Case Law Details

Case Name : Gujarat Organics Ltd. Vs ACIT (ITAT Mumbai)
Appeal Number : ITA No. 189/MUM/2010
Date of Judgement/Order : 09/02/2011
Related Assessment Year : 2000- 01
Courts : All ITAT (4278) ITAT Mumbai (1426)

Gujarat Organics Ltd. Vs ACIT (ITAT Mumbai)- The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008- 09. Even prior to Assessment Year 2008- 09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A.

For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “G”, MUMBAI

BEFORE  SHRI P.M. JAGTAP (A.M) & SHRI N.V.V ASUDEVAN(J.M)

ITA NO. 189/MUM/2010

(A.Y. 2000- 01)

ITA NO. 188/MUM/2010

(A.Y. 2005-06)

M/s. Gujrat Organics Ltd.,

3-A, Barodawala Mansion, 81, Dr. Annie Besant Road, Worli, Mumbai – 400018.

PAN:AAACR 2060G

(Appellant)

 

 

Vs.

The ACIT 6(3), Aaykar Bhavan, MK Road, Mumbai – 20.

 

 

(Respondent)

ORDER

PER N.V.VASUDEVAN, J.M,

ITA No. 189/M/2010 and 188/M/2010 are appeals by the assessee against  a common order dated 29/9/2009 of CIT(A) XII, Mumbai relating to assessment year 2000-01 and A.Y. 2005-06 respectively. First we take up for consideration appeal for A.Y 2000-01.  Ground No.1 raised by the assessee reads as follows:

“Ground No.1: Reopening of Assessment u/s. 147 of the Income Tax Act, 1961.

i.  The learned CIT(A) failed to adjudicate above ground of appeal while passing the order.”

2. The assessee is a company.  It is engaged in the business of manufacture of fine chemicals, trading in special chemicals and investments.  For A.Y 2000-01 the assessee filed a return of income on 27/11/2000.  The return was processed under section 143(1) of the Act on 2/3/2002.  The Assessing Officer thereafter issued a notice under section 148 dated 30/3/2007.  The Assessing Officer completed the reassessment proceedings by his order dated 4/12/2007.  Against the said order the assessee filed an appeal before the CIT(A).  In ground No.2 the assessee specifically raised an issue challenging the validity of initiation of reassessment proceedings under section 147 of the Income-tax Act, 1961 (the Act).  Admittedly this ground was not adjudicated by the CIT(A).  We, therefore, direct the CIT(A) to adjudicate the aforesaid ground of appeal.  Thus ground No.1 is allowed to the extent indicated above.

3. Ground No. 2 raised by the assessee reads as follows:

“Ground No. 2 : CIT(A) has erred in concluding that difference between Modvat included in Closing stock and Modvat credit shown in Balance Sheet as income of  the appellant.

i) The learned CIT(A) has erred in giving direction to the Assessing Officer to make addition to the tune of difference between the Modvat included in the Closing Stock and Modvat credit shown in the balance sheet.

ii) The Learned CIT(A) failed to appreciate that the inclusive of excise duty or exclusive of excise duty method are revenue neutral.

iii) The Learned CIT(A) failed to appreciate that the appellant company already following inclusive method of accounting and the same is clearly mentioned in notes to accounts of the Audited Accounts of the appellant company.”

4. According to the AO, the Assessee was showing opening and closing stock of raw materials without considering the excise duty paid by the Assessee on the same.  Only the value of finished goods in the closing stock was after including the excise duty paid or payable.  He held that after introduction of Sec.145-A of the Act by the Finance Act, 1998 w.e.f. 1.8.1999, it was mandatory for all Assessees to value inventory by including any tax due, cess  etc., by whatever name called actually paid or incurred by the Assessee to bring the goods to the place of its location.  The assessing officer  further observed that the closing stock of the earlier year which was the opening stock of the present assessment year, the closing stock was valued including inventory.  He disallowed the benefit of higher valuation of opening stock for the present Assessment year.  Thus the AO made following disallowance u/s. 145A of the Income Tax Act:-

(i) Rs. 8,16,250/- based on the Article given in the December, 2007 issue of the Journal of Institute of Chartered Accountants of India and

(ii) Rs. 6,91,801/- on account of duty of opening stock of raw material and finished goods.

