Expense cannot be disallowed merely for non-production of vouchers by employees

Hero Motocorp Ltd Vs ACIT (ITAT Delhi)

FULL TEXT OF THE ORDER OF ITAT DELHI

Regarding Ground No. 16 relating to disallowance of reimbursement of foreign travelling expenses to directors/employees amounting to 7.38 crores, the Ld. AR submitted that the disallowance was made on the ground of non-submission of evidence/proof of actual expenses incurred by employees. It was submitted that in the course of discharge of official duties, the employees of the company are required to travel abroad and incur incidental expenses in foreign currency like local conveyance, boarding and lodging expenses, telephone expenses etc. The assessee had introduced a policy fixing per diem allowance payable to employees, depending upon the grade/category of the employees and the place/country of travel. The employees are not entitled to any extra allowance in the event the actual expenditure incurred by the employee is in excess of such per diem allowance. It was submitted that for payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported /backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. It was submitted that in the assessment order, the AO made disallowance of Rs.7,38,27,378/- (comprising of Rs. 2,28,58,951/- in respect of Dharuhera, Gurgaon, Haridwar and Neemrana plants and Rs. 5,09,68,426/- in respect of head office expenses) out of expenditure incurred towards re-imbursement of foreign travel expenses incurred by employees, on the ground that declaration furnished by the employees was not a sufficient evidence to establish the incurrence of actual expenses, which were required to be supported with bills/invoices of factual expenditure incurred by the employees.

The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi Bench of the Tribunal in the assessee’s own case for the AYs 2007­08 and 2008-09, wherein the Tribunal held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, which has been reaffirmed by the Tribunal in the order dated 24.10.2016 passed for the assessment years 2010-11 and 2011-12. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AY 2009-10, 2012-13 and 2013-14.

We have heard both the parties and have perused the material available on record. The Tribunal, in assessee’s own case, has held in A.Ys. 2010-11 and 2011-12 as under:-

“226) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of foreign travelling expenses to directors/employees was deleted by the Tribunal in the assessee’s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007­-08 are as under:

“51.15.The assessing officer in this case has not doubted the fact that employees/ directors of the company travelled abroad and the fact that they have incurred incidental expenses in foreign currency. The reason for disallowance is that employees have not furnished to the assessee evidence in support of the fact that they have incurred conveyance, boarding and lodging expenses etc. When reasonable amount of daily allowance is fixed as per the rules of the company and when these D.A. rules are followed by the assessee, in our view, the incurring of expenditure by the employees is not to be doubted. Even in cases where officers of the government of India travel abroad, daily allowance is given and vouchers for such expenditure are not insisted because of practical difficulties in submitting bills/ vouchers of petty expenses. In such circumstances, what is to be examined by the assessing officer is the reasonableness of the expenses incurred as compared to the general rates of expenses and allow the same. The assessee submits that the fixed per diem allowance payable to employees depending on the grade is reasonable. When such rates are reasonable the question of disallowance does not arise unless the revenue demonstrates that the rates are excessive. In this case it is not that the expenses are not incurred for the stated purpose nor is it that the rates are unreasonable. The disallowance in question in our view on the sole ground that vouchers are not produced by the employees cannot be sustained. In the result this ground of the assessee is allowed.”

Thus, this Tribunal in A.Ys. 2010-11 and 2011-12 and earlier years has held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees. We also find that the Tribunal has in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12. As, the facts have not changed in this year as well, therefore, the issue is squarely covered by the decision of the Tribunal for earlier Assessment Years.

ITAT Allows Deduction under Section 80IC to Hero Motocorp

FULL TEXT OF THE ITAT JUDGEMENT

This appeal is filed against the assessment order passed under section 143(3) read with section 144C of the Income Tax Act, 1961 (‘the Act’) passed by ACIT, Circle-11, New Delhi vide order dated 30/10/2019.

2.0 The assessee has raised the following grounds of appeal:

1. That the assessing officer erred on facts and in law in completing assessment under section 143(3) read with section 144C of the Income-tax Act, 1961 (‘the Act’), vide order dated 30.10.2019, at an income of Rs. 3146,87,81,016/- under the normal provisions and at book profit of Rs. 3557,57,46,134 under section 115JB of the Act.

2. That the assessing officer/ Transfer Pricing Officer (‘TPO’) erred on facts and in law in partly disallowing claim of deduction under section 80IC to the extent of Rs.1,87,74,679 by reducing profits of the eligible undertaking by making transfer pricing adjustment on inter-unit transfer price of goods procured by the eligible unit from non-eligible unit during the relevant previous year.

2.1 That the assessing officer/ TPO erred on facts and in law in holding that the inter-unit transactions undertaken between the eligible unit and the non-eligible units of the assessee during the relevant previous year, were not undertaken at arm’s length price.

2.2 That the assessing officer/TPO erred on facts and in law in determining transfer pricing adjustment of Rs.1,87,74,679, by applying a markup of 7.69% and 7.03%, being the NP of Gurgaon and Dharuhera units respectively, to the purchases of Rs.17.72 crores and Rs.7.32 crores made by eligible unit from the respective non-eligible units by applying the provisions of section 80IA(8) read with section 80IC(7) of the Act.

2.3 Without prejudice that the TPO erred on facts and in law in computing the adjustment to total income on an adhoc basis, without following any acceptable method for determining arm’s length price prescribed under section 92C of the Act.

3. That the assessing officer erred on facts and in law in enhancing the value of closing inventory of raw materials/components by Rs. 321.25 lacs (net addition of Rs. 156.65 lacs after adjusting opening stock) in respect of freight inward expenses and import clearing charges incurred in relation to procurement of raw-material/components and attributable to the closing stock of the aforesaid goods on the ground that the aforesaid cost needs to be added to the value of closing stock in accordance with accounting standard-2 read with section 145A of the Act.

3.1 That on the facts and circumstances of the case, the assessing officer failed to appreciate that in accordance with the consistent, regular and accepted method of valuation of inventory followed by the appellant, the aforesaid costs being incurred in exceptional situations, are not to be considered for the purposes of valuation of closing inventory.

4. That the assessing officer erred on facts and in law in enhancing the value of closing inventory of finished goods by an amount of Rs. 13.83 lacs (net disallowance of Rs.3.95 lacs (13.83 – 9.87 lacs)), in respect of cost of rejection of semi-finished goods and obsolete items, on the ground that the aforesaid cost needs to be added to the value of closing stock in accordance with accounting standard-2 read with section 145A of the Act.

4.1 That on facts and circumstances of the case, the assessing officer failed to appreciate that the aforesaid costs were abnormal in nature and, therefore, in accordance with the consistent, regular and accepted method of accounting, was not considered for the purpose of valuation of closing inventory.

5. That the assessing officer erred on facts and in law in making a disallowance of Rs.72,64,48,360, being the provision made at the end of the year towards increase/decrease in prices of raw material already supplied by the vendors upto 31.03.2015.

5.1 That on the facts and circumstances of the case, the assessing officer erred in observing that as per the terms of purchase order, rates negotiated with the vendors cannot be modified from a prior date, thereby holding that provisions have been incorrectly made by the assessee and are not allowable expenditure.

5.2 That on the facts and circumstances of the case, the assessing officer failed to appreciate that the provisions were made in accordance with the consistent, regular and accepted trade practice followed by the assesse which has always been accepted and allowed by Revenue in the past.

5.3 That the assessing officer erred in not appreciating that out of the total provision of Rs 72,64,48,360, provision to the extent of Rs. 24,79,00,780 was made on the basis of actual price revisions approved upto the end of the relevant year and balance provision to the extent of Rs. 47,85,47,580 was made on the basis of management’s best estimate, on a scientific basis, which is an allowable business expenditure, as per mercantile system of accounting, under section 37(1) of the Act.

5.4 That the assessing officer erred on facts and in law in adding the total provision, aggregating to Rs. 72,64,48,360, made at the end of the year towards increase/decrease in prices of raw material while computing ‘book profit’ under section 115JB, holding the same to be an unascertained liability.

6. That the assessing officer erred on facts and in law in making an addition of Rs.3,78,400 by estimating the value of scrap lying in stock as at the end of the relevant previous year, on hypothetical / notional basis.

7. That the assessing officer erred on facts and in law in disallowing various expenses to the extent of Rs. 7,64,31,539 which pertained to services availed from vendors in the immediately preceding year, and were claimed as deduction during the year under consideration, since bills for such expenses were received or liabilities were recognized during the year, alleging the same to be prior period expenditure and not business expenditure of the relevant previous year.

7.1 That the assessing officer erred on facts and in law in failing to appreciate that the liability in respect of aforesaid expenses aggregating to Rs. 7,64,31,539 pertaining to services rendered by various vendors/creditors in the earlier years, crystallized during the relevant year only on receipt of bills and acceptance of same by the appellant and, therefore, the same did not constitute prior period expenditure.

7.2 Without Prejudice, the assessing officer erred on facts and in law in not allowing or directing to allow the aforesaid expenses in the relevant preceding year(s).

8. That the assessing officer erred on facts and in law in disallowing a sum of Rs.11,79,88,183 in respect of provision for advertisement expenses incurred at the head office at end of the relevant previous year, which were reversed in the succeeding year, alleging the same to be excessive.

8.1 That the assessing officer erred on facts and in law in alleging that the provision for expenses at the end of relevant previous year was not made on scientific basis and was not a reasonable estimate and, therefore, contingent in nature.

8.2 That the assessing officer erred on facts and in law in observing that the appellant failed to substantiate the method of creating the aforesaid provision.

8.3 That the assessing officer erred on facts and in law in adding back the provision for advertisement expenses incurred at head office, aggregating to Rs. 11,79,88,183, while computing ‘book profit’ under section 115JB, holding the same to be an unascertained liability.

9. That the assessing officer erred on facts and in law in disallowing purchases to the extent of Rs. 29.14 crores (Rs. 9.73 crores from multiple source purchases and Rs.19.40 with respect to single source purchases) made from certain parties related with the appellant, in terms of Accounting Standard 18 issued by the Institute of Chartered Accountants of India, alleging the same to be excessive, without appreciating the commercial expediency behind such purchases.

9.1 That on the facts and circumstances of the case, the assessing officer failed to appreciate that the expenditure was incurred for the purposes of business and no part of the same was excessive or unreasonable.

9.2 That on the facts and circumstances of the case, the assessing officer erred in not appreciating that the aforesaid parties were not related to the appellant in terms of section 40A(2)(b) of the Act and hence no disallowance of expense on the ground that payment made to such parties was excessive, could be made.

9.3 That the assessing officer erred on facts and in law in alleging that the appellant had maintained its relationship with the parties in a manner that they do not qualify for being related parties as per the provisions of section 40A(2) of the Act.

9.4 Without Prejudice, that the assessing officer erred on facts and in law in disallowing purchases to the extent of Rs. 19.40 crores, with respect to purchases from aforesaid related parties (in terms of AS-18) for which no comparable instance supporting the allegation of excessive payment, was available, on pure estimate basis.

10. That the assessing officer erred on facts and in law in making addition of Rs.22,26,00,000 to the income of the appellant under section 2(22)(e) of the Act on account of payments given by the customers of Hero FinCorp Ltd. (“HFCL”) to the appellant.

10.1 That on the facts and circumstances of the case, the assessing officer failed to appreciate that the payment given by the customers of HFCL to the appellant was not in the nature of loan or advance given by HFCL to appellant so as to constitute deemed dividend under section 2(22)(e) of the Act.

10.2 Without prejudice, that on the facts and circumstances of the case, the assessing officer failed to appreciate that the provisions of section 2(22)(e) of the Act were not applicable to the aforesaid transaction, since the loan or advance allegedly given by HFCL to the appellant was in the ordinary course of business of HFCL.

10.3 That the assessing officer erred on facts and in law in observing that the loan was not advanced by HFCL in the ordinary course of business of money lending.

11. That the assessing officer erred on facts and in law in disallowing expenditure of Rs.30,25,34,878 (being 30% of total amount of Rs.1,00,84,49,593) incurred towards quarterly target/turnover discount and trade discount of Rs. 16,05,24,888 (being 30% of total amount of Rs.53,50,82,960) given to the dealers/customers under section 40(a)(ia) on the ground that the appellant failed to deducted tax at source therefrom under section 194H of the Act.

11.1 That the assessing officer erred on facts and in law in observing that since the impugned payments were not in the nature of ‘discount’ to dealers, but incentives for meeting targets, the same was in the nature of ‘commission’, which was subject to TDS under section 194H of the Act.

11.2 That the assessing officer erred on facts and in law in not appreciating that the aforesaid discounts were offered under contracts entered into with the dealers on a principal to principal to basis, and did not constitute ‘commission’ as referred to in section 194H of the Act.

11.3 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the appellant was under a bona fide belief that no tax was required to be deducted therefrom, no disallowance was warranted under section 40(a)(ia) of the Act.

11.4 Without prejudice, the assessing officer erred on facts and in law in not appreciating that since the payees had paid tax on the income receivable from the appellant, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the appellant.

12. That the assessing officer erred on facts and in law in disallowing reimbursement of expenses aggregating to Rs. 1,93,993 (being 30% of the entire expenditure of Rs.6,46,644) under section 40(a)(ia), on the ground that the appellant failed to deduct tax at source therefrom under section 194J of the Act.

12.1 That the assessing officer erred on fact and in law in not accepting the invoices raised by the vendors for reimbursement of expenses on the ground that the said claims were raised on the basis of self-serving vouchers.

12.2 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the appellant was under a bona fide belief that no tax was required to be deducted therefrom, no disallowance was warranted under section 40(a)(ia) of the Act.

12.3 Without prejudice, the assessing officer erred on facts and in law in not appreciating that since the payees had paid tax on the income receivable from the appellant, no disallowance could be made under section 40(a)(ia) of the Act for alleged default in deduction of tax at source by the appellant.

13. That the assessing officer erred on facts and in law in treating gains arising from sale of investments made during the year as business income, instead of “capital gains” as considered by the appellant and consequently making an addition of Rs.319,87,41,973 under the head business income, as opposed to income of Rs.199,09,31,407 disclosed under the head ‘capital gains’.

13.1 That the assessing officer erred on facts and in law in observing that investments were made by the appellant with a view to earn profit from selling the same at a later stage and, therefore, profits were taxable under the head “business income”.

13.2 That the assessing officer erred on facts and in law in observing that the appellant had earned substantial turnover from sale of investments and was engaged in day to day monitoring of investments, therefore, the appellant was primarily engaged in activity of investments, which was to be regarded as business activity and, accordingly, income arising therefor was taxable under the head “business income”.

14. That the assessing officer erred on facts and in law in making additional disallowance of Rs. 1,65,07,000 under section 14A of the Act, by applying provisions of Rule 8D of the Rules.

14.1 That the assessing officer erred on facts and in law in applying provisions of Rule 8D of the Rules, without reaching a finding/recording satisfaction as to the incorrectness of the suo moto disallowance of expenses made by the appellant under section 14A of the Act.

14.2 That the assessing officer erred on facts and in law in attributing entire interest expenditure incurred during the year towards earning of exempt income by mechanically applying provisions of Rule 8D of the Rules.

14.3 That the assessing officer erred on facts and in law in alternatively holding that interest expenses to the extent of Rs. 41.06 lacs and half percent of average investment to the extent of Rs.124.01 lacs disallowed under section 14A and challenged in ground of ground of appeal no. 14 to 14.2 supra, are even otherwise not allowable business deductions under section 36(1)(iii) and section 37(1) of the Act, respectively.

14.4 That the assessing officer erred on facts and in law in not appreciating that expenses incurred during the year, including interest expenditure, was for the purpose of regular business activities and had no nexus with investments, and were, therefore, allowable business deduction under section 36(1)(iii) and 37(1) of the Act.

14.5 Without prejudice, that the assessing officer erred on facts and in law in holding that interest expenditure, if any, attributable to investments was not allowable under section 48 of the Act, without appreciating that such finding was extraneous and beyond jurisdiction to the assessment year under consideration inasmuch as the said issue could be raised only in the year of sale of investment(s).

14.6 That the assessing officer erred on facts and in law in making upward adjustment of disallowance computed under section 14A, read with Rule 8D, while computing ‘book profit’ under section 115JB of the Act without giving any reasoning.

14.7 That the assessing officer erred on facts and in law in not appreciating that the disallowance computed under section 14A of the Act read with Rule 8D of the Rules does not represent actual expenditure incurred for earning exempt income and the same, therefore, cannot be added back while computing ‘book profit’ under section 115JB of the Act.

15. That the assessing officer erred on facts and in law in enhancing the value of closing inventory and thereby income of appellant by Rs. 39,50,000 in respect of proportionate amount of depreciation on model fee incurred during the year and debited to the profit and loss account, alleging the same to be directly related to manufacture of finished goods and, therefore, attributable to the closing stock of such goods.

16. That the assessing officer erred on facts and in law in making disallowance of Rs.7,38,27,378 (comprising of Rs. 2,28,58,951 in respect of Dharuhera, Gurgaon, Haridwar and Neemrana plants and Rs. 5,09,68,426 in respect of head office expenses) out of expenditure incurred towards re-imbursement of foreign travel expenses incurred by employees, on the ground that the same were not supported with evidences/ bills of expenditure incurred abroad.

17. That the assessing officer erred on facts and in law in holding that expenditure aggregating to Rs. 127,48,17,707 (net disallowance of Rs. 95,61,13,280 after allowing depreciation @ 25%), incurred by the appellant during the relevant previous year on account of royalty paid to Honda Motor Co., Japan, (‘Honda’) under the ‘License and Technical Assistance Agreement’ (“LTAA”) was capital in nature and not allowable deduction.

17.1 That the assessing officer erred on facts and in law in observing that the assessee acquired capital assets in the nature of intellectual property rights and patents from Honda on payment of royalty and technical guidance fees under the License B Agreement.

17.2 That the assessing officer erred on facts and in law in observing that the assessee received benefit of enduring nature under the License B Agreement, since – (i) the appellant obtained exclusive right to manufacture and sell the products within the territory of India and, (ii) the license had a degree of perpetuity, as it was being renewed and extended year after year.

18. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of Rs.173.41 crores on the ground that part of profits earned by the eligible unit should have been attributed to advertisement and marketing activities carried out at head-office, and such profits were not derived from the business of manufacturing, which were only eligible for deduction under the aforesaid section.

18.1 That the assessing officer erred on facts and in law in holding that part of extraordinary profits earned by eligible unit at Haridwar were attributable to profit earned from marketing of products and brand value.

18.2 That the assessing officer erred on facts and in law in holding that since marketing activities were carried out at Head Office, therefore, the appellant should have transferred goods to Head Office at cost plus reasonable margin and the head-office should have earned higher profit on account of sales and marketing activities.

18.3 That the assessing officer erred on facts and in law in holding that the assets, such as, brand value and marketing network, were not owned by the eligible undertaking at Haridwar.

18.4 Without prejudice, that the assessing officer erred on facts and in law in attributing profits to the manufacturing activities at Haridwar by applying net profit rate of 6.85%, on an arbitrary basis.

18.5 Without prejudice, that the assessing officer erred on facts and in law in holding that the net profit rate of the first year of operation of business would be the rate of profit derived solely from manufacturing activities.

18.6 Without prejudice, that the assessing officer erred on facts and in law in computing the net profit rate of 6.85% for attributing profits to the manufacturing activity at Haridwar, by computing net profit rate for the first year of operation of the appellant company on an arbitrary basis.

19. That the assessing officer erred on facts and in law in disallowing deduction under section 80IC of the Act by an amount of Rs. 1,17,21,822 in respect of certain incomes earned by the eligible unit, on the ground that such incomes were not derived from the business of manufacturing.

19.1 That the assessing officer erred on facts and in law in holding that the other income aggregating to Rs. 1,17,21,822 is taxable under the head “income from other sources”.

20. That the assessing officer erred on facts and in law in not allowing weighted deduction of Rs. 74,31,13,902 claimed under section 35(2AB) of the Act with respect to scientific research and development expenses incurred during the year on the ground that such expenses were not claimed in the original return of income or revised return of income permitted under section 139(5) of the Act.

20.1 That the assessing officer erred on facts and in law in not appreciating that since the aforesaid claim was raised through notes appended to computation of income, which formed an integral part of the original return of income and, therefore, the said claim was raised in the original return of income itself.

20.2 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that since the aforesaid claim was, in any case, preferred during the course of assessment proceedings, the same ought to have been entertained and allowed by the assessing officer and could not have been denied merely because the same was not claimed in the return of income.

20.3 Without prejudice, that the assessing officer erred on facts and in law in not appreciating that the aforesaid claim was a modification/ variation of an existing claim made in the return of income and not a fresh claim, which could have otherwise been raised during the course of assessment proceedings, without revision of return within prescribed time limits.

21. Without prejudice, on the facts and the circumstances of the case and in law the aforesaid claim of Rs.74,31,13,902 under section 35(2AB) of the Act can even otherwise be allowed as additional ground by the Hon’ble Tribunal.

3.0.0 The Ld. Authorised Representative (AR) submitted that Ground No. 1 is general in nature and does not require any adjudication.

