Case Law Details

Case Name : Deepak Fertilizers & Petrochemicals Corporation. Ltd. Vs. DCIT (ITAT Mumbai)
Appeal Number : ITA No. 4904/Mum/2009
Date of Judgement/Order : 31/05/2011
Related Assessment Year : 2006- 07

Deepak Fertilisers & Petrochemicals Corporation Ltd. Vs. DCIT (ITAT Mumbai)- Whether the assessee is entitled to claim expenses for obsolete stores/ spares on provisional basis or it will be allowed in the year in which it is sold –

The assessee had written off the sum of Rs. 11,20,000/- on account of items considered obsolete. Such items included instrument items, cement, paint and paint materials, safety shoes and dress material. The Assessing Officer disallowed the claim of the assessee following the Bombay High Court judgement in the case of Herdilla Chemicals Ltd. 225 ITR 532 wherein it was held that such loss cannot be claimed in any year in which assessee likes.

Such loss can be claimed only in the year in which such items are sold and disposed off. On appeal, the dis-allowance made by Assessing Officer was confirmed. Aggrieved by the same the assessee is in appeal before the Tribunal for all the years. Contention raised on behalf of the assessee is that the decision of the Bombay High Court did not consider the Accounting Standard prescribed by the Institute of Chartered Accountants which were binding on the assessee. Therefore, the said decision should not be relied. It was also contended that the stocks can be valued at cost or market value as per the decision of Honourable Supreme Court in the case of Chainrup Sampatram 24 ITR 481. In our opinion both the contentions are without force. Normally, the Accounting Standards is accepted but it cannot override the provisions of the I. T. Act as held by the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. 227 ITR 172. The Judgment of Bombay High Court would therefore apply to the present case wherein it has been clearly held that loss can be claimed only in the year in which such items are sold. The decision of Supreme Court in the case of Chainrup Sampatram (supra) is applicable only where stock in trade is to be valued and not other tems. In the present case, the items written off do not form part of stock in trade. Hence, the said decision would not apply. No other contention has been raised. Therefore, following the judgement of Bombay High Court in the case of Heredilla Chemicals Ltd (supra) we do not find any merit in the appeals of the assessee on this issue. The orders of the learned CIT(A) are therefore upheld on this issue.

Whether dis-allowance u/s 14A can be made applying Rule 8D even prior to A.Y. 2008-09 –

The jurisdictional high Court in the case of Godrej & Boyce Mfg Co Ltd v DCIT (328 ITR 81) has held that Rule 8D, for determining the disallowance u/s 14A is prospective in its application and would be applicable for the AY 2008-09 and later. In respect of earlier years the AO should determine the dis-allowance on a reasonable basis having regard to all facts and circumstances of the case. In this case the Assessee themselves have disallowed the amount of Rs. 1,37,00,382/- The Assessing officer should examine whether this dis-allowance offered by the Assessee themselves is reasonable and if not explain why it is not so. In this view of the matter we remit the matter back to the file of the AO to rework the dis-allowance u/s 14A on a reasonable manner.

8.1. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Whether the assessee is entitled to depreciation on property ownership of which is attached with a particular and specific share having specified distinctive nos. as if that share is transferred then the absolute ownership of that flat is automatically transferred to the other party- virtue of holding of particular nos. of shares having particular distinctive nos., the holder would be entitled to have exclusive possession of a particular no. of flat so as to have exclusive use and occupation of the said flat. Thus, ownership a flat is attached with a particular and specific share having specified distinctive nos. Therefore, if that share is transferred then the absolute ownership of that flat is automatically transferred to the other party and the company has no power to refuse the transfer of such share from one person to another. This is an acceptable mode of transfer of property in the case of a company and is duly recognised by section 2(47(vi), section 27(iii) as well as section 269UA(d) of the Act. In view of the above discussions, we are of the view that assessee had become the owner of the properties by virtue of holding of shares of Yerrowda Investments Ltd and consequently it was entitled to claim depreciation in accordance with the law. The order of the learned CIT(A) is therefore upheld on this issue.