5. Before CIT(A), the Assessee submitted that it had during the course of assessment proceedings filed trading account based on inclusive method as well as on exclusive method to demonstrate that whether inclusive method or exclusive method is followed, the same is revenue neutral.  It was contended that provisions of Sec. 145A are revenue neutral, the assessing officer while arriving at the profit of Rs. 8,16,250/- in the 143(3) order, following December, 2007 Journal of Institute of Chartered Accountant of India has made the following errors:

i) The assessing officer has ignored the excise duty on processed goods amounting to Rs. 6,35,790/-. It may be appreciated that for A.Y 2002-03 the excise duty on the said processed goods has been duly taken by the said assessing officer. Therefore, once the excise duty of Rs. 6,35,790/- of processed goods is considered, the impact would be Rs. 1,80,460/-(Rs. 96,77,412-, Rs. 94,96,952/-).  The said working was filed before CIT(A).

ii) That for A.Y 2002-03 and A.Y. 2005-06 the amount considered and chargeable by the assessing officer is the amount paid through PLA and RG 23C which is as per the method given in the Institute Journal of December, 2007.  However, for the year under review the same assessing officer has not considered the amount paid through PLA.  Therefore, if the payment of Rs. 51,70756/- paid through the PLA is considered there would be no addition under the provisions of section 145A.  The said working was also filed before CIT(A).

6.  Without prejudice to the above contention that no dis-allowance can be done under section 145A of the Income Tax Act, it was submitted that the assessing officer has made a further addition u/s. 145A amounting to Rs. 6,91,801/- being excise duty on opening stock of raw material and finished goods amounting to Rs. 97,450/- and Rs. 6,02,351/- respectively on the ground that opening stock of one year has to be closing stock of earlier year and following the principle of consistency, the same amount has been disallowed.  It was submitted that the Assessee has consistently valued the finished goods in the books of account inclusive of excise and raw material, has always been valued in the books of account exclusive of excise and accordingly, closing stock of earlier year has been shown as opening stock of current year consistently and therefore there is no discrepancy in respect of the same. It was pointed out that for A.Y 2002-03 as well as A.Y 2005-06 addition was done in the 143(3) order of excise duty only on opening stock of Raw material and not finished goods.  Accordingly addition if at all should have been at Rs. 97,450/- being excise on opening stock of raw material.  The raw material is valued exclusive of excise on account of the fact that the purchase are always exclusive of excise. Therefore, if the raw materials have to be valued inclusive of excise, purchase would also be valued inclusive of excise and the same therefore would be revenue nature.  It was also pointed out that a similar dis-allowance u/s. 145A for A.Y 2003-04 was made and on appeal by the Assessee, the ld. CIT(A) in his order  has held that whether inclusive method or exclusive method is followed, the same is revenue neutral.

 7 The CIT(A), however without considering the above submissions of the Assessee,  directed the Assessing Officer to follow the order on an identical issue in assessee’s case for A.Y 2002-03 with a direction to verify and add to income if there is difference between the Modvat credits shown in the balance sheet and Modvat included in closing stock.  In fact, as well see in the subsequent paras the issue of addition on account of difference in Modvat credit shown in the Balance Sheet and Modvat included in closing stock is subject matter of ground No. 3 before the Tribunal. The grievance of the Assessee projected in ground No.3 before the Tribunal is the same grievance that was subject matter of ground No. 7 raised before CIT(A) by the Assessee. The verdict of the CIT(A) referred to above rendered in the context of Ground No. 2 before the Tribunal, is therefore, incorrect. It can be seen from the above that the CIT(A) has not adjudicated the real controversy. The controversy is as to whether the assessee follows an inclusive method or exclusive method of valuing its inventory. Both parties expressed the desire that Assessing Officer should examine this aspect and decide the issue afresh.  We accordingly set aside the order of the CIT(A) on this issue and direct the Assessing Officer to verify the method of accounting followed by the assessee for valuing its inventory and thereafter decide the issue in accordance with law.  The assessee will be at liberty to explain its stand in this regard in the light of the provisions of section 145A of the Act.