4.0.0 With respect to Ground Nos. 2 to 2.3, the Ld. AR submitted that they related to transfer pricing adjustment on the ground that the assessee company has shifted profits from non-eligible unit to the eligible unit in order to claim higher deduction under section 80IC of the Act. It was submitted that the assessee was engaged in the business of manufacturing two-wheelers and had four manufacturing plants at Gurgaon, Dharuhera, Haridwar and Neemrana. It was further submitted that the assessee was entitled for deduction under section 80IC of the Act in respect of profit derived from the undertaking located at Haridwar. The Ld. AR submitted that for the aforesaid activity, the assessee purchases various components required to be used in the assembly of two-wheelers, like gear box, fuel tank, etc., from third party vendors. In the present transaction, the aforesaid components were first purchased by non-eligible units at Gurgaon or Dharuhera from third parties, due to proximity of location of such units with third parties, business relationship, etc. and were, thereafter, transferred at the same purchase price to the eligible unit at Haridwar. The Ld. AR submitted that in such a transaction, no value addition in such components was carried out by the non-eligible units.

4.0.1 It was further submitted by the Ld. AR that in the books of accounts of the plant at Haridwar, which is eligible for deduction under section 80IC of the Act, goods aggregating to Rs. 25.04 crores, were shown to have been procured from other units, i.e., Dharuhera and Gurgaon plants. Out of the aggregate transactions of Rs. 25.04 crores: (i) components having value of Rs. 0.73 crores were semi-finished goods for which nominal processing was carried out at other units before transfer to the Haridwar plant, and (ii) balance components having value of Rs. 24.31 were procured by the aforesaid non-eligible units from third parties and were transferred to the eligible unit at material cost. Freight charges on transfer of the aforesaid items were always booked at the receiving unit.

4.0.2 The Ld. AR further submitted that in the transfer pricing study report, the assessee company benchmarked the aforesaid inter-unit transaction(s) between eligible and non-eligible units applying Comparable uncontrolled price (‘CUP’) method, being the most appropriate and preferred method in the facts of the present case. Alternatively, the assessee also applied Transactional Net Margin Method (‘TNMM’) considering itself to be the tested party. It was submitted that since the operating profit margin of the comparable companies at 9.31% was within +/- 3% of the operating profit margin of the assessee (11.18%), the transaction of inter-unit transfer was considered to be at arm’s length price.

4.0.3 The Ld. AR submitted that the AO/TPO ignored the CUP method, being one of the methods prescribed under section 92C of the Act, and held the impugned inter-unit purchases to be not at arm’s length price on the ground that the profit margin of the non-eligible units, viz., Gurgaon and Dharuhera unit at 7.69% and 7.03% respectively ought to have been charged on such transfer of components/semi-finished goods. Accordingly, the TPO/AO came to the conclusion that the assessee has shifted profits from non-eligible units to the eligible unit in order to claim higher deduction under section 80IC of the Act without benchmarking inter-unit transfer price with any contemporaneous evidence or acceptable method for determining arm’s length price. It was submitted that the TPO/AO worked out an adjustment of Rs. 1,87,74,679 in the following manner:

S. No.	Particulars of goods	Value of such goods (in Rs.)	Margin of non- eligible units	Value of mark up   or margin  should    have earned while transferring   to eligible units (in Rs.)
1	Transfer of goods from Gurgaon to Haridwar	17,72,17, 650	7.69%	1,36,28,037
2	Transfer of goods from Dharuhera to Haridwar	7,32,09,704	7.03%	51,46,642
	Total			1,87,74,679

4.0.4 The Ld. AR submitted that the aforesaid issue stands squarely covered in favour of the assessee, by the order dated 24.10.2016 passed by Tribunal in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12 wherein identical disallowance made by the assessing officer has been deleted. The Tribunal, in allowing the claim of the assessee under section 80-IC of the Act, held that for the purpose of computing market price of inter-unit transfer of goods, when the non-eligible units procured goods at market price from third party vendors and supplied the same to the eligible unit at the same purchase price as increased by the applicable freight cost, no further substitution of such price is warranted in terms of section 80IA(10) of the Act and the transaction was a genuine business transaction borne out of commercial expediency. It was further pointed out by the Ld. AR that following the order of the Tribunal for AY 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AY 2009-10, 2012-13 and 2013-14.

5.0 The Ld. CIT-DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

6.0.0 We have heard both the parties and perused the material available on record. This Tribunal, in order passed for A.Ys. 2010-11 and 2011-12, held as under:

“140) We have heard the rival contentions. We have observed that merely because there was inter-unit transfer of certain goods from non-eligible unit to eligible unit, the assessing officer automatically applied the provisions of section 80IA(8) of the Act to hold that such transfer should have been at market price without looking to the nature of transfer and the facts and circumstances of the case. It has been explained by the Appellant that substantive transfers were made on account of some finished components procured by the non-eligible unit from third party vendors, due to proximity of location/relationship, for further transfer to the eligible unit. The freight charges incurred in relation to the procurement and further transfer from noneligible to eligible unit have been stated to be borne by the eligible unit. We find force in the aforesaid facts stated by the appellant, considering that the unit at Haridwar was a new unit, whereas the other non-eligible units at Gurgaon and Dharuhera were old, established way back in years 1984 and 1997, having up and running operations during the year under consideration. Various ancillary units manufacturing components for such plants were also established near the old plants, which were continuously supplying such components to the non-eligible units. There was thus strong business/commercial reasons for such ancillary units to supply the components to the non-eligible unit first, by virtue of the existing relationship / process for supply of goods in place, which were further transferred at cost to the eligible unit at Haridwar. We do not find any in-genuineness in the aforesaid practice, which is backed by strong commercial reasons as, highlighted above. In the said process, there is no additional cost burden to be borne by the non-eligible unit. The aforesaid transfer only involves additional freight cost, which as stated has been borne by the eligible unit. Further, the provisions of section 80IA(8) as discussed in ground of appeal no. 26 (supra) provides for inter unit transfer at market price. The market price of the components procured by the non-eligible units from third parties/independent vendors do not undergo any change at the time of further transfer by the noneligible unit to the eligible unit. In other words, the market price of such components at which the same was procured by non-eligible units remains constant. Accordingly, even by applying the provisions of section 80IA(8), in our opinion, there can be no substitution of the price at which goods are debited by the eligible unit in its independent books of account. Similarly, with respect to components having value of Rs.6.34 crores, which were transferred by the non-eligible unit to the eligible unit at Haridwar after nominal processing, too, in our opinion, does not result in enhancement of any market price of such goods; in other words, in a free market condition such goods would have also been sold at the same price at which they have been transferred by the non-eligible unit to the eligible unit. In that view of the matter, we find that the present issue was not decided by the assessing officer in correct perspective and, therefore, erred in disallowing deduction under section 80IC, by enhancing the purchase price by adding certain markup thereon. In view of this we allow ground No. 30 of the appeal of the assessee.”

6.0.1 Therefore, the issue stands squarely covered in favour of the assessee by order dated 24.10.2016 passed by Tribunal in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12 wherein identical disallowance made by the assessing officer has been deleted. The Tribunal, while allowing the claim of the assessee under section 80-IC of the Act, held that for the purpose of computing market price of inter-unit transfer of goods, when the non-eligible units procured goods at market price from third party vendors and supplied the same to the eligible unit at the same purchase price as increased by the applicable freight cost, no further substitution of such price is warranted in terms of section 80IA(8) of the Act and the transaction was a genuine business transaction borne out of commercial expediency. We also find that the Tribunal has, in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

6.0.2 Therefore, Ground Nos. 2 to 2.3 are allowed in favour of the assessee.

7.0.0 The Ld. AR submitted that with regard to Ground Nos. 3 to 3.1 relating to addition of freight inward/import clearing expenses to cost of closing inventory amounting to Rs. 321.25 lacs (net of addition of Rs.156.65 lacs after adjusting opening stock) it can be seen that the Assessee purchases raw material on CIF basis and has included the freight cost for delivery of goods in purchase price and the same are factored in the value of closing inventory. In exceptional circumstances viz. material shortage, wherein assessee has to immediately lift material, transport charges are paid, which are not included to the purchase price, but are separately debited to profit and loss account, because the invoices of transporters are received after consumption of material. It was submitted that such freight amount is not included in the valuation of closing stock, as per regularly and consistently followed method of valuation of stock which has been accepted by the Revenue in the past. The Ld. AR submitted that the AO/Ld. DRP held that the assessee’s contention that as the method is regularly followed year after year its impact will be revenue neutral, cannot determine the income of the assessee correctly for the year under consideration. The AO/Ld. DRP further held that the revenue aspect keeps on changing on year to year basis. It was submitted that the Assessing Officer further held that impact on non-inclusion of freight inward and clearing charges at Rs. 321.25 lacs has to be added to the income of the assessee.

7.0.1 The Ld. AR submitted that this issue is decided in favour of the assessee by the recent consolidated order dated 24.10.2016 passed by the Delhi bench of the Tribunal in assessee’s own case for assessment years 2010-11 and 2011- 12, wherein the Tribunal, following the order of the coordinate benches of the Tribunal passed in assessee’s own case for the assessment years 2007-08 and 2008-09, deleted the aforesaid addition on the ground that in those years it has been held that the assessee was following consistent system of accounting, which was unnecessarily disturbed by the Revenue, without change in facts. It was further held that tinkering with the accounting method was unjustified when the exercise did not materially alter the profits of the assessee company. It was further pointed out by the Ld. AR that following the order of the Tribunal for AY 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

8.0 The Ld. CIT-DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

9.0.0 We have heard both the parties and perused the material available on record. The Tribunal in assessee’s own case for A.Ys. 2010-11 & 2011-12 held as under:

“11) We have carefully considered the rival contentions. The company is a corporate entity therefore it has to value its closing stock according to the accounting standard 2 ‘valuation of inventories’ issued by the Ministry of corporate affairs and ICAI. According to that accounting standard the closing stock of the finished goods is required to be valued including all cost of the finished goods is required to be valued including all cost of purchases, cost of conversion and other cost incurred in bringing the inventory to their present location and conditions. The contentions of the appellant is that that it’s all purchases are accounted for on CIF basis and therefore the suppliers are required to provide the goods at the factory location and therefore in the closing stock of inventory there cannot be any element of freight etc., this issue has been considered by the coordinate bench in appellant’s own case for A Y 2007-08 where in it has been held that :-

“7.13. We have considered the submissions and the material filed by both the parties. The issue in question is regarding method of valuation of closing stock. The primary contention of the assessee is that it had to make emergency purchases and that these stocks so purchased were immediately consumed. In such exceptional situations, the assessee has directly accounted the freight and import clearing charges to the profit and loss account. This means that such raw material stocks are not part of closing stock at all. Further, this fact is not rebutted by the DR.

7.14 Though technically it can be argued that the value of closing inventory must include freight/ import clearing charges, the facts explained by the assessee are that the purchases in question are done under exceptional circumstances (which are well known in this type of industry) for immediate consumption. They are in fact consumed immediately i.e. as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ import charges are directly debited to the P& L A/c along with the value of the purchases, naturally the question of treating them as part of closing inventory does not arise. The assessee has acted and accounted in a proper and acceptable method. Therefore, the relief should be granted on this count alone.

7.15 Alternatively, the undisputed fact remains that the assessee has consistently following the said method of accounting in the last many years and the Revenue has been accepting these facts and method of accounting without any demur.

7.16 The contention of the DRP that, the principle of res-judicata does not apply in Income tax proceedings and therefore, the Assessing officer is correct to come to independent conclusion and is not bound by past acceptance of a factual legal point by the department is untenable. Technically the principle of res judicata may not apply to the income tax proceedings as each year is an independent year, yet there ought to be uniformity in treatment and consistency as propounded by Hon’ble Supreme Court in the case of Radhasoami Satsang vs. CIT 193 ITR 321, when the facts and circumstances are identical. It is a judicially accepted principle that when the facts are same, a uniform view should be adopted for the subsequent years in the income tax proceedings. Unless there is a material change in the facts, which is neither demonstrated by assessing officer nor DRP, the view which is taken earlier, should not be changed, as held by various courts. We now discuss some of the case laws.

7.17 The Hon’ble Supreme Court in the case of Radhasoami Satsang (supra), on the theory of consistency, has held as under:

“Strictly speaking, res judicata does not apply to the income tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year, where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”

7.18 This view has been followed by the Hon’ble Delhi High Court in the case of CIT vs. Neo Ploy Pack (P) Ltd. [2000] 245 ITR 492 and the Hon’ble Bombay High Court in the case of CIT vs. Gopal Purohit [2011] 336 ITR 287.

7.19 Further, the Hon’ble Supreme Court in the case of CIT vs. Realest Builders and Services Limited (2008) 307 ITR 202 held as:

“In case where the department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being underestimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is underestimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in underestimation of profits and is, therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. In the instant case, that exercise had never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the department. In the circumstances, there was no reason to interfere with the conclusion given by the High Court.”

7.20 The Hon’ble Supreme Court in the case of CIT vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows:

“Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method.”

7.21 In the case of CIT vs. Jagatjit Industries Ltd. (2011) 399 ITR 382 (Del.), the Hon’ble Jurisdictional High Court has held as follows:

“If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, the doctrine of consistency would come into play. The method of accounting cannot be rejected. The assessee was following the mercantile system of accounting. According to past business practice, the expenditure spilled over the next year and was debited in the second year and was allowed by the Assessing Officer. The Assessing Officer for the assessment year in question disallowed Rs.13,46,299 claimed as expenditure of prior period allowable in the current year. The Commissioner (Appeals) deleted the disallowance and this was upheld by the Tribunal. On appeal to the High Court:

Held, dismissing the appeal, that the assessee had claimed prior period expenses on the ground that the vouchers for such expenses from the employees/ branch employees were received after March 31st of the financial year. It had branch offices throughout the country. It debited the expenditure spill over the subsequent years and the Assessing officer had been allowing it in the past. The accounting practice had been consistently followed by it and accepted by the Revenue. Nothing had been brought on record to show that there had been distortion of profits or that the books of account did not reflect the correct picture. In the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the Department in respect of the previous years.”

7.22 In the present case, the Revenue has rejected the method of accounting which is consistently followed by the assessee on the ground that there may be chance where in a particular year, the method adopted by the assessee may result in underestimation of profits. However, the Revenue failed to demonstrate with facts and figures that the impugned method of accounting may result in material underestimation of profits. On the contrary, the assessee has demonstrated that the change in the method of accounting for year under appeal would result in loss to the revenue as the opening stock would also require similar adjustment and the cascading effect will be loss to revenue. We observe that in many of the additions made in this case by the revenue, the consistent method of accounting is unnecessarily disturbed, though it has been accepted in many years. In our view such tinkering with the method is unjustified when the exercise does not materially alter the profits. The facts and figures in many additions demonstrate that the issue raised is revenue neutral in the long run. Such petty additions should be avoided on the ground of materiality, as AS-1 which talks about materiality, consistency, prudence etc. is part of the I.T. Act after it is notified u/s 145(2).

7.23 In view of the foregoing and proposition laid down by the Hon’ble Supreme Court and the Hon’ble High Courts, we are of the opinion that adjustment of Rs. 31.18 lacs made to total value of closing stock of Rs. 275 crores and consumption of stocks of Rs. 7178 crores is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee.

7.24 Further, the Hon’ble Supreme Court in the case of Berger Paints India Ltd. vs. CIT (2004) 266 ITR 99 at page 103(SC), has noted with approval, the observations of the Special Bench of the ITAT in the case of Indian Communication Network Pvt. Ltd. vs. IAC (1994) 206 ITR (AT) 96 (Delhi). At page 114 it observed that:

“Before we part with the ground, we cannot help feeling that the litigation between the parties could have been avoided since it was quite immaterial, whether full deduction was allowed in one year or partly in one year and partly in the next, since the assessee is a company and rate of tax is uniform. The gain to one and the loss to the other is illusory since what is deferred in one year, would have to be discharged in the next. In that sense, nobody has won and nobody has lost.”

7.25 Even on this plea also, the assessee succeeds. We have dealt with this issue elaborately as, in a number of grounds, this issue would become applicable. In view of above discussion, we allow this ground of the assessee.”

9.0.1 Thus, the issue stands squarely covered in favour of the assessee by order dated 24.10.2016 passed by Tribunal in the immediately preceding assessment years, i.e. AY 2010-11 and AY 2011-12 wherein identical addition made by the assessing officer has been deleted. Before us, the Ld. Departmental representative could not point out any changes in the facts and circumstances of the case for this year compared to the year in which the Tribunal has decided this issue. We also find that the Tribunal has in the appeals for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

9.0.2 Therefore, Ground Nos. 3 to 3.1 are allowed in favour of the assessee.

10.0.0 With respect to Ground Nos. 4 to 4.1 relating to addition on account of cost of rejection of semi-finished goods and obsolete items to the value of closing stock amounting to Rs. 3.95 lacs (net of addition of Rs.13.83 lacs after adjusting opening stock), it was submitted that the aforesaid rejections comprised of abnormal rejections arising in the course of manufacturing, like rejections on account of obsolescence, etc. The Ld. AR submitted that according to principles of accounting (AS-2), as also the consistent, regular and accepted method of accounting, the assessee only considers normal wastages arising in the course of manufacturing for the purposes of allocation to closing inventory. Since, the aforesaid expenditure comprised of abnormal wastages, it was not practically feasible to segregate normal and abnormal wastages and, therefore, the assessee, as per the consistent method of accounting, did not consider aforesaid costs for purposes of allocation to closing inventory. It was submitted that it is not practically possible for the assessee to segregate normal and abnormal wastages embedded in the aforesaid costs and, therefore, the assessee, as per consistent and regular method of accounting, which has been accepted by the Revenue as such in the earlier years, did not consider the aforesaid expenditure for the purposes of valuation of closing inventory of finished goods. It was submitted that the Assessing Officer disallowed this expenditure and added the same to the income of the assessee.

10.0.1 The Ld. AR submitted that the aforesaid issue stood decided in favour of the assessee by the order of the Delhi Bench of the Tribunal in the assessee’s own case for the assessment years 2007-08 and 2008-09 wherein similar adjustment made in that year was deleted on the same ground. The Ld. AR pointed out that the aforesaid issue has been decided in favour of the assessee by the order of the Tribunal in assessment year 2010-11 and 2011-12 wherein the Tribunal had held that only normal loss is to be loaded/added to the cost of closing inventory which was in consonance with the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI). It was further pointed out by the Ld. AR that following the order of the Tribunal for AY 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

11.0 The Ld. CIT-DR relied on the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

12.0.0 We have heard both the parties and perused the material available on record. The Tribunal for A.Ys. 2010-11 and 2011-12 has held as under:

“16. We have carefully considered the rival contention and has also perused the relevant provisions of the accounting standard – 2 which has been relied by the Ld. assessing officer. We have carefully perused the decision of the coordinate bench in the appellant’s own case for assessment year 2007-08 wherein the identical issue is dealt with as under:-

“8.9 The issue in question is whether the cost of abnormal rejections have to be considered for the purpose of valuation of closing stock. The assessee relied on Accounting standard -2- Valuation of Inventories which is a notified accounting standard by the Companies Act which stipulates that abnormal wastages should not be considered for valuation of inventory.

8.10 It was submitted by the Ld. AR of the assessee that it is in the manufacturing of precision and quality product and in case of unfit material it has been consistently following the method of changing the abnormal rejection of material to its profit and loss account, without any allocation to the value of closing inventory.

8.11 The assessing officer’s case is that cost of rejections needed to be included in the value of closing stock. Assessing officer worked out an amount of Rs. 9.24 lacs as attributable to closing stock out of total expenditure of Rs. 12.49 crores and closing stock value of Rs. 275 crores. The assessee as a consistent accounting policy has been claiming the cost of abnormal rejections as revenue expenditure for the previous years and this has been regularly accepted by department in past.

8.12 The amount of Rs. 9.24 lacs attributed by the assessing officer, in our view, is materially inconsequential so as to warrant disturbing the regular method of valuation of closing stock being followed by the assessee company. The quantum of the addition of Rs. 9.24 lacs is less than 0.74% of the value of abnormal rejections. As a percentage of total stocks / turn over / profits declared, this figure is miniscule.

8.13 Accounting Standard-2 stipulates that abnormal wastages should not be considered for valuation of inventory. It reads as follows:

“16. Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred are:

a)Abnormal amounts of wasted materials, labour or other production costs; storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs.”

8.14 Keeping in view the treatment prescribed under AS-2 and the fact that the assessee has been regularly following the same method of accounting for valuation of charging such rejection to P&L A/c and its closing inventory, we are of the view the addition in question is uncalled for. The adjustment is not material adjustment. Further, for the reasons staged by us on the issue of consistency, while disposing around no. 2 to 2.2, we allow this ground of the assessee.”

Both the parties have admitted that there is no difference in the facts and circumstances of the case of the appellant in the assessment year before us as well as the year for which the order of the coordinate bench pertains to. On reading of the assessment order as well as the direction of the Ld. Dispute resolution panel it was not found that how the loss of the assessee was found to be normal when the assessee submitted that it is an abnormal loss incurred by it during the course of manufacturing process. Further the Ld. dispute resolution panel has also stated that both the cost of normal and abnormal losses have to be loaded to the value of the closing stock is devoid of any merit as it is contrary to the accounting standard issued by the Institute of chartered accountants of India which has been mandated by the Ministry of corporate affairs, which only says that, only normal losses are required to be included and abnormal losses are required to excluded for the purpose of the valuation of the closing stock of the finished goods and semi finished goods. In view of the above, we respectfully following the decision of the coordinate bench in the appellant’s own case for the previous year allow ground no. 3 of the appeal of the assessee.”

12.0.1 Thus, this issue is squarely covered in assessee’s favour by the order of earlier assessment years. We also find that the Tribunal has in the appeal for the assessment years 2009-10, 2012­13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

12.0.2 Therefore, Ground Nos. 4 – 4.1 are allowed in favour of the assessee.

13.0.0 With respect to Ground Nos. 5 to 5.4, relating to disallowance of provision for increase in price of material amounting to Rs.72.64 crores, the Ld. AR submitted that it can be seen that the assessee had appointed various vendors for supply of material to be used in the process of manufacturing of vehicles. It was submitted that the assessee, at the time of issuing of purchase order, negotiates the price at which the particular component/ components shall be supplied by the vendor. Subsequently, vendors are provided supply of component schedule annually. It was submitted by the Ld. AR that in the business of manufacturing vehicles, the assessee purchases raw material from vendors with the express understanding that the rates would be revised, if there is substantial increase/decrease in cost of materials, at the agreed interval. It was submitted that in the assessment order, the assessing officer held that the aforesaid provision of 72.64 crores is not allowable business expenditure. The assessing officer held that provisions emanating from retrospective price amendments are contingent in nature and thus, not an allowable business expenditure. It was further submitted that the assessing officer also added back the aforesaid total provision while computing ‘book profit’ under section 115JB, holding the same to be an unascertained liability.

13.0.1 The Ld. AR submitted that the provision for the material is worked out as under:-

(1) Provision for purchase orders issued for price amendment as at 31.3.2015: Rs. 24.79 crores: The aforesaid provision was made on the basis of actual supplies made up to the end of the year as per price amendments actually issued as on 31.03.2015.

Therefore, the assessee has made provision of Rs. 24.79 crores on the basis of actual POs issued to vendors for the change in prices during the year and it involved no estimation.

(2) Provision made on best estimate basis of Rs.47.85 crores of which price amendments were not finalized by the end of the year: The provision for price increase of Rs.47.85 crores was made on the basis of per vehicle increase / decrease in metal cost during 3rd/ 4th Quarter multiplied by actual dispatch during the corresponding period.

13.0.2 The Ld. AR submitted that in assessment year 2008­09, the Tribunal deleted the disallowance holding that similar disallowance of provision was made by the assessing officer in complete disregard of the findings of the assessing officer in the preceding assessment year, viz. Assessment Year 2007-08 as also the consistent method followed by the assessee. In that year, the Delhi Bench of the Tribunal, vide order dated 13.06.2014 passed in the assessee’s own case for assessment year 2008-09 was pleased to delete the disallowance made by the assessing officer keeping in view the principle of materiality and consistency followed by the assessee. Further, the Ld. AR submitted that the Delhi Bench of the Tribunal, vide consolidated order dated 24.10.2016, passed in assessee’s own case for assessment year 2010-11 and 2011-12, has decided the aforesaid issue in favour of the assessee holding that the provision was made on scientific basis and the transaction is revenue neutral. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14. Further, in the order passed for assessment year 2009-10, the Tribunal has also held that the since the provision for increase in price of material was an ascertained liability made on an actual and scientific basis, assessing officer erred in making adjustment to book profit in accordance with the adjustments provided in the Explanation to section 115JB of the Act.

14.0 The Ld. CIT – DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

15.0.0 We have heard both the parties and perused the material available on record. This Tribunal, for A.Ys. 2010-11 & 2011-12, has held as under:

“20) We have carefully considered the rival contentions and also perused order of the coordinate bench in the appellant’s own case for earlier years. We have also perused the page no. 1130 to 1140 of the paper book volume 3 submitted by the assessee before the Ld. assessing officer in pursuance of direction of the Ld. dispute resolution panel. The parties before us have confirmed that there is no change in the facts and circumstances of the case for this year compared to the year for which the tribunal has decided this issue in favour of the appellant. The coordinate bench in assessee’s own case for assessment year 2007-08 has decided this issue as under:-

“12.11 The addition in question is on account of provision for increase in price of material. When there is an excess provision on account of price revision made during the year, the assessee reversed the same in subsequent year i.e. when the actual figures are known. Similarly, when there is a short provision for increase in price of raw material supplied in immediately preceding year, the balance is recognized as expenditure during the year. A claim is made based on ascertainment of actual liability. The assessing officer disallowed the reversals of provision on ground that this was a prior period expenditure.

12.12 When provisions are made, what is to be seen is whether the assessee has done a bona fide and genuine exercise to estimate its liability with reasonable certainty. The term reasonable certainty means that the provision in question might be slightly higher or lower than the actual figure. When the provision is higher, it is reversed in subsequent year, when the actual figures are known.

Similarly, when the provision is lower, the same is claimed in the latter assessment year. It cannot be said that these are prior period expenditure. The actual liability in question is ascertained only during the year and hence the liability crystallizes during the year. Estimation of an expense has to be considered in contradiction to actual ascertainment of the expenses. Once the actual expense has been ascertained, the liability accrues in that year to the extent not provided in the earlier year and is to be allowed as revenue expenditure in the year of crystallization. Concepts of going concern, accrual and consistency have to be taken into account by the revenue authorities while evaluating such provisions and making such adjustments. The assessee is disputing the figures of disallowance and the DRP is also expressing its inability to correct the figures. In our view the DRP is not helpless and could have directed the assessing officer to verify the figures and correct the mistakes, if any. In view of the above discussion, we allow this ground of assessee for statistical purpose and direct the assessing officer to properly verify the figures and allow the claim of the assessee.”

Subsequently for the assessment year 2008-09 when the similar disallowance was made by the Ld. assessing officer the coordinate bench vide its order dated 13.04.2014 has held deleted the disallowance made by the assessing officer keeping in view the principle of materiality and consistency followed by the appellant. On the ground that the mention has been made in the purchase order that there cannot be any revision of the prices subsequently and the prices mentioning the purchase order of final based on which the Ld. assessing officer has relied very heavily we are of the view that that these are the general terms and conditions of the purchase order claimed by the appellant upon its various vendors and there is no prohibition in the said purchase orders that subsequently the prices cannot be revised. Many times the prices are dependent upon the cost of the raw material such as metal etc of the vendors which is highly fluctuating, which may result into subsequent price revision. Further when the actual payments are made to the vendors on the basis of such retrospective increase in price of material supplied, which is accepted and allowed as revenue expenditure, the provision made for such are revenue neutral. Accordingly there is no justification in sustaining the aforesaid disallowance. Accordingly, we reverse the action of the assessing officer and allow the ground no. 4 of appeal raised by the appellant.”

15.0.1 Following the aforesaid order, the Tribunal in AY 2013-14 decided the issue in favour of the assessee while holding as under:

“It is observed that it is common trade practice to contract with vendors on such express terms for payment of arrears in the event of substantial increase/ decrease in cost, in order to maintain continuous supply of raw materials without being affected by market fluctuations, especially in light of the volume of purchases made by the assessee. In the absence of such understanding/ contract with the vendors, the assessee would not be able to operate and continue manufacturing operations without disruption. This same process is followed when there is reduction in cost elements of component prices, company informs the vendors for reduction in price of components. Accordingly, while price revisions are pending or negotiations are on, the vendors keep on supplying the material provisionally at the agreed rates, with the understanding that pursuant to negotiations being finalized, the arrears of the amount due to them would be paid to them retrospectively. Such price revisions, being an accrued liability at the time of purchase of raw materials, are recorded in the books of accounts by the assessee. At the year end, the company estimates the additional liability on account of price revision under negotiation and makes upward/downward provision, as the case may be, in relation to material supplied until the end of the relevant year. Thus, the Assessing Officer was incorrect in disallowing this claim.”

15.0.2 We also find that the Tribunal has in the appeal for the assessment years 2009-10 deleted the adjustment by the AO under section 115JB of the Income Tax Act, 1961 by holding as under:

“From the records it can be seen that the provision for the material is worked out in respect of price amendments which were already issued on 31.03.2009 which was made on the basis of actual supplied made upto the end of the year as per price amendments actually issued on 31.03.2009. The provision was made on the basis of actual PO issued to the vendors for change in the prices during the year and thus, does not involved any estimation. Therefore, the Assessing Officer was not right in making adjustments which are not consistent with the explanation to Section 115JB of the Income Tax Act, 1961. In the present Assessment Year also the facts are similar and are squarely covered with the decision of the Tribunal for A.Ys. 2010-11, 2011-12, 2012-13 and 2013-14. Hence Ground Nos. 15 to 14.3 are allowed.”

15.0.3 In the present Assessment Year also the facts are similar and are squarely covered with the decision of the Tribunal for A.Ys. 2009-10 to 2013-14.

15.0.4 Therefore, Ground Nos. 5 to 5.4 are allowed in favour of the assessee.

16.0.0 The Ld. AR submitted that Ground No. 6 is relating to disallowance of cost of scrap material amounting to Rs.3.78 lacs. It was submitted that in the course of the business of manufacturing, the process generates some scrap on account of rejection of components, obsolescence of components, etc. In the course of manufacturing process, scrap is generated mainly on account of grinding scrap in machining process of various components. Such

51 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT scrap generated in the course of manufacturing is not separately debited to the profit and loss account but is claimed as the part of cost of material consumed in the course of manufacturing. The Ld. AR submitted that the wastage generated in the manufacturing process is negligible compared to the overall consumption of material during the year. Further, such wastage is normal and inherent in the manufacturing process and in any case, within tolerable limits. Scrap generated in the aforesaid manner is transferred to scrap yard with proper approval of respective ‘Shop head’ and ‘Process Planning & Control department’ in the manufacturing unit and is sold after necessary processing (e.g. crushing of components), if any. The Ld. AR further submitted that the sale proceeds from sale of scrap is directly credited to the profit and loss account and is shown as income. It was submitted that having regard to the nature of scrap/wastage generated during the course of business i.e. empty oil drums, corrugated wooden boxes, plastic bags, etc., it is not possible to maintain scrap register at the shop floor containing item wise details of scrap generated. However, the assessee maintains record/register of each item of scrap sold

52 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT during the year. The sale proceeds from sale of scrap is directly credited to the assessee’s Profit & Loss A/c and is shown as income. The Ld. AR submitted that the assessee realized Rs. 22.92 crores from sale of scrap generated in the course of manufacturing, which was credited to the profit and loss account and shown as income. It was submitted that in the assessment order, the assessing officer has observed that the assessee has erred in not estimating the value of scrap lying in the factory premises as on the last date of the previous year viz. 31.3.2015 which should have been credited to profit and loss account as part of the closing stock. The assessing officer estimated the value of such scrap at an amount of Rs.3,78,400/- (computed on the basis of average scrap sales in the last 15 days of the relevant year and first 15 days of next year, vis-a-vis, after reducing the scrap sale as on the last days of the relevant year) and made addition of the same to the closing stock and consequently to the income of the assessee.

16.0.1 The Ld. AR submitted that the aforesaid issue has been decided in favour of the assessee in order passed by the Tribunal in assessee’s own case for the assessment years 2010-11 and 2011-12, wherein the Tribunal accepted the method as followed by the assessee of accounting income on sale of scrap on a consistent basis and deleted the impugned addition on the ground that the assessee was not dealing in scrap and/or holding the scrap as inventory, and, thus, was not required to value the closing stock after taking into account the value of scrap. The Ld. AR submitted that the Tribunal, in coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items. The Ld. AR pointed out that the Tribunal in assessee’s own case for the AYs 2007-08 and 2008-09 had restored the matter back to the file of the assessing officer to compute the value of closing stock on consistent basis, as per method to be followed by the assessing officer in the set-aside order. The Ld. AR submitted that the assessee had filed an appeal against the aforesaid order of the Tribunal, which was admitted by the High Court vide order dated 19.1.2015 as involving substantial question of law. It was further submitted that the AO in the set aside proceedings for AY 2007-08, vide order dated 31.10.2014, confirmed such disallowance on an ad- hoc basis by estimating the average of scrap lying in the closing stock as a proportion of scrap sales for the last 15 days for the ended 31.03.20007 and the first 15 days of the subsequent year and the Ld. CIT (A), vide order dated 01.02.2018, deleted the disallowance made by the AO in the set aside order. However, the Ld. AR pointed out that the aforesaid disallowance sustained by the Tribunal in assessment years 2007-08 and 2008-09 has been categorically distinguished by the ITAT in the AY 2010-11 (referred supra), wherein the Tribunal held that the earlier orders were passed without due consideration of AS-2 and application thereof to scrap generated during manufacturing process has not been examined. It was further pointed out by the Ld. AR that following the order of the Tribunal for AY 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2012-13 and 2013-14.

17.0 The Ld. CIT DR relied upon the Assessment Order and Order of the TPO as well as on the Tribunal’s decision for A.Y. 2007­08 and 2008-09.

18.0.0 We have heard both the parties and perused the material available on record. On the issue under consideration, a co­ordinate Bench of the Tribunal, for A.Y.s 2010-11 and 2011-12, has held as under:

“24. We have carefully considered the rival contentions. Accounting standard 2 notified by the Ministry of corporate affairs it provides that inventory is required to be valued at the end of the year for determining the true and fair profit or loss of the financial period of an enterprise. According to that the inventory is required to be valued according to accounting standard 2 in case it is held for the sale in the ordinary course of the business. In the present case the assessee is not holding scrap as an inventory in the ordinary course of its business. It is also not the dealer in scrap. The inventory that it holds in the ordinary course of its business at the raw materials semi finished goods and they finished goods of the company. Therefore, it is incorrect to hold that assessee should have valued the scrap at the end of the year. Furthermore the accounting policy of the company also states that the scrap is accounted for at the time of its disposal. Therefore, according to us it is not mandatory for an assessee to value scrap as at the end of financial period for working out the true and fair profit or losses of the company. More so as in the previous year this accounting policy of the company has been accepted by the revenue without disturbing the profit on this count. Further, while rendering our decision in the preceding ground of appeal, following the decision of honourable High Courts and Supreme Court, we have held that adjustment should not be made in the assessment order on issues, which are revenue-neutral. The impugned addition under consideration is purely revenue-neutral in as much as addition of the estimated value of the scrap to closing stock would be debited as opening stock in the profit and loss account of immediately succeeding year. Further, the assessing officer will need to carry out the similar exercise in the last year, to estimate stock of scrap which would become opening stock of this year. There is, thus, no escapement of Revenue on the basis of the impugned addition made by the assessing officer in the assessment order. We have already held in multiple grounds supra that no adjustment should be made to returned income on issues, which are revenue neutral. Having held as above, it is difficult to take any different view for the issue under consideration, which is also purely revenue neutral, especially considering that if similar adjustment (which has not been carried out by the assessing officer) is made to the opening stock, no additional tax liability would delve upon the appellant It could also be seen that the addition of Rs.3.02 lacs is miniscule having regard to the size of the company, which has declared turnover of Rs.16,000 crores (approx.) during the year under consideration and net profit of Rs.2232 crores. The aforesaid renders force in the arguments taken by the Ld. Counsel that an assessee engaged in the business of manufacturing, especially that of the size of the appellant, cannot be expected to keep quantitative tally of miniscule items like nuts and bolts lying in the scrap yard. In view of the aforesaid, keeping in mind the principle of materiality, we find that there is no error in the system and regular practice followed by the appellant of not estimating the value of scrap lying in the scrap yard and accounting for sale as and when such scrap is sold and removed from the factory premises. For the aforesaid cumulative reasons we do not find any justification in sustaining the addition of Rs.3.02 lacs made by the assessing officer in the assessment order. As regards the decision of the Tribunal in the earlier two assessment years, we draw support from the various decisions, wherein it has been held that since doctrine of res judicata is not applicable to income tax proceedings, the Tribunal can deviate from earlier orders passed in the assessee’s own case as in those earlier decisions the provisions of the accounting standard A-S to with respect to valuation of inventories were not considered and whether they apply to the scrap generated in a manufacturing process by the company. Furthermore there is no evidences brought on record by the Ld. assessing officer that the assessee has sold scrap out of the books. Furthermore the amount of addition working out by the Ld. assessing officer was also on the estimate basis without any quantitative details of the scrap. It is also not the case of the assessee that compared to the earlier years the scrap sold by the assessee is lesser during the year. In view of the above, the addition made by the Ld. Assessing officer on account of estimating the value of scrap lying in closing stock amounting to Rs. 3.02 lakhs is deleted and ground No. 5 of appeal raised by the assessee is allowed.”

18.0.1 In the present Assessment Year also the assessee is not dealing in scrap, and/or holding the scrap as inventory, and, thus, was not required to value the closing stock after taking into account the value of scrap. This Tribunal, for A.Y.s 2010-11 and 2011-12, while coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items. We also find that the Tribunal has in the appeal for the assessment years 2012­13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12. The facts are identical in the present year as well.

18.0.2 Therefore, Ground No. 6 is allowed in favour of the assessee.

19.0.0 With respect to Ground Nos. 7 to 7.2, relating to disallowance of prior period expenses amounting to Rs. 7.64 crores, it was the contention of the Ld. AR that the assessee is a large size manufacturing company which receives services from several vendors, running into hundreds. The Ld. AR submitted that the assessee had made reasonable attempt to quantify the liability incurred towards expenses during the relevant previous years and provided for it. It was submitted that it is not humanly possible to consider and provide for all expenses, in absence of relevant details/material/information for various reasons like, non-receipt of bills/invoices from the vendors, the contract terms with vendors not being settled, disputes in relation to bills received, services contracted by zonal/regional/branch officers not intimated to the head office, etc. Accordingly, the assessee claimed deduction for miscellaneous expenses aggregating to 7.64 crores pertaining to prior period. The Ld. AR submitted that in the assessment order, the assessing officer has disallowed the aforesaid expenses, on the ground that same pertained to prior period and are not allowable revenue expenditure against income of the relevant year.

19.0.1 The Ld. AR submitted that the aforesaid issue is covered by the order passed by the Tribunal in the assessee’s own case for Assessment Year 2008- 09, wherein, the Tribunal had taken into consideration the finding of the Ld. DRP deciding the issue in favor of the assessee and remanded the matter to the file of the Assessing Officer for correcting calculation errors. It was further submitted that the aforesaid issue has been decided in favour of the assessee by the order of the Tribunal for assessment years2009 to 2013-14.

20.0 The Ld. CIT-DR relied on the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

21.0.0 We have heard both the parties and perused the material available on record. This Tribunal, in A.Y. 2010-11 and 2011-12, has held as under:

“201. We have heard the rival contentions. We note that similar issue relating to disallowance of prior-period expenses was deleted by the Tribunal in the assessee’s own case for assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2008-09 are as under:

“5. On careful consideration of above contention and submissions of both the parties and careful perusal of the record placed before us, inter alia decision in assessee’s own case for AY 2007-08 (supra), we observe that the same issue was decided by coordinate bench of this Tribunal in favour of the assessee with following findings and conclusions:-

“61.10. The issue herein is year of deductibility. Additional ground of appeal was filed for A. Y. 2006­07 before the Tribunal and this additional ground was not disposed of Misc. application is pending. The assessee’s contention is that the correct amount is Rs. 23.86 lakhs and not Rs. 643.05 lakhs as mentioned by the A.O. Details are given in the paper book we find that the D.R.P. has directed the assessing officer to verify the price. This working given by the assessee is not properly verified by the A.O. The AO should have verified the claim of the assessee. We direct the assessing officer to verify the claim of the assessee. Be it as it may, the genuineness of the expenditure is not in doubt and as it is a question of excess/ short provision of discount in respect of sales effected, we are of the considered opinion that method of accounting followed by the assessee need not to be disturbed as it is being consistently followed over the years and as the revenue has accepted the same. The assessee’s claim that the amount of Rs. 23.86 lakhs is not prior period expenses is not seriously disputed by the revenue. As to the balance amount Rs. 90,000 under the festival offer scheme, it was marginal variation that arose due to estimation of liability towards sales discount to be given to dealers. Thus the disallowance cannot be sustained both on the grounds of materiality as well as consistency. Similar issues were dealt by us while disposing of ground nos. 7 and 7.1. Consistent with the view taken therein, we allow this ground of the assessee for statistical purposes.”

6. During the argument, both the parties fairly agreed that the assessee claimed deduction for following miscellaneous expenses aggregating to Rs.7,09,31,076 but in the assessment order, the amount of Rs.7,15,91,826 has been incorrectly reported on account of totaling expenses. From page no. 14-16 of DRP order, we observe that the DRP has also pointed out mistake of totaling. At the outset, we observe that the Assessing Officer has nowhere disputed the genuineness of the expenditure claimed by the assessee and if assessee is denied deduction, then it would never get deduction for such expenses. From DRP Order, we also observed that the DRP has followed its decision in respect of immediately preceding year. At the same time, we observe that the mistake of totaling and the working given by the assessee has not been properly verified at the end of Assessing Officer and the same should have been verified by the Assessing Officer. Under above circumstances, we hold that the issue is squarely covered in favour of the assessee by the decision of Hon’ble ITAT ‘C’ Bench in assessee’s own case for AY 2007-08 (supra) and we direct the Assessing Officer to allow the claim of the assessee after proper examination and verification. Accordingly, going consistent with the view taken by this Tribunal in assessee’s own case for the immediately preceding year to the year under consideration in this appeal, we hold that ground no. 1 of the revenue being devoid of merits deserves to be dismissed and we dismiss the same.”

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant’s own case for the earlier years. We dismiss ground No. 3 of the appeal of the revenue.”

21.0.1 It can be seen that the facts are identical in the previous Assessment Years 2009-10 to 2013-14 and squarely covered in favour of the assessee. Therefore, Ground Nos. 7 to 7.2 are allowed in favour of the assessee.

22.0.0 With respect to Ground No. 8 to 8.3 relating to provision of Head office expense reversed in succeeding year amounting to Rs.11.80 crores, the Ld. AR submitted that at the end of year, the assessee had made provision for various expenses incurred during the year on the basis of reasonable estimate, since in the absence of receipt of bills/invoices from the vendors, which are received in the succeeding year, the exact amount payable there against was not ascertainable. In the succeeding year, on receipt of bills from vendors, exact amount payable to vendors was ascertained. The amount of provision in excess of actual amount payable was reversed in the books of account. In case of shortfall, the profit and loss account was debited with the amount of shortfall. The Ld. AR submitted that the aggregate provision for advertisement expenses incurred at the head office made at the end of the relevant previous year, which was reversed in succeeding year amounted to Rs. 11.80 crores. In the assessment order, the Assessing Officer disallowed the provisions made at the end of the year of Rs. 11.80 crores which were reversed in the succeeding year on receipt of bills from the vendors on conclusion of negotiations with the vendors, on the ground that the provisions to that extent were excessive and represented contingent liability, which was not allowable deduction. That apart, the assessing officer also added back the aforesaid total provision while computing ‘book profit’ under section 115JB, holding the same to be an unascertained liability.

22.0.1 The Ld. AR submitted that the provision for advertisement expenses, in the year under consideration as well, has been made on the basis of actual Purchase orders and agreements and, thus, has been made on reasonable and scientific basis. Detail of provisions for advertisement was submitted before the authorities. The Ld. AR submitted that the Tribunal, in the immediately preceding assessment years, viz. AYs 2010-11 and 2011-12, has decided the issue in favour of the assessee by following the order for assessment year 2008-09 holding that the provision was made on a rational and scientific basis, and, thus, the same was to be allowed as business deduction, notwithstanding that part thereof was reversed in the succeeding year. It was submitted that the Tribunal, in coming to the aforesaid conclusion, also held that the disallowance cannot be made on issues which are revenue neutral. It was further submitted that this issue is also covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the assessment year 2008-09, wherein the Tribunal reversed the action of assessing officer in disallowing provision on the ground that the amount reversed there against in the succeeding year exceeded 15% of the amount of provision. The Tribunal held that the said approach followed by the AO had no valid basis and was purely ad-hoc. The Tribunal also held that the Assessing Officer was bound to follow the practice and stand taken by the Department on this issue in the earlier years and, accordingly, restored the matter back to the file of the Assessing Officer to reconsider the issue, having regard to the method of making provisions followed by the assessee and accepted by the Revenue in preceding years. The Ld. AR further submitted that the Assessing Officer, in the set-aside proceedings, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the assessee had computed the provision on the basis of actual Purchase Orders, which was scientific and logical in nature.

22.0.2 It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14. Further, in the order passed for assessment year 2009-10, the Tribunal also held that the provision for advertisement expenses was also allowable while computing book profit under section 115JB of the Act.

23.0 The Ld. CIT-DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

24.0.0 We have heard both the parties and perused the material available on record. On the issue under consideration, this Tribunal, in its orders for A.Ys. 2010-11 and 2011-12, has held as under:

33. We have heard the rival contentions. We agree with the submissions of the Ld. Counsel of the appellant, which, in fact, have even been agreed by the DRP and endorsed by Tribunal in the order for AY 2008-09, that a provision made for expenses on a scientific and rational basis is allowable business deduction. The provisions so made cannot be disallowed merely because; part thereof was reversed in the subsequent year at the time of actual quantification of the liabilities. We also find that the appellant had given complete details in respect of the method followed in creating the aforesaid provisions, which were made on the basis of details / information available with the company as at the end of the relevant year. We further reiterate and follow the finding given in the preceding ground of appeal that the Revenue should not make adjustment on the issues which are revenue neutral, having no impact on the overall tax liability of an assessee. While following the aforesaid principles, we observe that the present disallowance is also revenue-neutral, since the impugned amount of provision, as also admitted by the assessing officer itself, was reversed in the succeeding year and consequential offered to tax in that year. If such provision is disallowed in this year, the corresponding reduction would need to be made in the return of the succeeding year, neutralizing the entire tax liability on the appellant company. For the aforesaid cumulative reasons, we hereby delete the disallowance made by the by the Ld. Assessing officer of Rs. 1 9658 1820/– in respect of provision for advertisement expenses incurred at the head office made at the end of the relevant previous year which were reversed in the succeeding year and allow the ground No. 7 of appeal raised by the assessee.”

24.0.1 In the present Assessment Year, detail of provisions for advertisement was submitted before the lower authorities. Further, the Assessing Officer, in the set-aside proceedings for A.Y. 2008-09, vide order dated 26.02.2015, accepted the claim of the assessee and allowed relief on the aforementioned identical issue by observing that the assessee had computed the provision on the basis of actual Purchase Orders, which was scientific and logical in nature. Thus, the Assessing Officer was not right in disallowing the said expenses and also adding back the same while computing book profit, holding the same to be unascertained liability. Thus, the issue is squarely covered by the orders the Tribunal in A.Ys. 2008-09 to 2013-14.

24.0.2 Therefore, Ground Nos. 8 to 8.3 are allowed in favour of the assessee.

25.0.0 The Ld. AR submitted that Ground Nos. 9 to 9.4 relate to disallowance of alleged excessive purchases from related parties as per AS-18 amounting to Rs. 29.14 crores. It was submitted that in the course of business of manufacturing two wheelers, the assessee, inter alia, procures certain critical components like shock absorbers, carburetors, etc., which are fitted in the two- wheelers manufactured by the assessee, from a single vendor, having the requisite technology to manufacture the same, in accordance with the specifications given by the assessee. The assessee, does not procure such components from any other vendor. The Ld. AR submitted that the purchase price of components which are purchased from various suppliers are based upon negotiations with such vendors and are different due to various factors, like level of automation of vendor, amount of investment by vendor, age of the plant, capacity utilization (impacting fixed cost recovery), volume of supply, geographical differences (which could impact cost of freight, labour, power), lead time, indirect tax Costs (CST Vs VAT) etc. Further, the assessee also prefers purchasing material from certain suppliers, due to business/commercial expediency, viz., de-risking the supply chain to reduce dependence, inability of existing supplier to meet demand increase, etc. The Ld. AR submitted that the said parties are not related to assessee in terms of the provisions of section 40A (2)(b) of the Act. In addition to above, the assessee, in the course of manufacturing two wheelers, places purchase orders on vendors of certain customized intermediary products like wheel assembly, seat assembly, etc. The assessee, while placing aforesaid purchase orders to the vendors, also specifies the specifications of the raw materials/components to be used in manufacture of customized intermediary products as also the name of suppliers from whom the former vendor would purchase such materials/components at prices predetermined by the assessee. It was submitted that the AO after comparing purchase price of certain products, which were purchased from the aforesaid related parties as also from unrelated parties, held that the purchase price from related parties was excessive in order to reduce the taxable income. The AO also held that the assessee had conducted itself in such a manner that the parties do not qualify as ‘related party’ under section 40A (2) of the Act, even though said parties were related to assessee in terms of AS- 18. Accordingly, the AO computed excessive purchase price at Rs.9.73 crores in respect of purchases from related parties for which internal comparable of similar products purchased from related parties were available. In respect of other category of purchases from related parties for which no internal comparable was available, the AO worked out an amount of Rs. 19.41 crores in the same proportion as that of purchases for which internal comparable were available alleging the same to be excessive. Thus, the AO made total disallowance of Rs.29.14 crores out of purchases.

25.0.1 The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi Bench of Tribunal in the assessee’s own case for Assessment Years 2007-08 and 2008-09, wherein identical disallowance made in that year was deleted on the ground that since in the first place, the parties were not related to the assessee company in terms of section 40A (2), disallowance on ground of excessive purchase price could not have been made under that section. Further, the Tribunal held that the transactions were entered by the assessee on account of commercial expediency and when the recipients had paid tax on payments received from the assessee company, disallowance could not be made by applying provisions of section 40A (2) of the Act. The Ld. AR pointed out that similar disallowance made in the immediately preceding two Assessment Years, viz. AY 2010-11 and 2011-12 was also reversed by the Tribunal, following the aforementioned order of the Tribunal for assessment years 2007-08 and 2008-09. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

26.0.0 The Ld. CIT-DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

27.0.0 We have heard both the parties and perused the material available on record. On identical issue, this Tribunal in its order for A.Ys. 2010-11 and 2011-12 has held as under:

“55. We have carefully considered the rival contention and perused the relevant records placed before us. It was submitted by the parties that there is no change in the facts and circumstances of the case in the present assessment year compared to the assessment year for which the coordinate bench is decided this issue in the favour of the appellant for assessment year 2007 – 08 and 2008 – 09 wherein this issue has been decided by the coordinate bench as under:-

“13.14. The basic requirement for the applicability of section 40A(2) of the Act is that the payment should be made to a related person i.e. to a person referred to in clause (b), of sub-section (2) of section 40A of the Act.

13.15. In the present case, it is an undisputed fact that the payments are not made to a person mentioned in clause (b) of section 40A (2) of the Act.

13.16. Clause (a ) of sub-section (2) of section 40A of the Act provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the sub section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as it so considered by him to be excessive or unreasonable, shall not be allowed as a deduction. The object of section 40A (2) is to prevent diversion of income. An assessee who has large income and is liable to pay tax at the highest rate prescribed under the Act often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, section 40­A was added to the Act by an amendment made by the Finance Act, 1968. Clause (b) of section 40A (2) gives the list of related persons.

13.17. In the present case, it is an undisputed fact that none of the parties fall within the persons specified as defined under clause (b) of section 40A (2) of the Act. Related parties are to be considered in terms of provisions of sec. 40A (2) of the Act and not as mentioned in AS-18 issued by the Institute of Chartered Accountant. Thus, we are of the view that the provisions of section 40A (2) do not apply to the present case. Further, there is no provision under the Act which authorizes the Assessing Officer to lift the corporate veil and disallow an expenditure on the ground of reasonableness and commercial expediency unless it is established that the transaction is primarily devised to evade tax.

13.18. In the present case, it was submitted by the learned AR of the assessee that the related parties are profit-making companies and are subject to tax to at some less or the same rate of tax. Thus, there is no loss of Revenue. This submission of the assessee has not been controverted before us by the learned DR. Tax benefit alleged is factually wrong as the other compared assesses are profit making companies/assessees. There is no loss to the revenue if only the excess payment of price is taken, but this situation is not considered by the Revenue. Except for allegation that excess price is paid to reduce profit, no other evidence is gathered by assessing officer to prove that the assessee had in fact evaded or saved tax by such exercise. The argument of the Revenue fails. The allegation that the assessee has structured his associate concern so as to avoid sec. 40A (2) is also devoid of merit, as the revenue has failed to demonstrate as to how it has come to such a conclusion. The allegation means that profit is transferred to third parties, where the share holding of the assessee is not a major share holding. The allegation means that the assessee is distributing profits to companies with majority holding by unrelated parties for the purpose of reducing taxes. Such wild allegation cannot be endorsed by us.

13.19. The assessee does not dispute the fact that certain purchases are made at a rate higher than the rate paid to certain other parties for the same periods. The assessee at pages 1523 to 1523.18 of the paper book also furnished instances where purchases were made from these parties at price lower than the purchases made from unrelated parties. Further, the disallowance was made on adhoc basis without setting any benchmark for the disallowance.

13.20. Notwithstanding the above view, even assuming for a moment that the provisions of the section 40A (2) would apply to the present case, then the following propositions laid down by various courts have to be considered.

13.21. The Hon’ble Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 ITR 306 relying on CBDT Circular No. 6-P, dated 6-7-1968 held that no disallowance should be made under section 40A(2) of the Income-tax Act in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax.

13.22. Having held that the provisions of section 40A (2) of the Act does not apply to the facts of the case. We now proceed to answer whether the action of the Assessing Officer in disallowing the expenditure on the ground of commercial expediency is justified.

13.23. The Hon’ble Supreme Court in the case of CIT vs Walchand & Co [1967] 65 ITR 381 in the context of deductibility of expenditure under Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] held as under:

“In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue”.

13.24. Further, reference is also drawn to the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) , where in it was held as under:

“….that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent business man would act. The authorities must not look at the matter from their own view point but that of a prudent businessman….”

13.25. It is a well settled principle that Commercial expediency cannot be judged by the Revenue from its point of view. In the present case, we are of the view that the assessing officer has made this disallowance based on surmises and conjectures without properly examining the facts on record and without bringing any evidence that the purchases were made at an excessive price compared to fair market value to evade tax.

13.26. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. Hence, we uphold the grounds of the assessee.”

In view of the above about decision of the coordinate bench in appellant’s own case and further failure on part of the revenue to controvert any of the findings in the earlier order of the tribunal or pointing out any contrary decisions on this issue, the respectfully following the order of the coordinate bench to not inclined to uphold the disallowance made by the Ld. Assessing officer on account of the purchases of Rs. 7 2.40 crores made from the parties who are related parties in terms of accounting standard 18 issued by the Institute of chartered accountants of India but not in terms of provisions of section 40A (2) of the income tax act. In the result ground No. 11 of the appeal of the assessee is allowed.”

27.0.1 Admittedly, the issue is squarely covered by the order of the Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the Tribunal has in the appeals for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

27.0.2 Therefore, Ground Nos. 9 to 9.4 are allowed in favour of the assessee.

28.0.0 As regards Ground Nos. 10 to 10.3 relating to payment received on behalf of Hero Honda Fin Corp. Ltd. (HFCL) deemed as dividend under Section 2(22)(e) amounting to Rs.22.26 crores, the Ld. AR submitted that Hero Fin Corp. Ltd. (HFCL) is a related company which is engaged primarily in the business of financing of vehicles. It was submitted that in pursuance of the said business HFCL extends to the dealers of the assessee company, facility of financing vehicles purchased by the dealers from the assessee company. The dealers on purchase of vehicles from the assessee, get the bill of purchase raised by the assessee, discounted from HFCL and remit payment to the assessee. The dealers are required to make payment of aforesaid discounted bills to HFCL on maturity thereof. Subsequently, when payments by dealers to HFCL are due to the dealers, due to convenience of facility of collection centers of the assessee available all over India, make payment into the assessee’s bank account, for and on behalf of HFCL, which is in turn remitted by the assessee to HFCL in 2-3 days. It was submitted that the Assessing Officer held that the aforesaid amount received by the assessee from dealers was loan/advance given by HFCL to assessee and consequently deemed the same as dividend under section 2(22)(e) of the Act. It was further observed that the aforesaid advances were not given by HFCL to the assessee in the ordinary course of business since the aforesaid payments were given by customers of HFCL and not by HFCL directly.

28.0.1 The Ld. AR submitted that in AY 2007-08, the Tribunal decided the issue in favour of the assessee by holding that assessee’s intention did not reflect that the amount was received as loan or advance so as to attract the provisions of section 2(22)(e) of the Act. The Tribunal further held that the assessee was holding the money as a custodian and the amount would be exempted in terms of clause (ii) section 2(22)(e) since the amount was given in the ordinary course of business. It was also submitted that in assessment years 2008-09 to 2013-14, the Tribunal followed the order for Assessment Year 2007-08 and deleted the disallowance.

29.0 The Ld. CIT-DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

30.0.0 We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 held as under:

“214) We have heard the rival contentions. We note that similar issue relating to addition of deemed dividend was deleted by the Tribunal in the assessee’s own case for assessment year 2007­08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007­08 are as under:

“16.27. Section 2(22)(e), is a deeming section and it is well settled that it should be strictly interpreted. In the present case, the intention of the parties did not reflect that it was an advance or loan so as to attract section 2(22)(e). The assessee in this case was holding the money received from dealers as custodian of HHFL. There is no privity of contract between the assessee and HHFL. There is no positive act of granting loan or advance given by HHFL to the assessee. There is neither a stipulation for payment of interest or period of repayment. Further, the assessee has not used the funds for its own purposes, as admittedly the assessee is a cash rich company, not requiring loans. This fact is not disputed by the Revenue. The assessee was used as channel for remittance of money by the dealers to HHFL for the purpose of convenience and from assessee’s a standpoint this is business expediency. We are unable to appreciate the conclusions drawn by the assessing officer that this is a deemed loan. In our view, by no stretch of imagination it can be said that there was any amount of advance or loan given by HHFL to the assessee.

16.28. Even assuming that the transaction is in the nature of loan, we have to agree with the arguments of the Ld. AR of the assessee that the transaction cannot be deemed as dividend in terms of exemption provided in clause (ii) of section 2(22)(e) of the Act, since the loan would be considered as given by HHFL, which is engaged in the business of money lending, in the ordinary course of its business. Therefore, the amount cannot be deemed as dividend in the hands of the assessee. The arguments of the Ld. DR that since no interest was charged/ chargeable thereon from the assessee, the aforesaid loan cannot be said to be given in the ordinary course of business of HHFL is taken to its logical conclusion, supporting our view that this is not a loan or advance.

16.29. Considering the decision of the Hon’ble Delhi High Court and the intent of the Legislature in introduction of Section 2(22)(e) of the Act, we are of the view that the transaction in question would not fall within the provisions of section 2(22)(e) of the Act. Accordingly, this ground of the assessee is allowed.”

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant’s own case for the earlier years. We dismiss ground No.6 of the appeal of the revenue.”

30.0.1 This issue is also squarely covered by the order of the Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the Tribunal has in the appeals for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

30.0.2 Therefore, Ground Nos. 10 to 10.3 are allowed in favour of the assessee.

31.0.0 As regards Ground Nos. 11 to 11.4 relating to TDS on quarterly targets and turnover discount and Sales Discount amounting to Rs. 46.31 crores, it was the contention of the Ld. AR that during the relevant year, the assessee incurred expenditure of Rs.154,35,32,553/- on account of various incentives/discounts offered to dealers under various schemes on purchase of spare parts/vehicles from the assessee. Out of the aforesaid expenditure, Rs.100,84,49,593/-relates to amount of discounts offered by the company in various stockists/dealers, on purchase of spare parts made by the latter in accordance with sales incentive/discount scheme prevalent during the relevant previous year. The assessee has further given trade discount amounting to Rs.53,50,82,960/- to the dealers on the sales invoice at the time of sales. It was submitted that the Assessing Officer held that the assessee was liable to deduct tax from aforesaid discounts/incentives under section 194H of the Act since the payments made were on the basis of performance of dealers and targets achieved by dealers which was not in the nature of “discount” as the same was not given at the time of taking delivery of goods by the dealers but was given subsequently. The Assessing Officer held that incentive paid by the assessee to dealers was not in the nature of discount, but fell within the meaning of the term ‘commission’ as defined in section 194H of the Act and, thus, the assessing officer disallowed 30% of the entire expenditure of Rs. 1,00,84,49,593/- under section 40(a)(ia) of the Act.. Further, the AO also disallowed 30% of total trade discount of Rs.53,50,82,960/-crores given to dealers on sales invoice at the time of sale while alleging that the same was based on achievement of turnover targets which represented commission on which TDS under section 194H was liable to be deducted.

31.0.1 The Ld. AR submitted that the Tribunal in Assessment Year 2007-08 decided the issue in favour of the assessee relying on the decision of Hon’ble Delhi High Court in the case of CIT vs. Mother Dairy Ltd. (ITA No. 1925/2010) and Jai Drinks Pvt. Ltd. (336 ITR 383), holding that the discount in question is not in the nature of commission but an incentive for higher sale targets. The Ld. AR further submitted that the aforesaid finding was followed by the Tribunal in the AYs 2008-09 to 2013-14 wherein similar disallowance made by the Assessing Officer was deleted.

32.0 The Ld. CIT-DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal and the Hon’ble High Court.

33.0.0 We have heard both the parties and perused the material available on record. The Tribunal for A.Ys. 2010-11 and 2011-12 held as under:

“75) We have heard the rival contentions. As dealership agreement entered between the appellant and dealers is on a principal-to-principal basis and dealers do not act as agents of the appellant while purchasing and further selling the vehicles. Accordingly, the incentives offered at the time of purchase of vehicles do not fall within the meaning of commission u/s 194H of the Act. Further, the issue is squarely covered by the decision of the ITAT in assessee’s own case in AY 2008-09 wherein following the ITAT decision in assessee’s own case for the year AY 2007-08, it was observed as under –

“148. From the bare reading of the decision of the Tribunal in assessee’s own case for AY 2007-08 (supra), we observe that after dealing with rivals submissions and contentions of both the parties, the tribunal reached to the following finding and conclusion deciding the issue in favour of the assessee. The relevant operative part of the order of the Tribunal for AY 2007-08 in assessee’s own case (supra) read as under-

“45.11. The facts of this case clearly demonstrate that what is given to the stockiest/ dealers is discount on the purchase price and not any commission. The stockiest/ dealers purchase spare parts/ vehicles from the assessee. They are not commission agents. Sale consideration is paid by these parties to the assessee. As a matter of incentive for higher sale the assessee grants discount if the stockiest/ dealers achieve a particular volume of transaction. Thus, in our view the discount in question is not in the nature of commission or the brokerage which attracts sec. 194H. In the case of CIT Vs. Mother Dairy Ltd. (ITA no. 1925/2010(Del) the Hon’ble Delhi High Court was considering similar case and held as follows:

“3. The assessee explained in writing that it sold the products to the concessionaires on a principal to principal basis, that the concessionaires buy the products at a given price after making full payment for the purchases on delivery, that the milk and other products once sold to the concessionaires became their property and cannot be taken back from them, that any loss on account of damage, pilferage and wastage is to the account of the concessionaires and that in these circumstances the payment made to the concessionaires cannot be treated as “commission” for services rendered and consequently there was no liability on the part of the assessee to deduct tax. It is irrelevant that the concessionaires were operating from the booths owned by the Dairy and were also using the equipment and furniture provided by the Dairy. That fact is not determinative of the relationship between the Dairy and the concessionaires with regard to the sale of the milk and other products. They were licensees of the premises and were permitted the use of the equipment and furniture for the purpose of selling the milk and other products. But so far as the milk and the other products are concerned, these items became their property the moment they took delivery of them. They were selling the milk and the other products in their own right as owners. These are two separate legal relationships. The income tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk and the other products from the booths owned by the Diary and were using the equipment and furniture in the course of sale of the milk and other products, they were carrying on the business only as agents of the Diary.”

45.12. The Hon’ble High Court held that in such circumstances S.194H is not attracted.

45.13. In the case of Jai Drinks (P) Ltd. 336 ITR 383 (Del.), the Hon’ble Delhi High Court has held as follows:

“Held, dismissing the appeal, that a perusal of the agreement showed that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to purchase products at a pre- determined price from the assessee for selling them. Both the assessee and the distributor had been collecting and paying their sales tax separately. The CIT(A) and also the Tribunal rightly held that the payments being made by the assessee to the distributor were incentives and discounts and not commission.”

45.14. Respectfully following the propositions laid down in the aforementioned cases we allow this ground of the assessee.”

76) In that view of the matter, the Ld. departmental representative could not point out any decision contrary to the above finding of the coordinate bench or change in the facts and circumstances of the case, therefore respectfully following the decision of the coordinate bench in the appellant’s own case for assessment years 2007-08 and 2008-09 discussed supra, we delete the disallowance made by the Ld. assessing officer on account of expenditure of Rs. 3 6880 2598 towards the quarterly target on turnover discount on trade discount of Rs. 2 7744 7608 given to the dealers. In the result ground No. 15 of the appeal of the assessee is allowed.”

33.0.1 Thus, this issue is also covered in favour of the Assessee by the Tribunal order for A.Ys. 2010-11 and 2011-12 as well as the decision of the Hon’ble High Court in case of Mother Dairy Ltd. (supra). We also find that the Tribunal has, in the appeals for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

33.0.2 Therefore, Ground Nos. 11 to 11.4 are allowed in favour of the assessee.

34.0.0 The Ld. AR submitted that Ground Nos. 12 to 12.3 relate to the issue of TDS of on legal and professional charges amounting to Rs.1.94 lacs. It was submitted that during the relevant year, the assessee had incurred legal and professional expenses, amounting to Rs.6,46,644/- on account of reimbursement of actual expenses towards conveyance, air fare, out of pocket expenses, taxi charges, lodging etc. incurred and claimed by various persons on cost to cost basis. The details of said expenses were submitted before the authorities. The Assessing Officer disallowed 30 % of the aforesaid expenses amounting to Rs.1.94 lacs, invoking section 40(a)(ia), for the failure of the assessee to deduct tax at source there from under section 194J of the Act.

34.0.1 The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi Bench of Tribunal in the assessee’s own case for the Assessment Years 2007-08 and 2008-09, wherein disallowance of expenditure on account of re-imbursement of out-of-pocket expenses incurred by professionals/vendors under section 40(a)(ia) was deleted on the ground that same did not have any element of income in the hands of the recipient. It would also submitted that similar disallowance made in the draft assessment order, but subsequently deleted by the Ld. DRP, was challenged in Revenue’s appeal for AY 2010-11 and 2011-12. However, the Tribunal upheld the order of the Ld. DRP and confirmed the deletion of disallowance on account of non-deduction of tax on reimbursement of expenses following the order for assessment years 2007-08 and 2008-09. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010­11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

35.0 The Ld. CIT – DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

36.0.0 We have heard both the parties and perused the material available on record. The Tribunal held in A.Ys. 2010-11 and 2011-12 as under:

“222) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of professional expenses was deleted by the Tribunal in the assessee’s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007-08 are as under:

“35.8. It is the case of the assessee that it had reimbursed the expenses incurred by various consultants and vendors on travelling and out of pocket expenses. It is also claimed that out of an amount of Rs. 10.68 lacs expenses to the extent of Rs. 6.01 lacs were made after verifying the supporting vouchers for claims raised by the vendors. Balance amount of Rs. 4.66 lacs were based on self certification. In our view such reimbursement of expenditure has no element of income embodied in it. Thus, we apply the following decisions wherein it is held that payer is not obliged to deduct tax at source from reimbursement of expenses:

– United Hotels Ltd. Vs. ITO 93 TTJ 822;

– Karnavati Co-op. Bank Ltd. Vs. DCIT 134 TTJ 486 (Ahd.).

35.9. Respectfully following the same, the ground is allowed in favour of the assessee.”

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant’s own case for the earlier years, We dismiss ground No.8 of the appeal of the revenue.”

36.0.1 In the present Assessment Year, the Assessing Officer disallowed the aforesaid expenses, invoking section 40(a)(ia), for the failure of the assessee to deduct tax at source there from under section 194J of the Act. But, it is pertinent to note here that the Assessing Officer did not doubt that the payment was made by assessee towards reimbursement of expenses. It was still held that assessee was liable to deduct tax at source under section 194J of the Act. Thus, the issue is squarely covered by the order of the Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the Tribunal has, in the appeals for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

36.0.2 Therefore, Ground Nos. 12 to 12.3 are allowed in favour of the assessee.

37.0.0 With respect to Ground Nos. 13 to 13.2 relating to gains from sale of investments income treated as business income amounting to Rs.319.87 crores, it was the submission of the Ld. AR that the assessee invests surplus funds arising in the course of business under various modes of investment like mutual funds/PMS, shares, etc. The gains realized from sale of such various instruments, amounting to Rs. 319.87 crores during the relevant previous year, were disclosed under the head ‘capital gains.’ The Assessing Officer held that, having regard to the magnitude/volume of total turnover from sale of investments, the aforesaid income was taxable under the head ‘business income’.

37.0.1 The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi Bench of the Tribunal in the assessee’s own case for the AYs 2007-08 and 2008-09, wherein after considering the legal position and intention of the assessee company, the Tribunal came to the conclusion that income from sale of shares/mutual funds/PMS etc.

94 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT would be taxable as capital gains, instead of business income brought to tax by the assessing officer on the basis that the assessee (a) was not a trader in stock; (b) had no intention of holding the shares as stock; (c) sales were effected by delivery (d) that the department had itself in earlier years taxed such transactions under the head capital gains. The Ld. AR pointed out that the Tribunal, vide order dated 24/10/2006, passed in the assessee’s own case for AY 2010-11 and 2011-12, reversed the action of AO in changing the head of income and held that in cases where an assessee treats investments made in shares as capital assets, in view of Circular 6/2016 of the Board, gains/profits on sale of such investments shall be treated as capital gains and not income from business/profession. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

38.0 The Ld. CIT- DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

39.0.0 We have heard both the parties and perused the material available on record. The Tribunal for A.Ys. 2010-11 and 2011-12 held as under:

“99) We have heard the rival contentions. We have gone through the order passed by the Tribunal for the assessment year 2007­08, which was followed in appeal order for AY 2008-09. The Tribunal in that year went through the entire facts, which are similar to the year under consideration, and the legal position before coming to the conclusion that the gains arising from investment of surplus funds in shares/mutual funds/PMS as part of cash management policy cannot lead to the conclusion that the appellant was carrying on business to bring to tax such income under the head “business” as against ‘capital gains’ offered by the appellant. The Ld. Departmental representative could not point out any change in the facts and circumstances of the case of the current assessment year compared to the assessment year for which the tribunal is decided in the appellant’s own case for earlier years. No other judicial precedent was also cited by which we could deviate from the order of the coordinate bench in the earlier years in the appellant’s own case. The relevant observations in the appeal order for AY 2007-08 are as under:

“65.20. The issue that emerges for consideration is whether the gains that arose to the assessee from investment in debt mutual funds/PMS/ shares are to be taxed under the head “business income” or under the head “capital gains”.

………………..

65.28. Now, we proceed to analyze the facts of the present case in the light of the principles laid down by the Courts (Supra) for determining the nature of the transaction vis a vis capital gains vs. business income:

Intention of the assessee at the time of the purchase of shares:

65.29. The business of the assessee is not to deal in shares and securities. The investment was made with a view to earn capital appreciation and to use the spare fund optimally instead of keeping it in the banks. For the year under appeal, the assessee earned dividend income of Rs.22.61 crores from investments held in shares and mutual funds.

Treatment in the books of accounts:

65.30. It is an undisputed fact that the assessee had treated the transaction as investment in its books of accounts and not as stock in trade. The assesse has shown the investments in shares both at the beginning and closing of the year as an investment only and not as stock in trade.

65.31. The assessee has valued the investments at cost as per Accounting standard 13- Accounting for Investments and not in accordance with Accounting Standard –2 which deals with valuation of inventories.

65.32. The assessee has been holding the securities/ shares as investments from year to year and consistently following the same method of accounting for the purpose of disclosure and valuation. This treatment by the assessee was accepted by the Revenue for the past years.

65.33. The assessee had earned income from both long term and short term capital gains which means the assessee has also held shares for a period of more than 12 months.

Whether the investments are made out of borrowed funds

65.34. The investments were made from surplus funds of the assessee and there were no borrowings. The investments were made to optimally utilize the spare funds instead of keeping the same idle in the bank accounts. The investments were made in mutual funds (debt and liquid funds) and through portfolio management schemes/ IPOs.

65.35. The co-ordinate bench of the Delhi ITAT in the case of Narendra Gehlaut vs. JCIT [ITA No 1648/ Del/ 2010] held that despite borrowing, gains on shares assessable as Short term capital gains and not business profits. The decision is rendered considering the CBDT Circular No 4/2007 and various judicial precedents on the subject.

Frequency of the transactions

65.36. Out of the total sale value of Rs 13,690.84 crores realized from the investments, an amount of Rs 12,330.33 crores relates to sale of short term debt mutual funds and liquid funds in which the transactions are effected on daily basis (i.e. surplus amounts are invested and the withdrawals are made in a short span depending on the business needs of the assessee). These funds were invested mainly into money market instruments, short-term corporate deposits and treasury. Most schemes have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours.

65.37. The Assessing officer has brought the transaction to tax under the head “Business income” mainly on the ground that the volume of the transaction of such investments was high and the assessee is undertaking the trading of stocks and mutual funds regularly and systematically. However, we observe that there is not much frequency in sale/purchase of investments, from analysis carried out at page 526 of objections in Form 35A. It is not the case that the assessee has indulged in regular trading in shares on day to day basis.

65.38. The Mumbai Bench of the ITAT in the case of Janak S. Rangwala (11 SOT 627) observed that mere volume and magnitude of transaction will not alter the nature of transaction if the intention was to hold the shares as investment and not in stock in trade.

Investments in mutual funds –

65.39. Out of the total income earned from mutual funds, almost 67.34% of the total income earned from investments made in mutual funds was for a period of more than one year.

Investments in shares –

65.40. Investment in shares was primarily made either through PMS or under Initial Public Offer. Under PMS, the company advances funds to the Portfolio Manager, who in turn makes investment in various shares. In substance the investments under PMS are similar to investment in mutual funds. The assessee, reiterated that it is only interested in the return on funds invested and does not act as a dealer/trader, so as to be regarded as being engaged in business activity.

65.41. In view of the above factual matrix it emerges that assessee is:

(i) not a trader in stocks

(ii) Intention of holding the shares as investment/ stock is manifest.

(iii) Sales are effected by delivery.

(iv) Department has itself in earlier years taxed such transactions under the head “Capital Gains”.

65.42. Considering these facts and applicable judicial precedents on the issue, we are of the considered opinion that the income in question can be taxed only under the head “Capital Gains” and not under the head business income. This ground of the assessee is allowed.”

100) In addition to the aforesaid observations, the appellant in this year also has benefit of the recent Circular No.6 of 2016 dated 29.2.2016 issued by the CBDT, wherein with an idea to reduce litigation on this issue of classification of the head of income arising from sale of shares / mutual funds, etc., the CBDT has opined that gains arising from sale of such shares/securities held for a period of more than 12 months and shown as capital gains by the assessee should not be disputed by the assessing officer. Having regard to the aforesaid intent of the Circular where a consistent method has been followed by an assessee to treat the investment as on capital account corroborated with disclosure in balance sheet as investment, the same consistent stand should not be disputed by the assessing officer. It is also not disputed by the Ld. assessing officer that the capital gains arising on the various investments are held for less than 12 months and are not longterm capital gain. In view of the aforesaid reasons also, while respectfully following the appeal orders for AY 2007-08 and 2008-09, we reverse the action of the assessing officer in changing the head of income surplus arising from sale of shares/mutual funds, etc. therefore ground No. 20 of the appeal of the assessee is allowed.”

39.0.1 In the year under consideration, the issue is identical to the AYs 2010- 11 and 2011-12 wherein the Tribunal allowed this issue in favour of the assessee. We also find that the Tribunal has in the appeals for the assessment years 2009-10, 2012-13 and 2013­14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

39.0.2 Therefore, Ground No. 13 to 13.2 are allowed in favour of the assessee.

40.0.0 The Ld. AR submitted that Ground Nos. 14 to 14.7 are relating to disallowance under Section 14A as per Rule 8D amounting to 1.65 crores. It was submitted that during the relevant previous year, the assessee company had earned dividend/interest income of Rs. 14.49 crores from investments in shares, bonds, and mutual funds, which was exempt under section 10(34)/10(35)/10(15)(iv)(h) of the Act. In view of the provisions of section 14A of the Act, the assessee had suo moto disallowed Rs.66.88 lacs in the return of income, being salary of two employees of the company who were involved in treasury function along with portfolio management fee. It was submitted that in the assessment order, the Assessing Officer, did not accept the method of disallowance computed by the assessee under section 14A and made further disallowance of Rs. 1.65 crores invoking provisions of Rule 8D of the Rules after reducing the suo moto disallowance made by the assessee in the return of income. It was submitted that in the assessment order, the assessing officer, while computing `book profit’, made an adjustment of Rs.1.65 crores computed under section 14A read with Rule 8D of the Rules, without assigning any reason.

40.0.1 The Ld. AR submitted that as per section 14A(2), disallowance under that section as per Rule 8D can be made only if the Assessing Officer records satisfaction/finding as to the incorrectness in the method of disallowance followed by the assessee. In the absence of any satisfaction recorded in the assessment order, the disallowance as per Rule 8D needs to be deleted. Reliance in this regard was placed on the following decisions:

– CIT vs. Walfort Share & Stock Brokers 326 ITR 1(SC)

– Godrej & Boyce Manufacturing Company Ltd. VS. DCIT: 394 ITR 449(SC)

– Maxopp Investment Ltd: 347 ITR 272 (Del.)- Affirmed by the Hon’ble Supreme Court in 402 ITR 640

– CIT v. Essar Teleholdings Ltd.: 401 ITR 445 (SC)

– PCIT v. Vedanta Ltd.: [2019] 261 Taxman 179 (Delhi)

– H.T. Media Limited v. PCIT: 399 ITR 576 (Del)

– Eicher Motors Ltd. vs. CIT: 398 ITR 51 (Del)

– PCIT vs. U.K. Paints (India) (P.) Ltd.: 392 ITR 552 (Del.)

– CIT v. Abhishek Industries Ltd.: 380 ITR 652 (P&H)

– CIT vs. I.P. Support Services India (P) Ltd: 378 ITR 240 (Del)

– Joint Investments (P.) Ltd. v. CIT: 372 ITR 694 (Del) – CIT v. Taikisha Engg. India Ltd.: 370 ITR 338 (Del.)

40.0.2 It was further submitted by the Ld. AR that even otherwise, there is no nexus of expenses, like interest expenditure and other administrative expenses with investments, warranting disallowance u/s 14A.

40.0.3 On the issue of interest expenditure, the Ld. AR submitted that the assessee is a cash rich company, which does not borrow funds for making investment. The marginal interest expenditure of Rs. 2.10 crores was incurred on other temporary loans/dealers deposit, having nexus with main business function. It was further argued that no direct nexus of interest expenditure with investments or earning of dividend income was established by the assessing officer, for which the initial burden was on the assessing officer. The Ld. AR submitted that the assessee had substantial free reserves of Rs 2,946.30 crores at the beginning of the relevant previous year and had also generated substantial surplus/interest free funds of Rs. 814.51 crores during the year, which were sufficient to make net investment of Rs. 669.19 crores during the year. In such circumstances, it is to be presumed that only interest free funds have been utilized for making investments during the year. Reference, in this regard, was made to the following decisions:

– East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627 (SC)

– CIT v. Reliance Industries Ltd.: 410 ITR 466 (SC)

– CIT v. UTI Bank Ltd.: 215 Taxman 8 – The Supreme Court dismissed the revenue’s SLP in Civil Appeal No. 468/2014

– Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.)

– PCIT v. Basti Sugar Mills Co. Ltd.: ITA No. 205 of 2018 (Del HC)

– PCIT v. Reebok India Company: [2018] 259 Taxman 100 (Delhi)

– Indian Explosives Ltd. V. CIT: 147 ITR 392 (Cal.)

– Alkali & Chemicals Corp of India Ltd. v CIT: 161 ITR 820 (Cal)

– CIT v Radico Khaitan Ltd : 274 ITR 354 (All)

– CIT v Dhampur Sugar Mills Ltd : 274 ITR 370 (All)

– CIT v. United Collieries Ltd. : 49 Taxman 227 (Cal)

– CIT v. Enamour Investment Ltd.: 72 Taxman 370 (Cal)

– CIT v. Caroline Investment Ltd.: 87 Taxman 238 (Cal)

– CIT v. Kanoria Investment (P) Ltd.: 232 ITR 7 (Cal)

– CIT vs. Hotel Savera: 239 ITR 795 (Mad)

– Smt. Chanchal Katyal v. CIT: 298 ITR 182 (All.)

– CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom)

– CIT v. HDFC Bank Ltd.: 284 CTR 414 (Bom.)

– Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726 & 6102/Del/2012 (Del)

40.0.4 Reliance was also placed on the following cases, wherein, the Courts have repeatedly held that interest expenditure cannot be disallowed under section 14A of the Act, where the assessee had sufficient surplus funds and there was no finding by the assessing officer of any direct nexus of borrowed funds with investments:

– Godrej & Boyce Manufacturing Company Ltd. VS. DCIT: 394 ITR 449(SC)

– Pr. CIT vs. GMM Pfaulder Ltd.: ITA No. 506 of 2017 dated 31.07.2017 (Guj)

– CIT v. Max India Ltd.: 388 ITR 81 (P&H)

– CIT vs. Suzlon Energy Ltd.:[2013] 215 Taxman 272 (Gujarat)

– CIT vs. M/s. Ashok Commercial Enterprises: ITA No. No.2985 of 2009 (Bom)

– Lubi Submeribles Ltd.: ITA No.868 of 2010 (Guj)

– CIT vs. K. Raheja Corporation Pvt Ltd: ITA No.1260 of 2009

– Gujarat State Fertilizers and Chemicals Ltd : Tax Appeal No. 82 of 2013 (Guj HC)

– Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726/Del/2012 (Del)

– Eimco Elecon (India) Ltd. v. Addl. CIT: 142 ITD 52 (Ahd.)

40.0.5 As regards Administrative expenses, the Ld. AR submitted that all the expenses, other than the suo-moto disallowance by the assessee, related to main business function of manufacturing of vehicles. The Ld. AR pointed out that the Tribunal in the assessee’s own case for the assessment years 2007-08 and 2008-09 had set aside the matter to the file of the Assessing Officer to be decided afresh as per law, having regard to the satisfaction to be recorded qua correctness of the suo-moto disallowance made by the assessee in the return of income. It was submitted that the AO, in the set aside proceedings for assessment year 2007-08, vide order dated 30.10.2014 passed under section 254/143(3) of the Act did not make any disallowance in respect of interest expenses since there was no nexus between the income and such expenditure. The AO, however, made disallowance of such administrative expenses under section 14A in the proportion the total profit before tax bears to tax free income, which was upheld by the Ld. CIT (A) vide order dated 01.02.2018. The Ld. AR further submitted that the Tribunal, vide consolidated order dated 24/10/2016 passed in ITA Nos. 1545/Del/2015 and 914/Del/2016, in assessee’s own case for the immediately preceding assessment years AY 2010-11 and 2011-12, decided the issue in favor of the assessee on the ground that there was no reason/satisfaction recorded by the Assessing Officer under section 14A(2)/(3) of the Act while proceeding with disallowance made under section 14A of the Act. The Tribunal also held that there was nothing to demonstrate that any additional expenditure had been incurred by the assessee for earning exempt income and that the assessee had surplus funds/idle funds for making investment.

40.0.6 It was further pointed out by the Ld. AR that the Tribunal, vide recent order dated 31.05.2018, while dismissing the appeal of the Revenue for assessment year 2006-07, held that the assessing officer is bound to record satisfaction qua the incorrectness of the suo moto disallowance made by the assessee. It was submitted that in the relevant assessment year also, the assessing officer failed to record the mandatory satisfaction qua the incorrectness of the suo moto disallowance made by the assessee in the return of income.

40.0.7 Further, in all fairness, the Ld. Counsel pointed out that the Tribunal, while deciding the issue in the assessment years 2009-10, 2012-13 and 2013-14 restored the matter to the file of the assessing officer to decide the issue afresh after taking into consideration the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT: 402 ITR 640.

40.0.8 The Ld. AR further submitted that insofar as disallowance of Rs. 1.67 cores made under section 14A read with Rule 8D of the Rules was concerned, it cannot be added while computing book profits under section 115JB of the Act. It was submitted that section 14A contained in Chapter IV of the Act begins with the phrase – “For the purposes of computing the total income under this Chapter ”. Being so, section 14A has application only for the purposes of Chapter-IV. Income under the normal provisions of the Act is computed under the five heads specified in section 14 of the Act. Provisions relating to computation of income under different heads are contained in sections 14 to 59 forming part of Chapter IV of the Act. In other words, Chapter IV provides for computation of income of an assessee under the normal provisions of the Act. It was submitted that as a necessary corollary, provisions of section 14A cannot be extended to any Chapter, other than Chapter IV of the Act, i.e., while computing income under the normal provisions. It was further submitted that Section 115JB finds place under Chapter XII-B of the Act. Being so, provisions of section 14A contained in Chapter IV cannot be imported and incorporated under section 115JB, more so when clause (f) to Explanation 1 to the said section contains no reference to section 14A of the Act. Reliance in this regard was placed on the decision of the Hon’ble Delhi High Court in the case of PCIT v. Bhushan Steel Ltd.: ITA No. 593/2015, dated 29.09.2015, wherein, the Hon’ble Court upheld the decision of the Tribunal that disallowance under section 14A read with Rule 8D could not be added while computing book profits as per section 115JB and declined to frame question of law. Further, reliance was also placed on the decision of the Special Bench of the Delhi Tribunal in the case of ACIT vs. Vireet Investments (P.) Ltd: 165 ITD 27 (Del Trib.), wherein the Tribunal inter alia, placing reliance on the judgment of Hon’ble Delhi High Court in the case of Bhushan Steel Ltd. (supra), likewise, held that computation under clause (f) of Explanation 1 to section 115JB (2) of the Act is to be made without resorting to computation as contemplated under section 14A read with rule 8D of the Rules. The Ld. AR also relied upon the following decisions:

– Quippo Telecom Infrastructure Ltd v. ACIT: ITA No.4931/Del/2010 (Del ITAT)

– Beach Minerals Company (P.) Ltd. v. ACIT: ITA No. 2110/Mds/2014 (Chennai ITAT)

– Shriram Capital Ltd v. DCIT (ITA. Nos.512 &513 /Mds/2015) (Chennai ITAT)

– Scope Private Ltd. v. ACIT : ITA No. 8934/Mum./2010

– Reliance Industrial Infrastructure Ltd. v. ACIT: ITA Nos. 69 & 70/Mum/2009

– JCIT v. Reliance Capital Ltd.: ITA No. 3037/Mum/2008

– Bengal Finance and Investment (P) Ltd. v. CIT: ITA No. 5620/Mum/2010

– Essar Teleholdings Ltd v. DCIT : ITA 3850/Mum/2010

– Nahar Capital And Financial v. ACIT: ITA No. 1120/Chd/2011

– ACIT vs. Spray Engineering Devices Ltd: (2012) 53 SOT 70 (Chd.) (URO.)

– GMM Pfaudler Ltd. v. JCIT : ITA Nos. 2627 & 2923/Ahd/2008 & 3280/Ahd/2010

– Cadila Healthcare Ltd. v. ACIT: 21 Taxmann.com 483 (Ahd.)

– Reliance Petroproducts (P) Ltd. v. ACIT : ITA No. 2324/Ahd/2009

– Jindal Steel and Alloy Ltd. v. ACIT : ITA Nos. 961 & 962/Mum/2009

111 ITA No.9187/Del/2019 Hero Motocorp Ltd. vs. ACIT

40.0.9 In view of the above, the Ld. AR submitted that applicability of provisions of section 14A is confined to computation of tax liability under the five heads of income enumerated in section 4 under normal provisions contained in Chapter-IV of the Act. The said section 14A cannot be extended and read into section 115JB falling under Chapter XII-B of the Act.

41.0 The Ld. CIT – DR relied upon the Assessment Order and Order of the TPO.

42.0.0 We have heard both the parties and perused the material available on record. This Tribunal, in A.Ys. 2010-11 and 2011-12, had deleted the disallowance under section 14A of the Act on the ground of valid satisfaction not having been recorded by the Assessing Officer. Similarly, in assessment year 2006-07 the disallowance was deleted. However, we note that the aforesaid decision was not followed by the Tribunal in the recent decision for the assessment year 2013-14, wherein the issue was restored back to the file of the AO to record satisfaction. The relevant observations are as under:

“It is observed in the present case that the assessee has suo moto disallowed expenses under Section 14A of the Act. The Hon’ble Apex Court in case of Maxopp Investment Ltd. vs. CIT (2018) 402 ITR 640 (SC) held that:

“40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT (A) disallowed the entire deduction of expenditure. That view of the CIT (A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.

41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”

Though the Assessing Officer did not accept the method of disallowance computed by the assessee under section 14A and made further disallowance of Rs. 66,35,000/- invoking provisions of Rule 8D of the Income Tax Rules, 1962 after reducing the suo moto disallowance of Rs. 65.23 lakhs made by the assessee in the return of income. But the Assessing Officer has not given the proper calculation to that effect. Therefore, the matter is restored back to the file of the Assessing Officer. We direct the Assessing Officer that after taking cognizance of the the Apex Court decision, pass the appropriate order. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Therefore, Ground No. 16 to 16.7 are partly allowed for statistical purpose.”

42.0.2 Similarly, in assessment years 2009-10 and 2012-13 the matter was set aside. We have given a thoughtful consideration to the issue. As noted above, this Tribunal had restored the issue of computation of disallowance u/s 14A to the file of the Assessing Officer in Assessment Years 2006-07, 2009-2010, 2012-13 as well as in assessment year 2013-14 on identical facts. Therefore, it is our considered opinion that ends of justice would be met if in this year also, the issue is re-examined by the Assessing Officer in light of judgment of the Hon’ble Apex Court in the case of Maxopp Investment Ltd. vs. CIT (supra). Accordingly, the matter is restored to the file of the Assessing Officer. We direct the Assessing Officer to pass appropriate orders in accordance with law after duly considering the judgment of the Hon’ble Apex Court in the case of Maxopp Investment Ltd. vs. CIT (supra) after giving proper opportunity to the assessee to present its case.

42.0.3 As regard the addition of disallowance of Rs. 1.67 cores made under section 14A read with Rule 8D of the Rules while computing book profits under section 115JB of the Act, we find that the said issue is squarely covered in favour of the assessee by the order of the Hon’ble Delhi High Court in the case of PCIT v. Bhushan Steel Ltd.: ITA No. 593/2015 and by the order of the Special Bench of the Tribunal in the case of ACIT vs Vireet Investments (P.) Ltd: 165 ITD 27 (Del Trib.), accordingly the addition made in this regard is deleted.

42.0.4 Therefore, Ground Nos. 14 to 14.7 are allowed for statistical purposes.

43.0.0 It was submitted by the Ld. AR that Ground No. 15 relates to depreciation on Model Fee amounting to Rs. 39.5 lacs. It was submitted that the assessee manufactures two-wheelers under technical collaboration agreement entered into with Honda Motor Co. Ltd., Japan (‘Honda’). In accordance with the above collaboration agreement, the assessee pays model fee to Honda to obtain design/know-how to manufacture a new model of two-wheeler. The said expenditure is incurred prior to commencement of production of the new model. It was submitted that the assessing officer held that the expenditure incurred by the assessee towards model fee is directly related to manufacture of new models of two-wheelers and. therefore, needs to be attributed to the value of closing stock of finished goods of two-wheelers. Accordingly, the assessing officer, on proportionate basis, worked out a sum of Rs.39,50,000/- out of depreciation on model fee debited to the profit and loss account, as attributable to the value of closing stock and made addition of the said amount to the income of assessee.

43.0.1 The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the Delhi Bench of the Tribunal in assessee’s own case for assessment years 2010-11 and 2011-12 wherein following the order for assessment year 2008-09, similar disallowance of depreciation on model fee was deleted by the Tribunal on the ground that expenditure was incurred on new model fees prior to commencement of production of new models of two wheelers, and even otherwise this exercise would be revenue neutral in a broader perspective as the same adjustment would be required to be made to the opening stock of finished goods for the year under consideration. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

44.0 The Ld. CIT-DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

45.0.0 We have heard both the parties and perused the material available on record. This Tribunal had held in A.Ys. 2010-11 and 2011-12 as under:

“112) We have carefully considered the rival contentions. In absence of any change in the facts and circumstances of the case or any contrary decision, We have heard the rival contentions. We find that the similar issue was raised in the assessment order for AY 2008-09, which was decided in favour of the appellant by the Tribunal in appeal order for that year by observing as under-

“219. On careful consideration of above submissions of both the parties, we are of the view that if the closing stock of the year under consideration is to be varied, then similar adjustments would need to be made in the opening stock also and corresponding adjustments would also need to be carried out in the opening stock of the succeeding year and if any addition is made in this regard, would be revenue neutral if seen in a macro perspective. From the orders of the authorities below, we clearly observe that the AO has not disputed the mode of valuation of inventory made by the assessee during preceding years and if any kind of adjustment is held to be attributable to the value of finished closing stock, then the said corresponding amount/adjustment would need to be made in the opening stock of the succeeding year and in a broader sense, such kind of adjustment/addition would be revenue neutral. On specific query from the Bench, the DR submitted that the treatment given by the revenue authorities on the issue in the preceding year is not known to him and in this situation, we hold that the / department has not disputed the claim of the assessee in the preceding years.

220. It is well accepted legal proposition that when the department has taken a particular stand on a particular issue, then the department cannot take a deviated stand on the issue in the succeeding year without any sound, justifiable and cogent reason. The department has not disputed the fact that impugned expenditure was incurred prior to commencement of production of new model and the same was neither incurred during the manufacturing of new model nor model fee expenditure is directly related to manufacture of new models. In this factual aspect and circumstances, we hold that the assessee incurred expenditure on new model fees prior to commencement of production of new models of two wheelers, even otherwise this exercise would be revenue neutral in a broader perspective as the same adjustment would be required to be done in the opening stock of finished goods for the year under consideration. More so, when the assessee has followed a particular mode of accounting for this expenditure which was accepted by the Revenue, then the department cannot take a different stand in the succeeding year to make an addition in this regard. We are unable to see any valid ground to ‘accept’ a deviated stand of the Revenue on the issue, which in a broader sense, is revenue neutral, then no adjustment is called for in this regard. We hold that findings of the AO are not sustainable and we set aside the same.

Hence, we allow ground no.58 to 58.1 of the assessee.”

Accordingly, respectfully following the aforesaid decision, we decide the issue in favour of the appellant. Accordingly, the ground number 23 of appeal stands allowed.”

45.0.1 The facts of the present Assessment Year and the earlier Assessment Year are not different. In the present year also , the expenditure was incurred on new model fees prior to commencement of production of new models of two wheelers, thus, this action is revenue neutral in a broader perspective as the same adjustment would be required to be made to the opening stock of finished goods for the year under consideration. Thus, this issue is covered in favour of the assessee by the decision of the Tribunal for A.Ys. 2010-11 and 2011-12. We also find that the Tribunal has in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

45.0.2 Therefore, Ground No. 15 is allowed in favour of the assessee.

46.0.0 Regarding Ground No. 16 relating to disallowance of reimbursement of foreign travelling expenses to directors/employees amounting to 7.38 crores, the Ld. AR submitted that the disallowance was made on the ground of non-submission of evidence/proof of actual expenses incurred by employees. It was submitted that in the course of discharge of official duties, the employees of the company are required to travel abroad and incur incidental expenses in foreign currency like local conveyance, boarding and lodging expenses, telephone expenses etc. The assessee had introduced a policy fixing per diem allowance payable to employees, depending upon the grade/category of the employees and the place/country of travel. The employees are not entitled to any extra allowance in the event the actual expenditure incurred by the employee is in excess of such per diem allowance. It was submitted that for payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported /backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. It was submitted that in the assessment order, the AO made disallowance of Rs.7,38,27,378/- (comprising of Rs. 2,28,58,951/- in respect of Dharuhera, Gurgaon, Haridwar and Neemrana plants and Rs. 5,09,68,426/- in respect of head office expenses) out of expenditure incurred towards re-imbursement of foreign travel expenses incurred by employees, on the ground that declaration furnished by the employees was not a sufficient evidence to establish the incurrence of actual expenses, which were required to be supported with bills/invoices of factual expenditure incurred by the employees.

46.0.1 The Ld. AR submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi Bench of the Tribunal in the assessee’s own case for the AYs 2007­08 and 2008-09, wherein the Tribunal held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, which has been reaffirmed by the Tribunal in the order dated 24.10.2016 passed for the assessment years 2010-11 and 2011-12. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AY 2009-10, 2012-13 and 2013-14.

47.0 The Ld. CIT-DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

48.0.0 We have heard both the parties and have perused the material available on record. The Tribunal, in assessee’s own case, has held in A.Ys. 2010-11 and 2011-12 as under:-

“226) We have heard the rival contentions. We note that similar issue relating to disallowance relating to re-imbursement of foreign travelling expenses to directors/employees was deleted by the Tribunal in the assessee’s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007­-08 are as under:

“51.15.The assessing officer in this case has not doubted the fact that employees/ directors of the company travelled abroad and the fact that they have incurred incidental expenses in foreign currency. The reason for disallowance is that employees have not furnished to the assessee evidence in support of the fact that they have incurred conveyance, boarding and lodging expenses etc. When reasonable amount of daily allowance is fixed as per the rules of the company and when these D.A. rules are followed by the assessee, in our view, the incurring of expenditure by the employees is not to be doubted. Even in cases where officers of the government of India travel abroad, daily allowance is given and vouchers for such expenditure are not insisted because of practical difficulties in submitting bills/ vouchers of petty expenses. In such circumstances, what is to be examined by the assessing officer is the reasonableness of the expenses incurred as compared to the general rates of expenses and allow the same. The assessee submits that the fixed per diem allowance payable to employees depending on the grade is reasonable. When such rates are reasonable the question of disallowance does not arise unless the revenue demonstrates that the rates are excessive. In this case it is not that the expenses are not incurred for the stated purpose nor is it that the rates are unreasonable. The disallowance in question in our view on the sole ground that vouchers are not produced by the employees cannot be sustained. In the result this ground of the assessee is allowed.”

The Ld. departmental representative could not point out any change in the facts and circumstances of the case of the appellant as compared to the assessment year in which the above issue is decided by the coordinate bench. No other contrary decision was also pointed out therefore, respectfully following the decision of the coordinate bench in the appellant’s own case for the earlier years, we dismiss ground No. 9 of the appeal of the revenue.”

48.0.1 Thus, this Tribunal in A.Ys. 2010-11 and 2011-12 and earlier years has held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees. We also find that the Tribunal has in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12. As, the facts have not changed in this year as well, therefore, the issue is squarely covered by the decision of the Tribunal for earlier Assessment Years.

48.0.2 Therefore, Ground No. 16 is allowed in favour of the assessee.

49.0.0 The Ld. AR submitted that Ground Nos. 17 to 17.2 relate to disallowance of Royalty Expenditure amounting to Rs.95.61 crores on the ground of being capital in nature. It was submitted that the assessee company has been manufacturing two wheelers in India since 1985 on the basis of technology provided by M/s. Honda Motors Co. Ltd., Japan (“HM”) and has so far launched various models of motorcycles by obtaining the technology provided by that company. However, during AY 2011-12, on account of commercial considerations, HM decided to exit the joint venture. Consequently, a Memorandum of Understanding (‘MOU’) dated 16.12.2010 was entered into between the assessee and HM and the license agreement was mutually terminated. It was further submitted that in terms of the MOU, two new license agreements dated 06.07.2011 and 08.01.2011, License ‘A’ agreement and License ‘B’ agreement, were entered into between the assessee and HM. It was submitted that in terms of the license agreement for License ‘A’ Products, the assessee received the following rights:

(i) Rights to use the technology, design and drawings for manufacture of 18 specific models of motor cycles till perpetuity

(ii) Right to make modifications to the technology, design and drawings

(iii) Unrestricted right to export such products in the overseas markets.

49.0.1 It was further submitted by the Ld. AR that the assessee, subsequently had entered into a new License Agreement (for License B products) dated 22.01.2011 for the purpose of providing the assessee with transitional support and under the said agreement the assessee was provided right to manufacture 4 new models (namely (a) Passion XPRO, (b) Ignitor, (c) Maestro and d) Impulse) using the technology provided by HM on payment of lump sum model fee and royalty. Since the right to manufacture the aforesaid 4 models of motorcycles was not included in the License A agreement, therefore, in order to be able to manufacture the said models of motorcycles the assessee had to enter into separate agreement for manufacture of License ‘B’ products. The Ld. AR submitted that the assessee, after separation from Honda Motors Corporation, Japan, was not in a position to independently develop and launch new models of motorcycles immediately. Therefore, in order to survive in a highly competitive market, the assessee requested the associated enterprise to provide right and technology for manufacture of four new models of motor cycles. Accordingly, the assessee and the associated enterprise entered into license B agreement allowing the assessee the right to manufacture a) Passion XPRO, (b) Ignitor, (c) Maestro and d) Impulse models of motorcycles.

49.0.2 It was further submitted by the Ld. AR that during the relevant previous year, in terms of the aforesaid license B agreement, the assessee booked Rs. 127.48 crores as royalty, to Honda, which was claimed revenue deduction. The aforesaid payments were made after deducting tax at source @10% being the rate of tax applicable in relation to payment of royalty and fees for technical services under Article 12 of Indo-Japan DTAA. It was further submitted that the AO treated the aforesaid expenditure incurred by way of royalty paid to Honda as capital expenditure, by following the orders for the earlier year(s) on the ground that:

• The assessee had received benefit of enduring nature inasmuch as exclusive right was available with the assessee to manufacture and sell the products within the territory of India;
• The assessee was entitled to continued use of information supplied by Honda even after termination of agreement;
• The benefit under the agreement had a degree of perpetuity since the agreement was renewed and was extended year after year and did not, therefore, remain a short term agreement.
• The assessee had acquired asset in the nature of intellectual property rights and patents from Honda.

49.0.3 The Ld. AR submitted that the assessing officer treated the aforesaid expenditure incurred by way of royalty paid to Honda as capital expenditure on the ground that the assessee had received benefit of enduring nature and had accordingly, disallowed Rs. 95.61 crores out of total expenditure of Rs. 127.48 crores on account of royalty after allowing depreciation @ 25% thereof, amounting to Rs. 31.87 crores.