Whether the assessee is entitled to depreciation on software @ 60% covered under the category of computers or @ 25% as applicable on intangible assets –

From AY 2003-04, under the Depreciation Table in IT Rules, Computers including Computer software is entitled to depreciation at 60%. In this view of the matter we confirm the order of the CIT(A) granting depreciation at the rate 60% on the computer software and dismiss the revenue’s appeal on this issue.

Whether when the assessee did not claim the additional depreciation in the return of income, it cannot be denied merely on such basis as it is mandatory to be allowed if allowable as per the provisions of law

The main grouse is that the claim was not made in the return of income. Grant of depreciation and additional depreciation is mandatory, whether claimed by the Assessee or not. Omission to claim depreciation in the return, will not disentitled the assessee to claim additional depreciation to which they are statutorily entitled to for the first time before the CIT(A). The requisite certificate from the Auditors regarding the claim for depreciation has been filed during the assessment proceedings. There is no finding by the AO that the claim of the Assessee is not in accordance with the provisions of the Act. We therefore direct the allowance of additional depreciation as claimed by the Assessee subject to verification by the AO of the compliance with the section and correctness of computation.

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH ‘D’ MUMBAI

Deepak Fertilisers &  Petrochemicals Corpn. Ltd. Vs. DCIT

ITA No. 4904/Mum/2009 Assessment year- 2006-07

DCIT Vs. Deepak Fertilisers &  Petrochemicals Corpn. Ltd.

ITA No. 5027/Mum/2009 Assessment year-2006-07

ORDER

PER ASHA VIJAYARAGHAVAN (JM)

This set of cross appeals consisting of one appeal filed by the assessee and the other appeal filed by the Revenue is directed against the orders dt. 1.6.2009 passed by the ld. CIT(A)-XXVIII for the Assessment Year 2006-07.

2. The assessee is a Public Limited company having its factory at Taloja, Dist. Raigad and engaged in manufacture and sale of chemicals and fertilisers as well as generation of electricity. The assessee is also engaged in the business of trading in chemicals and fertilisers.
3. The assessee filed its return of income declaring a taxable income of Rs. 1,07,69,09,439/-. However, the ACIT completed the assessment determining the taxable income at Rs.1,10,90,07,090/-. While assessing the taxable income, the ACIT disallowed some claims.

ITA No. 4904/M/08-Assessee’s appeal

4. The first issue in the Assessee’s appeal is regarding the dis-allowance of [provision made for obsolete stores/ spares. During the assessment year the appellant made provision in the accounts amounting to Rs. 16,37,358 towards stores and spares and also had sold off / used store spares valued at Rs.35,40,882 and credited this amount to the profit & loss account. The assessee claimed that the company was entitled to deduction of Rs.35,40,882/-. As per the judgement in the case of CIT Vs Herdilla Chemicals 225 ITR 532 the assessee claimed that an amount of Rs.19,03,124 (Rs.35,40,882 – Rs.16,37,758) should have been allowed as deduction while computing the taxable income for the year. However, the Ld. Additional Commissioner did not allow the claim of Rs.35,40,882/- and added back the provision of Rs. 16,37,758/-. The aggrieved assessee has filed an appeal before the CIT(A). The Ld. CIT(A) held as follows:

“6.2 The issue was decided against the assessee by the Honourable ITAT for the AY 97-98 with the direction the appellant would be entitled to claim deduction on account of loss in the year in which the items were sold. Respectfully following the decision of ITAT, the Assessing Officer is directed to allow credit for value of stores and spares sold during the year of Rs.35,40,882/-. The dis-allowances made by the Assessing Officer towards the provision of Rs. 16,37,758/- is confirmed.”