8. Ground No.3 raised by the assessee reads as follows:

“Ground No.3: Disallowing Rs. 20,65,270/- on account of difference in rates of opening and closing stock of finished goods:

i) The Learned CIT(A) failed to adjudicate above ground of appeal while passing his order.”

9. The assessing officer disallowed a sum of Rs. 20,65,270/- on account of difference in rates of  closing  and opening stock of finished goods. The assessing officer has made addition of Rs. 20,65,270/- on the ground that closing stock value shown by the Assessee was at Rs.15,17,400/- as against Rs. 36,35,670/- arrived at by the assessing officer.  It was submitted before CIT(A) that the assessing officer has made following errors in calculating closing stock figure of Rs. 15,17,400/-.

i) Closing stock shown by the Assessee in the accounts was at Rs.25,04,999/- and not Rs. 15,17,400/- as stated by the assessing officer.

ii) That the assessing officer has applied the opening stock rate of  1.03 on Para / Ortho Hydroxy Benzoic Acid and 1.81 on derivatives of  Para / Ortho Hydroxy Benzoic Acid on the closing stock without appreciating that items mixed and rate of opening and closing stock can never be the same.  In fact during the course of the assessment proceedings, it was explained that the opening of stock of 15.23 MT included Para / Ortho Hydroxy Benzoic Acid  quantity of 7.898MT @ 118.42 totalling to Rs. 9,35,281/- which was included in Rs. 15,68,000/- whereas out of total closing stock of 11.31 MT, closing stock of  Para / Ortho Hydroxy Benzoic Acid quantity was only 0.163 MT @ 118 totalling to Rs. 19452/- in the total stock of Rs.7,07,000/-. The quantitative details with value of opening and closing stock of finished goods was filed before CIT(A).

iii) That the assessing officer in para 6.4 of his order has stated that the opening stock of first two items in Schedule N comes to 30.89 lacs which is exactly same as shown by the assessee in 145A working the value of opening stock of finished goods without excise.  This statement of the AO is factually incorrect.  In fact the trading account inclusive of excise as reflected in annexure f clearly shows that Rs. 30.89 lacs is inclusive of excise of Rs. 6,02,351/-.  It was submitted that the Assessee has always valued stock of finished goods inclusive of excise and never exclusive of excise.

Accordingly it was submitted that the closing stock of finished goods was correctly valued by the Assessee at Rs. 25,04,999/- inclusive of excise and that there was no basis for the assessing officer to value the closing stock of finished goods at Rs. 36,35,670 in an adhoc and arbitrary manner.

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10. The assessee projected its grievance against the order of the Assessing Officer on the above addition in ground No. 7 before the CIT(A).  The CIT(A), however, has not adjudicated this ground.  We, therefore, direct the CIT(A) to decide this issue in the set aside proceedings.

11.     Ground No.4 raised by the assessee reads as follows:

“Ground 4:  Directing the AO to calculate dis-allowance u/s. 14A as per methodology laid down in Rule 8D.

i) The Learned CIT(A) failed to appreciate that the appellant company has not incurred any expenditure to earn the exempt income in the form of dividend income from Indian company.

ii)The appellant company has huge surplus fund available and the said funds were utilized for the purpose of investment.  As a  result the interest expense has nothing to do with earning the dividend income.

iii) The Learned CIT(A) failed to understand that interest free funds available with appellant company was utilised for investment purpose as a result the proportionate interest expense should not be disallowed u/s. 14A.

iv) On the basis of facts of the case of the appellant company dis-allowance u/s. 14A is not justifiable.”

12. The Assessing Officer had disallowed a sum of Rs. 11,24,725/- under the provisions of Sec. 14A of the Income Tax Act consisting of Rs. 6,74,622/- towards interest expense and Rs. 4,50,103/- being 5% of the dividend income amounting to Rs. 90,02,060/- towards common expenses.

13. On appeal by the assessee the CIT(A) directed the Assessing Officer to follow the decision of the Honourable Special Bench  Mumbai in the case of Daga Capital Management Pvt. Ltd., 117 ITD 169(SB)(Mum) and compute the dis-allowance under section 14A of the Act.

