008-09 and 2009-10, respondent is entitled to depreciation of Rs.5,5 7,63,315/- while computing taxable income of current year.”
16. Ground no.1 of the Cross Objection relates to denial of deduction of Rs.3,71,271/- under s.80G of the Act. In support of the aforesaid ground, it is the case on behalf of the assessee that receipt for the donation in question was in the name of Adani Energy Ltd. whose division had paid donation prior to its merger with the assessee under a scheme of Demerger. It is thus the case of the assessee that it is rightly entitled to claim deductions under s.80G of the Act for payments by the other company ultimately merged with it. On perusal of the orders of the AO and CIT(A), it is noticed that the Revenue has denied the deduction on the ground that only one of the division of Adani Engery Ltd. got merged with the assessee company. The Adani Energy Ltd. continued to exist as a separate entity. We do not see any rational in such line of reasoning. Where donation has been paid by a division which was demerged from the other company and merged with assessee’s company, there is no warrant to deny the deduction in the hands of the resulting company (assessee). It shall however be open to the AO to verify as to whether the demerged company (Adani Energy Ltd.) has already claimed deduction or not. Where the assessee proves to the satisfaction of the AO that no deduction has been claimed under s.80G of the Act by the demerged company towards the amount in question, the AO shall allow the deduction in the hands of the assessee company after verifying the receipts etc. in accordance with law.
17. In the result, Ground no.1 of assessee’s Cross Objection is allowed for statistical purposes.
18. The Ground no.2 of the assessee’s Cross Objection is not pressed and accordingly dismissed.
19. The Ground no.3 concerns disallowances of preliminary expenses amounting to Rs.10,28,028/- claimed under s.35D of the Act. It was pointed out that similar claim was made in the earlier year and similar controversy arose in the earlier year and adjudicated in favour of the assessee. For this purpose, the decision of the co-ordinate bench of the Tribunal concerning AY 2008-09 in assessee’s own case in ITA Nos. 2241 & 2516/Ahd/2011 order dated 18.01.2016 was referred. In view of the issue being covered in favour of the assessee by the order of the co-ordinate bench for earlier year, we find merit in the claim of the aforesaid amount under s.35D of the Act. The assessment order is thus directed to be modified in respect of the aforesaid issue.
20. Ground No.3 of the assessee’s Cross Objection is allowed.
21. We shall now advert to the additional ground raised by assessee as adjunct to its Cross Objection. The learned AR submitted that the additional ground raised by the assessee in its cross objection concerns eligibility of depreciation of goodwill arising on demerger. The learned AR submitted that additional ground concerning the issue does not require any fresh investigation of facts and therefore urged for admission of the same in the light of the decision of Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. CIT (1998) 229 ITR 383 (SC): CIT vs. Sinhgad Technical Education Society [2017] 84 taxmann.com290 (SC). Elaborating further, the learned AR referred para 7 of page no.33 to the assessment order passed under s. 143(3) of the Act concerning AY 2012-13 and submitted that the controversy has arisen because the scheme of the demerger was sanctioned by the order of the Hon’ble Gujarat High Court vide its order dated 09.12.2009 w.e.f. the appointed date of 01.01.2007 as mentioned in the draft scheme of demerger. The sanction was accorded by the Hon’ble High Court in FY 2009-10 i.e. AY 2010-11. The assessee claimed depreciation on the goodwill arising on the demerger in the AY 2010-11 as the order was received in FY 2009-10 relevant to AY 2010-11, the AO however complied depreciation on goodwill generated as a result of the demerger (Rs.33.98 Crore) w.e.f. FY 2006-07 i.e. AY 2007-08 and consequently, calculated the WDV of the goodwill generated notionally after reducing the depreciation of the each year starting from AY 2006-07. Thus, whereas the assessee has claimed depreciation for the first time in FY 2009-10 relevant to AY 2010-11 on the amount of goodwill generated, the AO allowed the depreciation after reducing the depreciation for AY 2006-07 and 2007-08. Consequently, the depreciation on goodwill was allowed at Rs.5,57,63,315/- as against claim of depreciation of Rs.8,80,01,481/- claimed by the assessee, the AO thereby disallowed the remaining claim of goodwill amount of Rs.3,22,38,166/- by revising the amount of goodwill carried forward owing to notional depreciation in AY 2006-07 and 2007-08. The learned AR referred to the tabulated statement worked out by the AO as reproduced in the assessment order concerning AY 2012-13 which is reproduced hereunder for easy reference and understanding of the subject:
