DCIT Vs Aarti Drugs Ltd (ITAT Mumbai)
Held that education cess paid by the respondent-assessee is not allowable as an expenditure under Section 37 read with 40(a)(ii) of the Income Tax Act.
Facts- The assessee has made investments on which it has earned exempt income. Accordingly, the assessee was asked to show cause as to why disallowance u/s14A r.w.r.8D should not be made. After considering the submission of the assessee, the AO computed the disallowance of Rs.31,65,557/- u/s 14A r.w.r. 8D(2)(ii) and disallowance of Rs.6,69,375/- u/s 14A r.w.r. 8D(2)(iii), aggregating to total disallowance of Rs.37,91,582/-. CIT(A) after considering the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in preceding assessment years deleted the disallowance towards interest expenditure u/s 14A r.w.r. 8D(2)(ii) on the basis that assessee’s own funds are adequate to cover the investments. As regard the disallowance made u/s 14A r.w.r. 8D(2)(iii), the learned CIT(A) restricted the disallowance to the dividend income earned by the assessee. Being aggrieved, the Revenue is in appeal before us.
Another issue raised by revenue is with regard to claim of education cess as allowable expenditure.
Conclusion- Held that we find that the Hon’ble Jurisdictional High Court in CIT Vs. Reliance Utilities & Power Ltd., [2009] 313 ITR 340 (Bom.), held that if funds are available with the assessee, which are sufficient to meet the investment, then the presumption would arise that the investment is made out of funds so available with the assessee. We further find that the Co-ordinate Bench of the Tribunal in assesee’s own case in Aarti Drugs Limited Vs. Addl. CIT, in ITA No. 6783-84/MUM/2014, vide order dated 10/02/2017, for the assessment years 2010-11 and 2011-12, following the principle laid down by the Hon’ble Jurisdictional High Court in aforesaid decision directed the deletion of addition made u/s 14A r.w.r. 8D(2)(ii). We find that the Hon’ble Jurisdictional High Court in Nirved Traders (P.) Ltd. Vs. Dy. CIT, I.T. Appeal No.149 of 2017, vide judgement dated 23.04.2019, has held that disallowance under section 14A of the Act cannot be more than exempt income. Thus, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue.
Held that education cess paid by the respondent-assessee would not be allowed as an expenditure under Section 37 read with 40(a)(ii) of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the Revenue challenging the impugned order dated 31/08/2020, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–12, Mumbai, [“learned CIT(A)”], for the assessment year 2012–13.
2. In its appeal, the Revenue has raised the following grounds:–
“1. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in restricting the disallowance u/s 14A of the Income Tax Act r.w.r. 8D(2)(iii), to the extent of exempt Income received by the assesseeduring the year under consideration without appreciating the Circular No.5 of 2014 dated 11.02.2014 of CBDT.
2. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in holding that the assessee is entitled to claim 10% additional depreciation in the year under consideration ignoring the second proviso to section 32(1) of the Act, which clearly suggests the intention of legislature to give such additional depreciation for the yearin which the assets were put to use, but not in any succeeding year.
3. On the facts and circumstances of the case and in law, whether theLd CIT(A) is justified in holding that the expenditure incurred by the assessee was a normal business expenditure towards sale of products and hence it is allowable as revenue expenditure ignoring the fact that the expenditure incurred towards obtaining “Certificate of Suitability (COS)” and filing of “Drug Master File (DMF)” are capital in nature as these expenses give enduring benefit to the business of the assessee spread over several years and therefore the Ld CIT(A) ought tohave held it as capital in nature.
4. On the facts and circumstances of the case and in law, whether theLd CIT(A) is justified in ignoring the ratio laid down by the Hon’ble Supreme Court in the case of BallimalNavi Kishore Vs CIT reported in 224 ITR 414 (SC); in allowing the expenditure incurred towards obtaining COS and DMS as revenue expenditure.
5. On the facts and circumstances of the case and in law, whether theLd CIT(A) is justified in allowing the prior period expenses of Rs. 78,572/-without appreciating the fact that such expenditure was not incurred oraccrued during the year under consideration.
6. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in allowing deduction u/s 80IA of the Act, which has been claimed by the assessee in appellate stage by way of filing a letter for the first time, ignoring the fact that the assessee has never made the claim of deduction u/s 801A in the return of income filed u/s 139 for the year under consideration.
7. On the facts and circumstances of the case and in low, whether theLd CIT(A) is justified in allowing deduction u/s 801A of the Act ignoringthe findings of the Assessing Officer in the remand report, wherein theAO has strongly objected the admission of fresh claims.
8. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in allowing deduction u/s 801A of the Act ignoring the ratio laid down in the decision of the Hon’ble Supreme Court in the case of M/s Goetze India Ltd.
9. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in treating the “Status Holder Incentive Scripts (SHIS). “Focus Market Scheme (FMS)” and “Focus Product Scheme (FPS)”as capital receipts, claims of which have been made in appellate stage by way of filing a letter, ignoring the fact that the assessee has never made the claim in the return of income filed u/s 139 for the year under consideration.
10. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in treating the SHIS. FMS and FPS as capital receipts ignoring the findings of the Assessing Officer in the remand report. wherein the AO has strongly objected the admission of fresh claims.
11. On the facts and circumstances of the case and in law, whether theLd CIT(A) is justified in treating the SHIS, FMS and FPS as capital receiptsignoring the ratio laid down in the decision of the Hon’ble Supreme Court in the case of M/s Goetze India Ltd.
12. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in ignoring the amendment in Finance Act. 2015 w.e.f. 01.04.2016 which ultimately culminated into the taxing belt with the due insertion of sub-clause (xviii) in Section 2(24) of the IT Act, 1961 providing an inclusive definition of the expression ‘income’ under the tax law, which includes assistance in the form of a subsidy by the Central Government.
13. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in ignoring the fact that the consequential amendment in the statutory provisions calls for enforcing the very taxability of the subsidy or concessional grants received from the Government or any other constituted body.
14. On the facts and circumstances of the case and in law, whether
theLdCIT(A) is justified in allowing the expenditure of education cess, whichhas been made in appellate stage by way of filing a letter, ignoring thefact that the assessee has never made the claim of deduction in the return of Income filed u/s 139 for the year under consideration.
15. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in allowing the expenditure of education cess paid as revenue expenditure ignoring the findings of the Assessing Officer in the remand report, wherein the AO has strongly objected the admission of fresh claims.
16. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in allowing the expenditure of education cess paid as revenue expenditure ignoring the ratio laid down in the decision of the Hon’ble Supreme Court in the case of M/s Goetze India Ltd.
17. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in allowing the expenditure of Education Cess of Rs.23.30.097/-, which has been made in the first appellate stage for the first time by the assessee in view of the judgment of Hon’ble Rajasthan High court in the case of Chambal Fertilizers and Chemicals Ltd ignoring the fact that the department has challenged the decision of the Hon’ble High Court and the SLP No. 6655 of 2019 is pending before the Hon’ble Supreme Court.
18. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in ignoring the fact that education cess ultimately form a part of the income tax and cannot be allowed as Revenue expenditure in the view of the Judgment of Hon’ble Supreme Court in the case of Shri K Srinivasan reported at 83 ITR 346 and Memorandum of Finance Bill of 2004.
19. The appellant craves to leave, to add, to amend and / or to alter of the ground of appeal. if need be.”
3. The brief facts of the case are: The assessee is a company and is engaged in the business of manufacture of chemicals and bulk drugs. For the year under consideration, the assessee filed its return of income on 29/11/2012 declaring a total income of Rs.18,50,97,133/-. The return of income filed by the assessee was selected for scrutiny and statutory notices u/ss 143(2) and 142(1) of the Act were issued. The Assessing Officer (the “AO”) vide order dated 05/03/2015 passed u/s 143(3) assessed the total income of the assessee at Rs.22,00,50,904/- after making various disallowance/addition. In further appeal, the learned CIT(A) vide impugned order partially allowed the appeal filed by the assessee. Being aggrieved, the Revenue is an appeal before us.