14. The Honourable Bombay High Court in INCOME TAX APPEAL NO.626 OF 2010  in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income Tax,Range 10(2), Mumbai & Anr.  And W.P. 758/10 Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs.Dy. Commissioner of Income Tax Range 10(2), Mumbai & Ors. by Judgement dated 12-8-2010 has dealt with the dis-allowance that can be made u/s.14-A of the Act.  The Honourable Court also dealt with the decision of the Special Bench of the ITAT in the case of Daga Capital Management Pvt.Ltd. 117 ITD 169 (mum) (SB) and has laid down the following proposition:

i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee.

Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1);

ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis;

iii) The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid;

iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution;

v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09;

vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;

vii) The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.

15. In view of the aforesaid decision of the Honourable Bombay High  Court the issue with regard to dis-allowance under section 14A has to be made in accordance with the principle laid down by the Honourable Bombay High Court.  Rule 8D should not be applied and the AO has to adopt a reasonable basis or method consistent with all relevant facts and circumstances and after  affording reasonable opportunity to the assessee to place all germane material on the record.  We, therefore, remit the issue to the A.O for fresh consideration as stated above.

16. Ground No.5 raised by the revenue reads as follows:

“Ground 5:  Denial for deduction of repairs and maintenance expenses by treating the same as capital in nature amounting to Rs. 2,14,574/- after considering depreciation on it.

i) The learned CIT(A) has erred in denying  deduction of the current repairs amounting to Rs. 2,14,574/- stating that the same is capital expenditure for want of details whereas entire details has been submitted

ii) The learned CIT(A) failed to appreciate that the repairs and maintenance  expenditure incurred  are purely of revenue nature since they are not incurred on existing machinery.

17.  The assessing officer disallowed a sum of Rs. 7,40,227/- incurred towards repairs and maintenance by treating the same as capital in nature on the ground that

(i) Payments to Jay Jalram Eng. & Fabricator mentions that payments were regarding work gear new machinery, shaft welding, Gland pusher and fabrication of Dryers which are capital in nature and not towards repairs and maintenance.

(ii) Capital work regarding new machinery was going on for which very less amount has been capitalised in the books.

18. Before CIT(A), the Assessee submitted that the Assessee during the course of assessment proceedings had filed complete details date wise of various expenses incurred towards repairs and maintenance and the same were also filed before CIT(A). Along with the said details sample copies of the bills of each of the parties were also attached.  Sample copies of bills of Jay Jalram Eng.& Fabricators were also filed. It was pointed out that from the said details as well as bills, it can be seen that within each bill, there are further sub expenses of small repairs in nature. This according to the Assessee clearly established that the expenditure incurred were towards repairs and maintenance of the plant and machinery and there was no new capital assets coming into existence.  It was pointed out that a bill for Rs.4,460/- of Jay Jalram Eng. & Fabricator consisted of 9 further items of small repair expenses.  With regards to the AO’s observation that the Assessee did not capitalise value of work in progress, it was submitted that during the previous year  the Assessee had capitalised a sum of Rs. 33,00,757/- which includes capitalisation towards plant & machinery of Rs. 12,86,821/-. Accordingly, it was argued that the assessing officer erred in stating that very less amount has been capitalised in the books.  It was submitted that there was no  basis to consider genuine repair expenses as capital in nature on the ground that a very small amount has been capitalised. It was also pointed out that in the preceding years as well as in the succeeding year expenses on repairs were incurred and the same were duly accepted  as revenue in nature in the order passed under section. 143(3) of the Act.

19. The CIT(A) deleted the addition to the tune of Rs. 5,25,653/- for the following reasons.

“6.2  The details of repairs and maintenance expenses submitted by the appellant  only contain a list of bills including the name of the party and date and amount.  The appellant has also submitted a list showing the nature of  work carried out.  The list, however, does not give details of whether the fabrications etc. are for repair of  machinery or for new machinery. In certain cases, however, it is clearly mentioned that the expenditure is only for spares which only mean that it is only for existing machinery.  There are as under:

Particulars

Amount (Rs.)

Spares for Pump Rs. 25,303

Spares for air compressor

Rs. 90,749
Spares for watering vac-cum pump Rs. 1,31,870
Seals for rotary units Rs. 40,606
Seals, rotary units Rs. 32,652
Rewinding lab-our charges Rs. 45,905
Repairs of machinery Rs. 1,58,568
Total Rs. 5,25,653

The above items are certainly in the nature of repairs which should be allowed as a deduction on revenue account.  The dis-allowance in respect of the remaining items for which details are not available is confirmed.”