 49.0.4 The Ld. AR submitted that Royalty was not capital expenditure. There are no ownership rights but only limited right to use in License B Products Agreement. It was submitted that during the currency of the agreement, the assessee only had a limited right to use the technology of Honda. Ownership/proprietary rights in the technical know-how continued to vest in Honda and the assessee was not authorized to transfer, assign or convey the know-how/technical information to any third party as the assessee only acquired limited right to use and exploit the know-how. As regards to Non-exclusive license, the Ld. AR submitted that the said right vested with the assessee was not exclusive in as much as, in terms of Article 2 and article 9 of License B agreement, Honda reserved the right to provide technology to its affiliates to manufacture motorcycles. The Ld. AR further submitted that aforesaid limited rights were available to the assessee and the fact of such rights being not exclusive can be gathered from the following clauses of the agreement:-

i) ARTCLE 2 – Grant of License and Exclusivity

ii) ARTICLE 3-No sublicense

iii) ARTICLE 9 – Use and Disclosure of Technical Information

iii) ARTICLE 13 – Terms of agreement (upto 30.06.2007)

iv) ARTICLE 21/22 Termination/Effect of Expiry and Termination

v) ARTICLE 25/26 Certain Prohibitions/Maintenance of Secrecy

49.0.5 The Ld. AR further submitted that payment under the agreement is allowable revenue expenditure. It was submitted that as per the various clauses of the agreement, it would be appreciated that the royalty payable to Honda is only for the purpose of use of technical assistance in the manufacture and sale of products and the assessee has not acquired any capital asset, much less in the nature of intellectual property rights or patents belonging to Honda, which, in unequivocal terms, as provided in the agreement vested in absolute ownership of Honda at all times. Further, on perusal of Article 22 of the License B product agreement, it would be appreciated that on termination/expiration of the agreement, the assessee was required to return all the documents and materials to Honda and promptly discontinue the use of trademarks licensed by Honda and the assessee did not have any right to continue using such know-how. It was submitted that, thus, it is clear that there is no explicit or implied intention to transfer or create ownership in the technical knowhow/ technical information to the assessee. On the contrary, it is unequivocally agreed to between the parties that the know-how should at all times remain the property of Honda. It was further submitted that the conditions in the agreement as to non-assignability, confidentiality and the secrecy of the know-how also indicate that the assessee had merely obtained the right to use the know-how during the currency of the agreement. Reliance in this regard was placed on the following decisions wherein it has been held that where payment is made to simply use the technical know-how/knowledge provided by the foreign collaborator as opposed to acquisition of ownership rights therein, the payment made would be regarded as revenue expenditure:

• CIT v. Ciba India Ltd.: 69 ITR 692 (SC)
• CIT vs. British India Corp. Ltd. [1987] 165 ITR 51 (SC)
• Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377 (SC)
• Shriram Refrigeration Industries Ltd. v. CIT: 127 ITR 746 (Del HC)
• Triveni Engineering Works Ltd. vs. CIT : 136 ITR 340 (Del)
• Addl. CIT vs. Shama Engine Valves Ltd. : 138 ITR 217 (Del)
• CIT vs. Bhai Sunder Dass & Sons P. Ltd. : 158 ITR 195 (Del)
• CIT vs. Lumax Industries Ltd. : 173 Taxman 390 (Del)
• Shriram Pistons & Rings Ltd. vs. CIT : 171 Taxman 81 (Del)
• CIT vs. Shri Ram Pistons and Rings Ltd. : 220 CTR 404 (Del)
• Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM)
• ITO vs. Shivani Locks : 118 TTJ 467 (Del)
• Climate Systems India Ltd. vs. CIT: 319 ITR 113 (Del-HC)
• CIT vs. Sharda Motor Industries Ltd: 319 ITR 109 (Del-HC)
• CIT vs. Essel Propack 325 ITR 185 (Bom)
• CIT v. Modi Revlon (P) Ltd: (2012) 9 TMI 48 (Del.)
• Mafatlal Denim Ltd. V. DCIT: 2011 (12) TMI 351 (Mum.)
•  Climate Systems India Ltd. vs. CIT: 319 ITR 113 (Del-HC)
•  Goodyear India Ltd. vs. ITO : 73 ITD 189 (Del)(TM)
•  CIT v. Avery India Ltd. 207 ITR 813 (Cal)
•  CIT v. Bhai Sunder Dass & Sons P. Ltd.:158 ITR 195 (Del)
• CIT v. DCM Ltd.: ITA No. 87-89/1992 (Del.)(HC)
• CIT v. Denso India P. Ltd.: ITA 16/2008 (Del.) (HC)
• CIT v. Eicher Motors Ltd.: 293 ITR 464 (MP)(Indore Bench)

49.0.6 The Ld. AR submitted that since no proprietary rights in the know-how vested in the assessee and the assessee being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how /technical information in the assessee. It was argued that the expenditure by way of royalty incurred by the assessee was allowable revenue deduction since-

• payment was made for limited license to use the know-how provided by Honda, as the proprietary and ownership rights in the same continued to remain vested with Honda at all times and, therefore, there was no absolute parting of know-how in favour of the assessee resulting in acquisition of any asset,
• no benefit of enduring nature in the capital field accrued to the assessee, even if the license to manufacture and sell products in India is assumed to be exclusive, except for grant of license to HMSI,
• the subject payment made did not cover consideration paid for setting up of the manufacturing facility in India,
• On termination of the agreement, the assessee was required to return all the documents and materials to Honda and promptly discontinue the use of trademarks licensed by Honda and the assessee did not have any right to continue using such know-how.

49.0.7 The Ld. AR further pointed out that the aforesaid issue is covered in favour of the assessee by the decision of the Tribunal in assessment years 2000-01, 2001-02, 2002-03, 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11 wherein the Tribunal has held that annual payment of royalty was allowable revenue expenditure. It was submitted that the aforesaid orders of the Tribunal relating to assessment years 2000-01 to 2002-03 have been affirmed by the Hon’ble Delhi High Court in the assessee’s own case reported as CIT v. Hero Honda Motors Ltd.: 372 ITR 481.48. It was also submitted that in orders passed by the Tribunal for assessment years 2011-12 to 2013-14, the royalty paid in terms of license B agreement has been held to be an allowable revenue deduction.

50.0 The Ld. CIT – DR relied upon the Assessment Order and Order of the TPO but could not distinguish the order of the Tribunal for A.Ys. 2010-11 and 2011-12.

51.0.0 We have heard both the parties and perused the material available on record. This Tribunal, on identical issue, has for A.Y.s 2010-11 and 2011-12 held as under:

“95) We have heard the rival contentions. We have gone through the orders in the assessee’s case for the earlier assessment years as was pointed out by the Ld. Counsel. Both the parties admitted before us that there is no change in the facts and circumstances of the case as well as the agreement under which the payments have been made by the assessee. The Ld. departmental representative also could not point out any other judicial precedent on this issue of the higher forum. In this event we are duty bound to follow the order of the coordinate bench passed in the case of the assessee for the beer years. For the sake brevity, we reproduce hereunder the finding in the appeal order for AY 2007-08, which was followed in the order for AY 2008-09 as under:

“57. The issue whether the expenditure in question is in the capital field or the revenue field has been decided in favour of the assessee by the ITAT in assessee’s own case for earlier assessment years 2000-01, 2001-02, 2002-03 and 2006-07. The ITAT Delhi Bench ‘C’ in assessee’s own case for A.Y. 2006-07 in ITA no. 5130/Del/2010 vide order dated 23- 11-2012 has held that the annual payment of royalty was a revenue expenditure. In doing so the ITAT has relied on various judicial pronouncements including the decision of Jurisdictional High Court in the case of Climate Systems India Ltd. and Sharda Motors Industrial Ltd. No change in facts and circumstances has been pointed out by the ld. DR. Therefore, respectfully following the same, we allow this ground of the assessee.”

Therefore respectfully following the above decisions of the Tribunal and High Court in the assessee’s own case, we reverse the order of the Ld. Assessing officer in holding the above 3 payments as capital expenditure. In the result ground No. 19 of the appeal of the assessee is allowed.”

51.0.1 We also find that the Tribunal has in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company by following the aforesaid order passed for assessment years 2010-11 and 2011-12. The Tribunal, in its order passed for AY 2012-13, after examining the terms of license B agreement, held the royalty paid to be an allowable revenue deduction. The relevant observations of the co­ordinate Bench of the Tribunal are as under:

“It is pertinent to note that no proprietary rights in the know how vested in the assessee, the assessee being a mere licensee with limited rights to use the technical assistance during the currency of the agreement, there is no explicit or implied intention to transfer or create ownership in the technical know-how /technical information in the assessee. In view of the aforesaid, expenditure by way of royalty, technical guidance fee and model fees incurred by the assessee was allowable revenue deduction as held in the decision given by the Tribunal for A.Ys. 2010-11 and 2011-12. The issue is squarely covered by the said decision. Therefore, Ground No. 32 to 32.6 are allowed.”

 51.0.2 Respectfully following the orders passed by the Tribunal in earlier years, in assessment years 2011-12 to 2013-14, the royalty paid in terms of license B agreement is held to be an allowable revenue deduction.

 51.0.3 Therefore, Ground Nos. 17 to 17.2 is allowed in favour of the assessee.

 52.0.0 Ground Nos. 18 to 18.6 are relating to disallowance u/s 80IC on account of profit attributable to the brand value and marketing network amounting to Rs. 173.41 crores. It was submitted by the Ld. AR that in the business of manufacturing and selling two-wheelers, including goods manufactured at eligible unit, the assessee was required to incur marketing expenses. The said expenses were incurred by the Head Office at Delhi. The common expenses, including advertisement/brand creation expenses, etc. incurred at Head Office were allocated to various manufacturing units of the assessee-company, including the unit eligible for deduction under section 80IC, on a rational and scientific basis. The expenses on brand /advertisement, etc. incurred at Head Office were duly allocated to manufacturing units and have been deducted, while computing profits of the unit eligible for claim of deduction under section 80IC of the Act. It was further submitted that the price realized on sale of the products, i.e., two wheelers, is credited to the profit and loss account and direct and indirect expenses, including advertisement expenses, incurred in relation to sale of the products are reduced there from for purpose of computing profits of the eligible unit and corresponding claim of deduction under section 80IC of the Act. It was submitted that the AO held that profits are derived by the assessee-company on account of three assets, viz., (1) manufacturing assets, (2) brand assets and (3) marketing assets whereas deduction under section 80IC is available only on profits derived from business of manufacturing of specified articles or things. It was further observed by the AO that the manufacturing and marketing activities were carried out at Head Office and, therefore, the brand developed was not owned by the eligible unit, which came into existence much later than the existence of the assessee-company as a whole. Thus, as per the AO, part of the profits earned by eligible unit should have been attributed to advertisement/marketing activities carried out by head office. In order to attribute profits to marketing/advertisement activities, the AO computed rate of net profit for the financial year 1984-85, being the first year of operations of the assessee company, at 6.85% on an arbitrary basis and applied the same to arrive at the profit solely attributable to the manufacturing activity of Haridwar unit. It was submitted that on the basis of above, the assessing officer computed profit attributable to the manufacturing activity at Rs. 213.15 crores. Accordingly, deduction under section 80IC qua remaining profit of Rs. 173.41 crores, allegedly attributable to marketing and advertisement activity was disallowed.

52.0.1 The Ld. AR submitted that the issue is squarely covered in favor of the assessee by order dated 24.10.2016 passed by the Tribunal for assessment years, i.e. AY 2010-11 and AY 2011 – 12, wherein identical disallowance made by the AO has been deleted. It was submitted that the Tribunal, in coming to the aforesaid discussion, reiterated that the head office is not a separate profit centre and, therefore, no profit is to be separately attributed to such activity. It further observed that, for the purpose of working out eligible deduction under section 80-IC of the Act, actual expenses incurred at the head office are to be allocated between various profit centers on a rational and scientific basis. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

53.0 The Ld. CIT – DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

54.0.0 We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 has held as under:

“154) We have heard the rival contentions. We have already discussed the aforesaid issue at length while disposing the ground of appeal No. 31 to 31.2 supra, wherein we have dealt with that head office is a separate cost centre and expenses incurred thereat needs to be allocated to various profit centers/manufacturing units on a rational and scientific basis, without any element of profit/markup. The issue raised by the assessing officer in the present ground of appeal is categorically similar to that raised in the aforesaid ground. Accordingly following our findings stated above, we reverse the action of the assessing officer and delete the disallowance made under section 80IC. Accordingly, the ground No. 33 of appeal is allowed.”

54.0.1 Thus, the issue is squarely covered in favor of the assessee by the order dated 24.10.2016 passed by the Tribunal for immediately preceding assessment years, i.e. AY 2010-11 and AY 2011 -12, wherein identical disallowance made by the AO has been deleted. The Tribunal, in coming to the aforesaid discussion, reiterated that the head office is not a separate profit centre and, therefore, no profit is to be separately attributed to such activity. It further observed that, for the purpose of working out eligible deduction under section 80-IC of the Act, actual expenses incurred at the head office are to be allocated between various profit centers on a rational and scientific basis. We also find that the Tribunal has, in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

 54.0.2 Therefore, Ground Nos. 18 to 18.6 are allowed in favour of the assessee.

 55.0.0 Ground Nos. 19 to 19.1 are relating to disallowance u/s 80IC on account of other income amounting to 1.17 crores on the ground that such incomes were not derived from the business of manufacture of specified articles or things. During the relevant previous year, the eligible unit at Haridwar earned the following other incomes, which were credited in the Profit and Loss Account of that unit:

S.No	Name /Type of Other Income	Amount (in Rs.)
1	Interest on loan given at subsidized   rates to the employees	16,06,615
2	Interest on loan provided for working capital support to vendors	1,01,15,207
	TOTAL	1,17,21,822

55.0.1 The Ld. AR submitted that in the return of income, the assessee claimed deduction under section 80IC on the aforesaid ‘other incomes’ since the said receipts had direct and immediate nexus with the business of manufacturing and selling of specific articles or things. The assessing officer, without considering the nature of each of the aforesaid receipts, held that the aforesaid incomes were not derived from the business of manufacturing of articles or things and were, therefore, taxable under the head “income from other sources”. Accordingly, the assessing officer disallowed deduction under section 80IC by an amount of Rs 1,17,21,822/-.

55.0.2 The Ld. AR submitted that similar disallowance made by the assessing officer in preceding assessment years, i.e. AY 2010-11 and AY 2011-12 has been deleted by the Tribunal vide consolidated order dated 24.10.2016. The Tribunal, after examining the nature of the aforesaid incomes, held that other incomes in the nature of Interest on loan to employees, interest on loan to vendors for working capital support, freight recovery, sundry sales, cash discounting from vendors and exchange fluctuation gain, etc. earned by a unit eligible for deduction under Section 80IC of the Act shall be considered as incidental to the activity of carrying out manufacturing and were, thus, eligible for deduction under that section. It was accordingly submitted that the aforesaid issue stands squarely covered in favour of the assessee. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AYs 2009-10, 2012-13 and 2013-14.

55.0.3 The Ld. CIT – DR relied upon the Assessment Order and Order of the TPO, but could not distinguish the decision of the Tribunal.

 56.0.0 We have heard both the parties and perused the material available on record. The Tribunal in A.Ys. 2010-11 and 2011-12 has held as under:

“158) We have heard the rival contentions. Our findings on the various issues raised by the assessing officer are given in seriatim hereunder:

1. Interest on loan given at subsidized rates to employees The Supreme Court in the case of Liberty India vs. CIT: 317 ITR 218, has held that source of income beyond the first degree nexus with the manufacturing operation cannot be considered as derived from such business/activity. Following the aforesaid decision, the Courts / Tribunal in certain cases have held that interest income earned from fixed deposits made by the eligible unit is not eligible for deduction under the relevant provisions of the Act. [Refer: Paswara Electronics (P) Ltd. v. ITO: ITA No. 71/D/2011; Reckit Benckiser India Ltd. v. Addl. CIT: 231 Taxman 585 (Cal.)] However, the facts under consideration are slightly different. The question that needs to be answered is whether interest income earned from loan given at subsidized rate to employees has first-degree nexus with the business operations carried on by the eligible unit. The appellant is engaged in the business of manufacturing two-wheelers and is not engaged in the activity of giving loans and advances to earn interest income. It is not the case of appellant or the assessing officer that surplus funds were given to the employees to earn interest income. The loans/advances to employees under consideration was a measure of incentive / perquisites to the employees involved in carrying on the business of manufacturing. The source of such income is, thus, not the activity of giving loan, but benefit extended to employees engaged in the business. The first-degree nexus of such income, in our view, is the eligible business carried on by the appellant. Therefore, such income would be eligible for deduction u/s 80IC of the Act. The action of the assessing officer on this account is thus reversed.

2. Interest on loans provided for making capital support to vendors The present issue is similar to the immediately preceding issue. In our view, loan has been given to vendors to provide uninterrupted supply of goods to the appellant. The first-degree nexus of giving loan is, thus, business of manufacturing. Accordingly following our findings in the preceding issue, the action of the assessing officer on this account is reversed.

……………………………………………………………………….

Accordingly the action of the assessing officer on this ground is reversed and we hold that assessee is eligible for deduction under section 80 IC of the income tax act on interest on loans given at subsidized rates to the employees of Rs. 162975/–, interest on loans provided for working capital support to vendors Rs. 6626854/–, freight recovery from customer Rs. 935418395/–, sundry sales of Rs. 924103150/–, cash discount received from the vendor is Rs.56732831/– and exchange fluctuation of Rs. 24167060/–. In the result ground No. 34 of the appeal of the assessee is partly allowed.”

56.0.1 Similar disallowance made by the assessing officer in assessment years 2010-11 and 2011-12 has been deleted by the Tribunal vide consolidated order dated 24.10.2016. The Tribunal, after examining the nature of the aforesaid incomes, held that other incomes in the nature of interest on loan to employees, interest on loan to vendors for working capital support earned by a unit eligible for deduction under Section 80IC of the Act shall be considered as incidental to the activity of carrying out manufacturing and, thus, eligible for deduction under that section. Accordingly, the aforesaid issue stands squarely covered in favour of the assessee. We also find that the Tribunal has in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12.

 56.0.2 Therefore, Ground Nos. 19 to 19.1 are allowed in favour of the assessee.

 57.0.0 Ground Nos. 20 to 20.3 relate to allowability of weighted deduction of Rs.74,31,13,902/- under section 35(2AB) of the Act with respect to scientific research and development expenses incurred during the year. The Ld. AR submitted that the aforesaid claim of weighted deduction has been disallowed in the assessment order on the ground that the said claim was not raised by the assessee in the return of income filed for the relevant year, which is being disputed by the assessee. The Ld. AR submitted that the facts relating to the aforesaid claim are as under:

1. That the assessee had set up a dedicated in-house research and development (“R&D”) centre at 69 K.M., Stone, Delhi Jaipur Highway, Dharuhera, Rewari, Haryana which was established in the year 1987, purely for the purposes of research activities. Having regard to substantial increase in R&D expenses, the assessee applied for recognition of the said R&D centre before the Department of Scientific and Industrial Research (‘DSIR’) vide application dated 29.12.2014. The DSIR, after considering the application and verifying the R&D activities carried on by the assessee in the past and those proposed in future, granted recognition and registration vide letter dated 18.03.2015 for the period from 26.02.2015 to 31.03.2017.

2. That subsequently, post receipt of the aforesaid recognition/registration, the assessee vide application dated 30.03.2015 applied for obtaining approval from DSIR under section 35(2AB) in Form 3CK, which was granted to the assessee vide Form 3CM dated 17.07.2015 stating the period of approval as 26.02.2015 to 31.03.2017.

3. That on the basis of the aforesaid approval in Form 3CM, the assessee claimed weighted deduction of Rs. 11,69,47,165/- under section 35(2AB) with respect to R&D expenses (revenue and capital) incurred at the centre after 26.02.2015 in the return form filed for the relevant assessment year.

4. That it is the contention of the assessee that, while in the return form only the undisputed claim of Rs.11,69,47,165/- was made, the additional claim for weighted deduction of Rs. 74,31,13,902/- with respect to R&D expenditure (both revenue and capital) incurred at the centre during the period 01.04.2014 to 25.02.2015, was raised through note appended to the computation of income, which should be deemed to have been filed alongwith the return form for the relevant year. The copy of acknowledgement of return of income alongwith computation of income for assessment year 2015-16 was enclosed at page nos. 1-4 of PB.

5. That the note given in the computation of income appended with the return of income, as reproduced in the assessment order reads as under:

“During the relevant previous year, the assessee company’s in-house R&D facility at Dharuhera, in the state of Haryana, was approved by Department of Scientific & Industrial Research (‘DSIR’) for the purposes of section 35(2AB) of the Act vide Form 3CM dated 17.07.2015. Although there is no requirement in section 35(2AB) read with prescribed Form 3CM to state the period of approval, the DSIR, however, stated the period of approval as 26.02.2015 to 31.03.2017.

During the relevant year, the assessee company incurred following expenses (both capital and revenue, other than land and building,) at the aforesaid in-house R&D centre:

Particulars	01.04.14  to 25.02.15	26.02.15  to 31.03.15	Total 2014-2015
A.  Revenue Expenditure
Electricity	3,01,89,809	31,01,068	3,32,90,877
Cutting tools	53,64,864	2,45,096	56,09,960
Indirect tools	12,79,201	26,39,080	39,18,281
Salary – of technical employees	56,99,90,817	6,58, 63,200	63,58,54,017
Any other expenditure directly related to R & D	3,55,59,632	1, 77,42,465	5,33,02,097
TOTAL – A	64,23,84,323	8,95,90,908	73,19,75,231
B.  Capital Expenditure
Data Processing Equipment	2,11,680	20,58,000	22,69,680
Equipments	6,73,65,693	1,65,57,341	8,39,23,033
Office Equipments	8,65,904	–	8,65,904
Softwares	2,32, 17,580	83,04,475	3,15,22,055
Vehicles	90,68,722	4,36,441	95,05,163
TOTAL – B	10,07,29,579	2,73,56,257	12,80,85,836
GRAND TOTAL – A+B	74,31,13,902,	11,69,47,165	86,00,61,067

In view of the approval in Form 3CM granted from 26.02.2015 to 31.03.2017, the assessee has claimed weighted deduction under section 35{2AB) for revenue and capital expenditure incurred at in-house R&D centre after 26.02.2015 amounting to Rs.11,69,47,165. The assessee was, however, legally advised that, notwithstanding the period of approval stated in Form 3CM, the company is eligible for weighted deduction of entire expenses incurred at the approved R&D centre of Rs. 86,00,61,067, including the expenditure incurred during the period from 01.04.2014 to 25.02.2015, as detailed above.

In view of the above, although in the return of income the assessee has claimed weighted deduction @ 200% of Rs.11,69,47,165 under section 35(2AB), the company, however, through this note to the return of income/computation of income is preferring the enlarged claim for weighted deduction @ 200% of Rs.86,00,61,067 under section 35(2AB) with regard to entire revenue and capital expenses incurred at the approved in-house R&D centre during the year under consideration.”

6. That during the course of assessment proceedings, the assessee vide reply dated 18.12.2018 justified the aforesaid additional claim of deduction of Rs.74,31,13,902 incurred at approved R&D facility prior to 26.02.2015, which was supported with the following decisions, wherein it was held that weighted deduction under section 35(2AB) is available to the centre approved by DSIR dehors the date of recognition accorded in the approval:

• • CIT v. Claris Lifesciences Ltd.: 326 ITR 251(Guj) – Special Leave Petition (‘SLP’) filed by the Revenue against the aforesaid decision of the Gujarat High Court was dismissed by the Supreme Court vide order 4.8.2009, bearing CC No.10181/2009
  • CIT vs Sandan Vikas India Ltd.: 335 ITR 117 (Del) – SLP dismissed by the Supreme Court vide order 09.01.2012, bearing CC No.21706/2011
  • Maruti Suzuki India Ltd v. Union of India & Anr (397 ITR 728) – The Special Leave Petition of the Revenue was dismissed by the Hon’ble Supreme Court vide order dated 11.05.2018 in SLP No. 32458/2017.
  • CIT vs. Wheels India Ltd.: 336 ITR 513 (Mad)
  • Banco Products (India) Ltd. vs. DCIT (ITA No. 1057/2017)(Guj.)
  • DCIT vs. International Tractors Ltd.: ITA No. 5817/ 6071 of 2010 (Del);
  • ACIT vs Meco Instruments (P) Ltd.: ITA No. 4246/Mum/2009 (Mum.)
  • DCIT vs. Famy Care Ltd: 67 SOT 85 (Mum)
  • ACIT vs. Wockhardt Limited: ITA No.71/Mum/2007

7. That after considering that the aforesaid reply of the assessee, the assessing officer accepted the aforesaid claim of the assessee in principle, observing at para 22.3 of the final assessment order as under:

“22.3 The reply of the assessee has been considered and is being discussed as under:-

On going through the claim of the assessee alongwith various judicial precedence we have found force in assessee argument that notwithstanding the period of approval stated in Form 3CM, the company is eligible for weighted deduction of entire expenses incurred at the approved R&D centre of Rs. 86,00,61,067, including the expenditure incurred during the period from 01.04.2014 to 25.02.2015. However, since assessee has not claimed deduction in its return of income, therefore same cannot be allowed in assessment.”

8. That in view of the above, in the assessment order while the assessing officer accepted the claim in principle, but denied the same on the ground that the same was not made in the return form. The aforesaid finding was also approved by the DRP, observing as under:

“22.5 DRP Directions:

Having considered the submission of the assessee and the AO’s draft order (para

22), it is noted that the AO after considering the assessee’s submission noted that the assessee’s argument for additional weighted deduction of Rs. 86,00,61,067/- on account of expenditure of Rs. 74,31,13,902/- could not be allow as the same has been claimed in the return of income, notwithstanding the period of approval stated in Form 3CM. It has also been noted by the AO that the R&D facility at Dharuhera was approved by DSIR for the purposes of Section 35(2AB) in Form 3CM dated 17-07­2015 for the period 26-02-2015 to 31-03-2017. The assessee claimed to have incurred expenditure of Rs. 74.31 crores from 01-04-2014 to 25-02-2015 and another Rs. 11.69 crores from 26.02-2015 to 31-03-2015. The assessee claimed weighted deduction @200% of the entire amount of Rs. 86.00 crores.

Having considered the submission of the -asses see, and considering the fact that no deduction u/s 35(2AB) was claimed in the return of income or by way of revised valid return of income, AO has rightly rejected the claim. Assessee’s objection is rejected.”

9. That the aforesaid findings have been challenged by the assessee vide ground of appeal no. 20 to 20.3, contending that the claim through note in the computation of income, should be considered as raised in the return form.

57.0.1 It was argued by the Ld. AR that notes to computation of income form an integral part of return of income and, therefore, any claim made in such notes is deemed to have been made in the return of income itself. In the present case, the applicant, it is submitted, claimed deduction of research and development expenses to the extent of Rs.74,31,13,902/- by way of notes to the computation of income, which formed integral part of the return of income and therefore, was allowable under section 35(2AB) of the Act. Reliance for the aforesaid was placed on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Nav Sansar Agro Products: 392 ITR 399 and Hon’ble Punjab and Haryana High Court in the case of Amritsar Transport Co. (P.) Ltd. vs. CIT: 272 ITR 403 wherein it was held that notes to the computation of income attached with the return of income formed integral part of the return form.

57.0.2 Analogy for the aforesaid proposition was also drawn from the following cases wherein it has been held that notes to accounts formed integral part of the accompanying financial statements:

• CIT vs. Sain Processing & Wvg. Mills (P) Ltd.: (2010) 325 ITR 565 (Del)
• CIT vs. Khaitan Chemicals & Fertilizers Ltd: 307 ITR 150 (Del)
• Kanoi Paper Industries Ltd. vs. CIT: ITA No. 298 of 2004 (Cal)
• K.K. Nag Ltd. vs. ACIT: 52 SOT 381(Pune)
• Hindustan Shipyard Ltd. vs. DCIT: 130 TTJ 213(Vishakhapatnam)
• Shivalik Venture (P.) Ltd. v DCIT: 173 TTJ 238 (Mum)
• B & B Infotech Ltd. v ITO: 155 ITD 1040 (Bang)
• J.K. Lakshmi Cement Ltd. vs. ACIT: ITA No. 1275/Kol/2010 (Kol)

57.0.3 The Ld. AR also our drew attention to Rule 12(2) of the Rules which provides that return of income filed electronically should not be accompanied by a statement showing the computation of the tax payable or proof of tax claimed/deducted/collected at source or advance tax. Thus, computation of income was not required to be filed with the return of income and, therefore, the same was to be furnished during the course of assessment proceedings. Accordingly, under the scheme of e-filing of return of income, all the accompanying documents including computation are deemed to be filed at the time of filing of return of income itself. The Ld. AR pointed that, section 139(9) provides that if the return of income is not accompanied by computation of income, Tax Audit Report, etc., the same would be considered as a defective return. Accordingly, it was argued that, in the e-filing scheme, by virtue of the specific embargo to not file these documents, they are to be deemed as filed along with the return of income, if the same are furnished subsequently. It was submitted that in the present case, since these documents were filed after receiving the notice, computation of income is to be deemed to be filed along with return of income and notes therein are to be read as integral part of the return of income. It was submitted that the assessee was to be considered as having made the impugned claim of weighted deduction under section 35(2AB) of the Act in the return of income itself and non-grant of claim by the assessing officer was completely erroneous in law, which deserves to be reversed and claim ought to be allowed.

57.0.4 Without prejudice to the above, the Ld. AR also made additional submissions, that if notes to computation of income were not to be considered as forming part of the Return, even then since all the facts relating to the aforesaid claim were before the AO, which were accepted at Para 22.3 of the assessment order, the impugned claim was not a completely new claim, but revision/modification of the existing claim already taken in the return form, for which the AO was under a bounden duty to allow while passing the assessment order as per mandate contained in Article 265 of the Constitution. Reliance in this regard was placed on the following decisions:

Chokshi Metal Refinery vs. CIT: 107 ITR 63 (Guj)

CIT vs. Geo Industries and Insecticides (I) Pvt Ltd: 234 ITR 541 (Mad)

Subhash Chandra Sarvesh Kumar v. CIT: 132 ITR 619 (All.)

CIT v Simon Carves Ltd.: 105 ITR 212 (SC)

Anchor Pressings (P) Ltd. vs. CIT and Ors.: 161 ITR 159 (SC)

CIT v Bharat General Reinsurance: 81 ITR 303 (Del)

CIT vs. Hiranand: 136 Taxman 66 (Raj)

CIT v. Ahmedabad Keiser-e-Hind Mills Co. Ltd.: 128 ITR 486 (Guj.)

CIT v Archana R. Dhanwatay: 136 ITR 355 (Bom.)

Sneh Lata Jain vs. CIT: 140 Taxman 156 (J&K)

PCIT v. Oracle (OFSS) BPO Services Ltd.:[2019] 102 taxmann.com 396 (Del.)

CIT v. Bharat Aluminium Co Ltd: 303 ITR 256 (Del)

CIT v. Ramco International : 332 ITR 306 (P&H)

Raghavan Nair vs. ACIT: 304 CTR 96 (Ker)

JCIT v. Hero Honda Finlease Ltd.: 115 TTJ 752 (Third Member).

SNC-Lavalin Acres Inc.: 110 TTJ 13 (Del ITAT)

ACIT v. Pushpons International in ITA No. 814/Del/1998 (Del ITAT)

Mit Mohan Singh Kahlon v. DCIT: 61 SOT 93 (URO)/ ITA No. 57/Chd/2012. (Chd. ITAT)

Emerson Net Work Power India (P) Ltd. v. ACIT 2009122 TTJ 67 (Mum ITAT)

Aishwarya Rai: ITA No. 1159/Mum/04 (ITAT Mum)

Ogilvy and Mather (P) Ltd. v. Addl. CIT: ITA No. 925/Mum/2009 (ITAT Mum)

DCIT v. Tata Asset Management Ltd.: ITA No. 4665/Mum/2010 (ITAT Mum)

57.0.5 In view of the above, the Ld. AR argued that the action of the AO in not allowing the claim needs to be reversed and the AO needs to be directed to allow the said claim.

 57.0.6 Without prejudice to the above, the assessee has also raised additional ground of appeal vide Ground No.21, to contend that if the action of the AO is held to be correct, then the Tribunal is empowered to admit and allow the same as an additional ground of appeal, in view of plenary power vested in the Tribunal, as per the decision of the Hon’ble Supreme Court in the case of National Thermal Power Company: 229 ITR 383 (SC). The Ld. AR also made submissions in support of the aforesaid ground of appeal.

58.0 The Ld. CIT – DR refuted the aforesaid submissions made by the assessee and supported the assessment order. It was argued that the claim made by way of note in the computation of income cannot be considered as a claim made in the return of income, since the tax liability is computed and discharged as per the claim made in the return form and not on the basis of notes in the computation of income. The Ld. CIT – DR also relied upon the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. v. CIT: 284 ITR 323, wherein it was held that the AO is not bound to entertain a claim made by the assessee otherwise than through return of income filed under section 139(1) or revised return of income under section 139(5) of the Act. The Ld. CIT (DR) also referred to the provisions of section 80A (5) of the Act which barred the assessee to raise additional claim otherwise than through that taken in the return of income. As regards the additional ground of appeal, the Ld. CIT (DR) argued that when the AO was not empowered to allow the claim, the Tribunal cannot indirectly allow the claim through additional ground of appeal.

59.0 In the rejoinder, the Ld. AR pointed out that the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. (supra) relied upon by the Ld. CIT – DR was not applicable to the facts of the present case since the same was applicable to a situation where a claim was not made in the return of income at all and was raised for the first time during the course of assessment proceedings, whereas the plea of the assessee herein is that, the impugned claim was raised in the return of income, albeit through notes in the computation of income, which constituted integral part of return of income. It was argued that even otherwise the aforesaid decision only bars completely new/fresh claim and not modification /enlargement of an existing claim already made in the return form. Thus, on both the aforesaid accounts, it was argued that the decision of the Hon’ble Supreme Court in the case of Goetze India supra was not applicable to facts of assessee’s case. As regards section 80A (5) referred by the Ld. CIT – DR, it was argued that the same shall not applicable to the claim of deduction under section 35 (2AB) and had restricted scope of specific sections mentioned therein. As regards the power of the Tribunal to entertain the additional ground of appeal, the Ld. Counsel argued that the decision of the Hon’ble Supreme Court in the case of Goetze India (supra) only prohibited power of the AO to entertain a new claim and there was a specific finding in that decision, that the said embargo does not impinge upon the power of the Tribunal to entertain an additional ground as laid down by the Hon’ble Supreme Court in the case of NTPC (supra). For the aforesaid proposition the Ld. Counsel also relied upon the decision of the Hon’ble Delhi High Court in the case of CIT vs. Jai Parabolic Springs Ltd: 306 ITR 42 and the decision of the Special Bench of Tribunal in the case of Allcargo Global Logistics Ltd vs. DCIT: 137 ITD 26.

60.0.0 We have heard both the parties and have perused the material available on record. We find that the entire facts relating to the aforesaid claim were before the AO and after examining the same, the AO did not dispute the allowability of claim on merits. The sole issue raised by both the AO and the Ld. DRP is that the said claim is not allowable, since the same was not raised in the return form whereas the contention of the assessee is that a claim through note in the computation of income forms integral part of return form and, therefore, the same should have been entertained and allowed by the AO. We find that the return of income in the present case was filed through electronic/digital mode. Prior to the shifting of practice of filing the return of income to the electronic mode, it was an accepted practice that the return form be accompanied by various supporting documents like accounts, challans, tax audit report etc. including computation of income. In that regime, it was an accepted position that notes given in the computation of income was to be read as forming integral part of the return of income. The support for the aforesaid accepted position can be drawn from the following decisions brought to our notice by the assessee:

(1) In the case of CIT vs. Nav Sansar Agro Products: 392 ITR 399 (Delhi), the Hon’ble Delhi High Court held that notes in the computation of income formed part of the return of income. The relevant observations of the Court are as under:

“This Court has considered the submissions. The note appended to the computation of income file along with the return by the assessee in this case clearly stated that interest and legal charges were excluded on the basis of the Income Tax Department’s stand in other group cases that they could be included in the case of land and were done by way of “abundant caution” as a disallowance.”

(2) Similarly, the Hon’ble Punjab and Haryana High Court in the case of Amritsar Transport Co. (P.) Ltd. vs. CIT: 272 ITR 403, while dealing with the issue of jurisdiction of assessing officer under section 154 of the Act, held that notes forming part of computation of income formed integral of the return of income and any oversight thereof while framing assessment is rectifiable under section 154 of the Act. The relevant observations of the Court are as under:

“5. After hearing the counsel for the parties and having perused the orders of the authorities below, we are satisfied that it is a clear case of mistake apparent from the record which could have been rectified under section 154 of the Act. The assessee itself in the computation of income had given the note requesting the Assessing Officer to consider the payment of interest under section 244(1A) of the Act which appears to have escaped the notice of the Assessing Officer when he framed the original assessment. In view of this matter, there is possibly no question of this issue being termed as debatable.”

60.0.1 On shifting of the regime of filing the return form from physical mode to electronic mode, Rule 12(2) specifically bars an assessee to file any document along with the return of income. Such documents are to be filed after receiving the notice under section 143(2)/142(1) selecting the return for scrutiny. The corollary of the aforesaid procedure is that the accompanying documents are deemed to have been filed along with the electronic return of income. If that was not to be the case, then the return of income would have been treated as a defective return under section 139(9) of the Act. Accordingly, when the assessee receives notice for assessment and is asked to file the documents in support of the return of income including computation of income, such documents and computation of income are deemed to have been filed at the time of filing the original return of income, rendering the original return to be a valid return and not a defective return under section 139(9) of the Act. In view of the same, computation of income is deemed to be filed along with return of income and notes of such computation of income as per the undisputed practice and ratio laid down by the aforesaid decisions are to be deemed as forming integral part of the return of income, which are required to be considered by the assessing officer, while completing the assessment of an assessee.

 60.0.2 In view of the aforesaid legal position, on the facts of the present case, especially considering that the AO after examining the facts and legal position with respect to the impugned weighted claim of deduction under section 35(2AB), did not dispute the same on merits, erred in not granting the benefit to the assessee merely on the ground that the same was made through note to computation of income and not in the return form. Accordingly, we reverse the action of the AO and direct him to allow the weighted deduction to the assessee. Considering that, we have allowed the claim on the principal contention raised by the assessee, alternate contentions as well as the additional ground of appeal are rendered academic in nature.

 60.0.3 We, therefore, allow ground of appeal No. 20 to 20.3 and dismiss ground of appeal No.21 as being academic in nature.

 61.0.0 The assessee has also raised the following by way of additional ground of appeal:

“1. That on the facts and circumstances of the case, depreciation @ 25% on leasehold rights acquired in lands at Haridwar (Rs.9,79,51,067) and Neemrana (Rs.3,27,49,678), aggregating to Rs.12,42,62,467/- be allowed under section 32(1)(ii) of the Act in accordance with the orders passed by the Hon’ble Tribunal for earlier assessment years viz., AYs 2009-10 to 2011-12 and 2013-14.”

61.0.1 In relation to the aforesaid additional ground, the Ld. AR submitted that the assessee had taken certain lands on lease for the purposes of constructing factory (ies) and carrying on business operations thereon. The land at Haridwar was purchased in the earlier year on payment of premium. From the assessment year 2009-10 i.e., the year in which commercial production begun on factory constructed on said land, the assesse claimed deduction for the proportionate amount of premium paid for acquiring lease as amortised revenue expenditure. It was further submitted that in assessment years 2010-11 and 2011-12 the assessing officer disallowed the aforesaid claim holding the premium paid to be capital expenditure. On further appeal, the Tribunal (ITAT) upheld the aforesaid action of the AO, but accepted alternate plea of the assessee that the aforesaid premium paid resulted in acquisition of an intangible asset in nature of a ‘business or commercial rights’, which is eligible for depreciation under section 32(1)(ii) of the Act. It was further submitted that following the aforesaid order of the Tribunal, the consequential claim of depreciation was allowed by the Ld. DRP/ITAT in the assessment year 2009-10 and 2013-14.

 61.0.2 The Ld. AR submitted that in the impugned assessment order, the assessee inadvertently forgot to raise the claim in the return of income or in the course of assessment proceedings and has, therefore, raised the consequential claim by way of additional ground of appeal. Apart from the claim of depreciation on the premium paid on land at Haridwar in the earlier year, it is stated that during the relevant year the assessee had paid additional premium for land taken on lease at Neemrana for a period of ninety nine years from RICCO.

 61.0.3 The Ld. AR drew our attention to the facts relating to the aforesaid land at Neemrana, as stated in the application for additional ground of appeal. They are reproduced hereunder:

“The assessee was, vide allotment letter dated 06.07.2005 allotted land at Neemrana by Rajasthan State Industrial Development and Investment Corporation Ltd. (RICCO) on lease for a period of 99 years. The aforesaid lease was granted on payment of premium cum development charges of Rs. 12,34,50,000/-. The total amount capitalized in the books of accounts was Rs. 13,09,98,710/- which included premium cum development charges, security deposit, registration and stamp duty and other miscellaneous charges. In addition, the assessee was also required to pay annual rent of Rs.19,735 (Rs. 237 per acre per annum). The industrial unit at Neemrana began commercial production on 25.06.14. The assessee submits that akin to the legal position of leasehold rights in respect of land at Haridwar, the leasehold right in the land at Neemrana acquired on payment of premium cum development charges is covered within the meaning of ‘business or commercial right’ eligible for depreciation under section 32(1)(ii) of the Act. In the return of income filed for the relevant assessment year, the assessee, however, inadvertently, did not claim depreciation of Rs.3,27,49,678 on the aforesaid amount of premium/development charges paid for acquiring leasehold rights in the said land.”

61.0.4 In support of the aforesaid ground of appeal, the Ld. AR explained the facts and relied upon the finding of the Tribunal, in the order for AY 2010-11 and 2011-12.

62.0 The Ld. CIT (DR) pointed that the Department has not accepted the aforesaid order has challenged the same in further appeal before the High Court.

63.0.0 We have heard both the parties and have perused the material available on record. Though this claim was not made before the lower authorities, we find that the additional ground raised by the assessee raises a pure question of law, facts for the same are on record. We accordingly admit the additional ground of appeal raised by the assessee following the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co Ltd vs CIT: 229 ITR 383 (SC).

63.0.1 We also find that the issue on merits is squarely covered in favour of the assessee by the order dated 24.10.2016 passed by Tribunal in the preceding assessment years, i.e. AY 2010­11 and AY 2011-12 wherein the Tribunal held that lease premium charges were not allowable revenue deduction. However, the Tribunal allowed the alternate plea raised by the assessee company and held the premium paid for acquisition of leasehold rights to be an intangible asset, independent from the land itself, eligible for depreciation under Section 32(1)(ii) of the Act.

63.0.2 Accordingly, we hold that the assessee is eligible for depreciation at 25% on lease hold rights acquired in Haridwar and Neemrana. As regards the land at Haridwar, the AO is directed to allow the claim of depreciation as per opening WDV carry forward from the earlier years. In so far as the depreciation of land at Neemrana is concerned the same shall be allowed after verification of the relevant payments claimed to have been made by the assessee.

64.0 In the final result, the appeal of the assessee is partly allowed.

Order pronounced on 13/04/2021.