5. Aggrieved the assessee is on appeal before us regarding dis-allowance of Provision made for stores/spares. We find that this issue has been decided by the ITAT in Assessee’s own case by the ITAT for the AY 97-98 in ITA No. 2188/M/04 wherein at paras 2 1-22 the ITAT has held as follows:

“21. The next issue common to all the appeals relates to dis-allowance of provisions for obsolete inventory. For the sake of convenience the facts relating to the Assessment Year 1997-98 are being narrated. The assessee had written off the sum of Rs. 11,20,000/- on account of items considered obsolete. Such items included instrument items, cement, paint and paint materials, safety shoes and dress material. The Assessing Officer disallowed the claim of the assessee following the Bombay High Court judgement in the case of Herdilla Chemicals Ltd. 225 ITR 532 wherein it was held that such loss cannot be claimed in any year in which assessee likes. Such loss can be claimed only in the year in which such items are sold and disposed off. On appeal, the dis-allowance made by Assessing Officer was confirmed. Aggrieved by the same the assessee is in appeal before the Tribunal for all the years.

22. Contention raised on behalf of the assessee is that the decision of the Bombay High Court did not consider the Accounting Standard prescribed by the Institute of Chartered Accountants which were binding on the assessee. Therefore, the said decision should not be relied. It was also contended that the stocks can be valued at cost or market value as per the decision of Honourable Supreme Court in the case of Chainrup Sampatram 24 ITR 481. In our opinion both the contentions are without force. Normally, the Accounting Standards is accepted but it cannot override the provisions of the I. T. Act as held by the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd. 227 ITR 172. The Judgement of Bombay High Court would therefore apply to the present case wherein it has been clearly held that loss can be claimed only in the year in which such items are sold. The decision of Supreme Court in the case of Chainrup Sampatram (supra) is applicable only where stock in trade is to be valued and not other tems. In the present case, the items written off do not form part of stock in trade. Hence, the said decision would not apply. No other contention has been raised. Therefore, following the judgement of Bombay High Court in the case of Heredilla Chemicals Ltd (supra) we do not find any merit in the appeals of the assessee on this issue. The orders of the learned CIT(A) are therefore upheld on this issue.”

Respectfully following the decision of the co-ordinate bench we uphold the order of CIT(A) on this issue. However we make it clear that the assessee would be at liberty to claim deduction on account of loss in the years in which such items are sold. The Assessing Officer shall look into the matter if necessary evidences are filed before him. To that extent, the order of the learned CIT(A) is modified.

6. Ground No. 1 Part-2 is not pressed by the Assessee and is dismissed as not pressed.
7. The second issue is dis-allowance u/s 14A read with Rule8D. The facts of the issue is that the assessee claimed dividend income of Rs. 7,50,76,831/- exempt from tax. The Assessing Officer worked out the dis-allowance u/s 14A in accordance with Rule 8D at Rs. 2,35,68,500/-. On further appeal before the CIT(A), the counsel for the assessee submitted that the assessee had already disallowed the amount of Rs. 1,37,00,382/-. It was further submitted that no part of such expenditure can be attributable towards earning the tax free dividend income. The CIT(A) dismissed the claim of the Assessee holding as under:

“I have carefully considered the information on record. The Hon’ble Tribunal Special Branch Mumbai in case of Daga Capital Management Ltd held that “the provisions of Section 14A(2) and (3) or retrospective in nature and rule 8D would apply accordingly”. Since this decision is being followed in all cases wherever Section 14A is involved, I do not find any infirmity in action taken by the Assessing Officer. Further, Rule 8D prescribes that the average value of assets at the beginning and at the end of the year is to be considered for the purpose of Rule 8D. Nowhere it is mentioned that the gross value of the fixed assets and not WDV should be taken. Regarding investment in subsidiary company Star chem, Rule 8D do not differentiate whether the investment is for the purpose of business and also in view of the fact that such dis-allowance is confirmed by the CIT(A) order for AY 2005-06, following the rule of consistency the dis-allowance made the Assessing Officer u/s. 14A is confirmed”.

8. The jurisdictional high Court in the case of Godrej & Boyce Mfg Co Ltd v DCIT (328 ITR 81) has held that Rule 8D, for determining the dis-allowance u/s 14A is prospective in its application and would be applicable for the AY 2008-09 and later. In respect of earlier years the AO should determine the dis-allowance on a reasonable basis having regard to all facts and circumstances of the case. In this case the Assessee themselves have disallowed the amount of Rs. 1,37,00,382/-The Assessing officer should examine whether this dis-allowance offered by the Assessee themselves is reasonable and if not explain why it is not so. In this view of the matter we remit the matter back to the file of the AO to rework the dis-allowance u/s 14A on a reasonable manner.

8.1 In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

ITA 5027/M/09 Departmental Appeal

9. The first issue is with respect to prior period expenses claimed as a deduction by the Assessee. The CIT(A) allowed the Assessee’s claim as under:

“I have carefully considered the information on record. From the details of the ‘Prior Period Expenses” claimed, the expenses pertained to discount crystallised during the year. Similar expenses were allowed by CIT(A) for AY 05-06 vide order dt. 10.07.2008. The Honourable ITAT for AY 97-98 also allowed such expenses. The observations of the ITAT are as under:

‘The next issue relates to the dis-allowance in respect of ‘Prior Period Expenses’. This issue arises in the Assessment Years 1997-98, 98-99 and 2000-01. The dis-allowance has been made without much discussion by the Assessing Officer in these years but the learned CIT(A) following his earlier order decided the issue in favour of the assessee. It had been contended before learned CIT(A) that certain expenses are not supported by the bills/vouchers and sometimes the claims are not processed and accepted by the accounts department. As and when such bills/vouchers are received or claims are settled, the expenses are booked through sometimes it may relate to the earlier years. It was also submitted that such procedure was being followed consistently. The learned CIT(A) accepted the contention of the assessee. The learned CIT(A) also took into consideration the decision of Bombay High Court in the case of Nagri Mills Co Ltd. 33 ITR 681 wherein their Lordships observed that where the deduction is obviously a permissible deduction then the department should not dispute as to the year in which deduction should allowed. Following the aforesaid observations of Bombay High Court and for the sake of consistency, the learned CIT(A) upheld the contention of the assessee and consequently, dis-allowances made by the Assessing Officer were deleted. Aggrieved by the same, the Revenue is in appeals before the Tribunal. After hearing both the parties, we find that the issue is covered in favour of assessee by the decision of the Tribunal dated 31st December, 2004 in assessee’s own case for the Assessment Year 1 990/-91, wherein the system of accounting adopted by the assessee has been accepted. Therefore, following the same, the orders of the learned CIT(A) are upheld”.

Since the facts and circumstances are exactly same, following the principles of consistency the addition made by the Assessing Officer of Rs. 13,11,309/- towards ‘Prior Period Expenses’ is deleted.”

10. Aggrieved the Department is on appeal before us. We find that on this very same issue, the ITAT by its order dt. 21.9.2007 for Assessment Year 1997-98 has held as follows:

“The next issue relates to the disallowance in respect of prior period expenses. This issue arises in the Assessment Years 1997-98, 1998-99 and 2000-01. The disallowance has been made without much discussion by the Assessing Offier in these years but the learned CIT(A) following his earlier order decided the issue in favour of the assessee. It had been contended before learned CIT(A) that certain expenses are not supported by the bills/vouchers and sometimes the claims are not processed and accepted by the accounts department. As and when such bills/vouchers are received or claims are settled, the expenses are booked through sometimes it may relate to the earlier years. It was also submitted that such procedure was being followed consistently. The learned CIT(A) accepted the contention of the assessee. The learned CIT(A) also took into consideration the decision of Bombay High Court in the case of Nagri Mills Co Ltd. 33 ITR 681 wherein their Lordships observed that where the deduction is obviously a permissible deduction then the department should not dispute as to the year in which deduction should allowed. Following the aforesaid observations of Bombay High Court and for the sake of consistency, the learned CIT(A) upheld the contention of the assessee and consequently, dis-allowances made by the Assessing Officer were deleted. Aggrieved by the same, the Revenue is in appeals before the Tribunal. After hearing both the parties, we find that the issue is covered in favour of assessee by the decision of the Tribunal dated 31st December, 2004 in assessee’s own case for the Assessment Year 1990/-91, wherein the system of accounting adopted by the assessee has been accepted. Therefore, following the same, the orders of the learned CIT(A) are upheld”.