20. Aggrieved by the order of CIT(A), the Assessee has raised ground No. 5 before the Tribunal. It was submitted before us that the expenses which were considered by the CIT(A) were not the expenses which were disallowed by the Assessing Officer.  In this regard ld. Counsel for the assessee submitted that the details of expenses disallowed by the Assessing Officer which were as follows:

S. No. Name of the party Purpose Disallwoed by AO Allowed by CIT(A)
1. B.S.Patel Fabrication and erection work   30,945
2. Industrial Insulation Thermal insulation 120,737
3. Jay Jalram Eng.& Fabrications Work gear new machining, shaft welding, gland pursher, fabrication of dryer 140,337
4. Mehsana Iron Stores Angle, Flat angle, ismc, ched plat ec.  69,5711
5. Suhrad Agency Cement, AC sheets  35,329
6. Ankur Electricals Cable & wiring work, electric fittings 48,189
7. B.R. fibre Glass & Equipment Welding joint, pipe fabrication work 114,311
8. Vishnu Engineering Fabrication, modification of machinery 214,277
9. Relax Metal

Pipes, reducers, stubends, elbow, valves.

TOTAL

 

Less: Depreciation

 57,878

 

831,574

 

91,348

 

740,226

=======

 21.  It was submitted that on reading of the CIT(A)’s order and comparing the same with the above, it will be evident that the assessee’s grievance had not been properly addressed by the CIT(A).  It was also submitted that all the details of the expenses had been filed before CIT(A).

22. We find the above contention to be correct and in the circumstances, we set aside the order of the CIT(A) on this issue and remand the issue for fresh consideration by the CIT(A) in the light of the evidence filed by the assessee and taking into consideration the correct items of dis-allowance which were challenged before CIT(A).

23. For statistical purposes the appeal of the assessee is treated as allowed.

ITA No.188/M/10

24. Ground No. 1 raised by the assessee in this appeal reads as follows:

“Ground No. 1: CIT(A) has erred in concluding that difference between Modvat included in Closing stock and Modvat credit shown in Balance Sheet as income of  the appellant.

iv) The learned CIT(A) has erred in giving direction to the Assessing Officer to make addition to the tune of difference between the Modvat included in the Closing Stock and Modvat credit shown in the balance sheet.

v) The Learned CIT(A) failed to appreciate that the inclusive of excise duty or exclusive of excise duty method are revenue neutral.

vi) The Learned CIT(A) failed to appreciate that the appellant company already following inclusive method of accounting and the same is clearly mentioned in notes to accounts of the Audited Accounts of the appellant company.”

25. This ground is identical to Ground No.2 raised by the assessee in its appeal ITA No. 189/M/2010.  For the reasons stated therein the issue is remanded back to the Assessing Officer for fresh consideration with the directions as were gtiven while deciding appeal being ITA No. 189/M/2010.

26.  Ground No.2 raised by the revenue reads as follows:

“Ground 2:  Directing the AO to calculate dis-allowance u/s. 14A as per methodology laid down in Rule 8D.

i) The Learned CIT(A) failed to appreciate that the appellant company has not incurred any expenditure to earn the exempt income in the form of dividend income from Indian company.

ii) The appellant company has huge surplus fund available and the said funds were utilised for the purpose of investment. As a result the interest expense has nothing to do with earning the dividend income.

iii) The Learned CIT(A) failed to understand that interest free funds available with appellant company was utilised for investment purpose as a result the proportionate interest expense should not be disallowed u/s. 14A.

iv) On the basis of facts of the case of the appellant company dis-allowance u/s. 14A is not justifiable.”

27. This ground of appeal is identical to Ground No.4 raised by the assessee in ITA No. 189/M/2010. The issue relates to dis-allowance of expenses under section 14A of the Act. The issue is remanded back to the Assessing Officer for fresh consideration in the light of the directions given while deciding identical ground of appeal in ITA No. 189/M/2010.

28. For statistical purposes the appeal of the assessee is  treated as allowed.

29. In the result, both the appeals are treated as allowed for statistical purposes.

Order pronounced in the open court on the  9th day  of February 2011.

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