Respectfully following the decision of the Co-ordinate Bench in assessee’s own case for earlier years, we dismiss the departmental appeal on this issue.

11. The next issue in the Departmental appeal is against grant of depreciation on buildings. The Assessee claimed depreciation in respect of a Flat which has been used for business purposes. The Assessing Officer disallowed depreciation on the following grounds.

a) The assessee acquired shares and not building and hence, no depreciation is allowable.

b) The assessee is not the owner of the building and hence, it cannot claim depreciation.

c) The assessee’s claim that above transaction in pari materia with that of cooperative society is not accepted since this is a case of company and not co-operative society and therefore cannot be equated.

12. The CIT(A) allowed the claim of the Assessee observing as under:

“The issue was covered in favour of assessee by the order of CIT(A) for A. Y 2004-05 and 2005-06. This was also covered by the Hon’ble ITAT in favour of the assessee for AY 1997-98. The Hon’ble ITAT discussed the issue at length and held that the word “owner” has to be understood in a wider sense and not in the legal sense as per the Transfer of Property Act. The sure test would be whether the assessee can exercise the right of the owner to the exclusion of others? As there is no change in facts and circumstances, respectfully following the decision of the ITAT, the addition made by the Assessing Officer of Rs.25,55,754/- is deleted.”

13. Aggrieved the Department is on appeal. We find that for the A.Y 1997-98, the Tribunal has held as follows:

“A bare reading of the aforesaid articles shows that by virtue of holding of particular nos. of shares having particular distinctive nos., the holder would be entitled to have exclusive possession of a particular no. of flat so as to have exclusive use and occupation of the said flat. Thus, ownership a flat is attached with a particular and specific share having specified distinctive nos. Therefore, if that share is transferred then the absolute ownership of that flat is automatically transferred to the other party and the company has no power to refuse the transfer of such share from one person to another. This is an acceptable mode of transfer of property in the case of a company and is duly recognized by section 2(47(vi), section 27(iii) as well as section 269UA(d) of the Act. In view of the above discussions, we are of the view that assessee had become the owner of the properties by virtue of holding of shares of Yerrowda Investments Ltd and consequently it was entitled to claim depreciation in accordance with the law. The order of the learned CIT(A) is therefore upheld on this issue.”

Respectfully following the decision of the ITAT in the Assessee’s own case for the earlier years, we confirm the order of the CIT(A) granting depreciation on the buildings and dismiss the revenue’s appeal on this issue.

14. The next issue in the Departmental appeal is against the allowance of loss in respect of r value of Stores & Spares sold.
15. As held by us in Assessee’s appeal supra, on the same issue, the Assessee is not entitled to any deduction on the provision made for obsolete stores/ spares, but is entitled to claim deduction of loss arising from actual sale of stores/ spares. The Assessing Officer shall verify the correctness of computation of loss. With the above directions the Departmental appeal on this issue is dismissed.
16. The next issue in the Departmental appeal is whether Depreciation is to be allowed on the software- ERP system capitalised at the rate of 60% or 25%.
17. The CIT(A) has held as follows:

“The appellant has spent a sum of Rs. 263.74 lacs for acquiring ERP software. The appellant claimed 60% depreciation while Assessing Officer allowed 25% as applicable in case of intangible assets. The difference is Rs. 12,16,326/-. The appellant pleads that if items falls under specific category ‘computer software’ (60% depreciation), that depreciation is to be allowed over general category ‘intangible assets’ (25% depreciation). It has further pleased, if an item falls under both categories, the one which is favourable to assessee has to be followed.

The issue is covered in the favour of assessee by the order of CIT(A) for AY 2005-06 following the decision of Hon’ble Supreme Court in the case of Tata Consultancy Services 271 ITR 401 wherein it was held the computer software package was “goods” for the purpose of Central Excise. Therefore, it can not be considered as intangible assets. In accordance with principles of consistency the Assessing Officer is directed to allow 60% depreciation on computer software.”

18. Aggrieved Revenue is on appeal before us. The Learned Counsel for the assessee Shri H.P. Mahajani submitted before us that in Datacraft India Ltd (40 SOT 295) Special Bench Mumbai, it has been held that “aid can be taken of the definition of the term ‘computer’ given in Information Technology Act 2000. The Special Bench has reproduced the definition of computer which includes ‘Computer Software’. The Special Bench has held that from AY 2003-04 enhanced rate of 60% would apply to computer software. We heard both parties.
19. We find that from AY 2003-04, under the Depreciation Table in IT Rules, Computers including Computer software is entitled to depreciation at 60%. In this view of the matter we confirm the order of the CIT(A) granting depreciation at the rate 60% on the computer software and dismiss the revenue’s appeal on this issue.
20. The next issue is with respect to addition of Rs. 18.18 lakhs being the amount transferred from special reserve and set off against the depreciation in the Books.
21. The CIT(A) has dealt with this issue at para 9.1 and 9.2 as follows:

“The facts of the issue are the assessee had received an incentive from Government of India on commissioning of its Nitro Phosphate Plant on 1.7.1992. For accounting purposes the said amount was reflected in the Balance Sheet under a special reserve account. For the last several years the assessee followed the accounting practice of transferring proportionate amount from this Special Reserve and setting off of book depreciation. In the year current year also assessee adjusted Rs. 18.18 lacs against the book depreciation as per income tax rules. The set off of special reserve e against book depreciation donot affect the income. Also as the amount was received in 1992 therefore the same cannot be treated income of assessee in this year.

The issue was covered in favor of assessee by CIT(A) for AY 2005-06 on the ground that this was only a mere book entry which was set off against depreciation. This amount was capital subsidy received in the year 1992. Therefore the same can not be treated as income of the appellant for this year. Hence the addition made by Assessing Officer is deleted.”

22. Aggrieved Revenue is on appeal before us. We find that ITAT for the A.Y 2005-06 has held as follows:

“We have considered the rival submissions. We find that the assessee has set up a plant of Nitro Phosphate in the year 1992 and had received incentive from the Government on the Commissioning of the plant, which was reflected in the balance sheet of the assessee as a special reserve. This amount of special reserve is set off against the book depreciation. The CIT(A) has recorded that since the assessee had already added the entire book depreciation and has claimed depreciation as per Income Tax Rules and, therefore, the set off of special reserve in book depreciation do not effect the income of the assessee and that since the amount was received in the year 1992, therefore, the same could not be treated as income of the assessee in this year. We find that the revenue could not controvert the submission of the ld. Counsel for the assessee that no such addition was ever made by the revenue right from the year 1992 when the plant was set up till the immediately preceding assessment year 2004-0 5 and that the relevant assessment year 2005-0 6 is the first assessment year in which such addition has been made by the department. We find that there is no justification for the action of the department in making the addition of the amount transferred from special reserve. There being no mistake in the decision of the CIT(A) on this issue, we confirm the order of the CIT(A) on this issue and the ground of appeal no.4 of the revenue is dismissed.”

Respectfully following the decision of the ITAT in the Assessee’s own case for the earlier years, we confirm the order of the CIT(A) and dismiss the Departmental appeal on this issue.

23. The last ground is against grant of additional depreciation of Rs. 26,96,923/- on new plant and machinery installed. The main grouse is that the claim was not made in the return of income. Grant of depreciation and additional depreciation is mandatory, whether claimed by the Assessee or not. Omission to claim depreciation in the return, will not disentitled the assessee to claim additional depreciation to which they are statutorily entitled to for the first time before the CIT(A). The requisite certificate from the Auditors regarding the claim for depreciation has been filed during the assessment proceedings. There is no finding by the AO that the claim of the Assessee is not in accordance with the provisions of the Act. We therefore direct the allowance of additional depreciation as claimed by the Assessee subject to verification by the AO of the compliance with the section and correctness of computation.

24. In the result the appeal filed by the Revenue is dismissed.

Order pronounced on this 31st day of May, 2011

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