4. The issue arising in ground no.1, raised in Revenue’s appeal, is pertaining to disallowance u/s 14A of the Act.
5. The brief facts of the case pertaining to this issue are: During the assessment proceedings, it was observed that the assessee has made investments on which it has earned exempt income. Accordingly, the assessee was asked to show cause as to why disallowance u/s14A r.w.r.8D should not be made. After considering the submission of the assessee, the AO computed the disallowance of Rs.31,65,557/- u/s 14A r.w.r. 8D(2)(ii) and disallowance of Rs.6,69,375/- u/s 14A r.w.r. 8D(2)(iii), aggregating to total disallowance of Rs.37,91,582/-.
6. In its appeal before the learned CIT(A), the assessee submitted that it has earned a dividend income of Rs.99,483/ during the year, which is exempt from tax. Further, the assessee submitted that it has suo moto made a disallowance of Rs.43,350/-, being the expenditure incurred in relation to earning such exempt income as required u/s 14A of the Act. The assessee also submitted that it has a total share capital of Rs.12.10 crore and general reserves of Rs.15.10 crore, which is much more than the average value of investment of Rs.13.38 crore as appearing in the balance sheet. The learned CIT(A) after considering the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in preceding assessment years deleted the disallowance towards interest expenditure u/s 14A r.w.r. 8D(2)(ii) on the basis that assessee’s own funds are adequate to cover the investments. As regard the disallowance made u/s 14A r.w.r. 8D(2)(iii), the learned CIT(A) restricted the disallowance to the dividend income earned by the assessee. Being aggrieved, the Revenue is in appeal before us.
7. During the hearing, the learned Departmental Representative (the “learned DR”) vehemently relied upon the order passed by the AO. On the contrary, the learned Authorised Representative (the “learned AR”) placed reliance upon the judicial precedent in assessee’s own case.
8. We have considered the rival submissions and perused the material available on record. In the present case, it is an admitted position that the interest-free funds available with the assessee in the form of share capital and reserves are more than the investments from which the assessee earned exempt income. We find that the Hon’ble Jurisdictional High Court in CIT Vs. Reliance Utilities & Power Ltd., [2009] 313 ITR 340 (Bom.), held that if funds are available with the assessee, which are sufficient to meet the investment, then the presumption would arise that the investment is made out of funds so available with the assessee. We further find that the Co-ordinate Bench of the Tribunal in assesee’s own case in Aarti Drugs Limited Vs. Addl. CIT, in ITA No. 6783-84/MUM/2014, vide order dated 10/02/2017, for the assessment years 2010-11 and 2011-12, following the principle laid down by the Hon’ble Jurisdictional High Court in aforesaid decision directed the deletion of addition made u/s 14A r.w.r. 8D(2)(ii). We find that the Hon’ble Jurisdictional High Court in Nirved Traders (P.) Ltd. Vs. Dy. CIT, I.T. Appeal No.149 of 2017, vide judgement dated 23.04.2019, has held that disallowance under section 14A of the Act cannot be more than exempt income. Thus, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground no.1, raised in Revenue’s appeal is dismissed.
9. The issue arising in ground no.2, raised in Revenue’s appeal, is pertaining to the allowance of additional depreciation.
10. The brief facts of the case pertaining to this issue are: During the assessment proceedings, the assessee was asked to explain the additional depreciation claimed by the assessee during the year in respect of assets purchased after 01/10/2010, which was not claimed in the assessment year 2011-12. In response thereto, the assessee submitted that it had purchased machinery during the assessment year 2011-12. Since, the assessee has purchased new machinery, which was eligible for additional depreciation at 20% u/s 32(1)(iia) of the Act, after 01/10/2010, the assessee only claimed 10% of the additional depreciation in the assessment year 2011-12. The balance 10% of additional depreciation was claimed in the year under consideration. The AO vide order passed u/s 143(3) of the Act did not agree with the submission of the assessee and held that section 32(1)(iia) of the Act does not allow any carry forward of additional depreciation. Accordingly, additional depreciation to the extent of Rs.3,04,34,108/- was disallowed u/s 37(1) of the Act.
11. The learned CIT(A) vide impugned order allowed the appeal filed by the assessee on this issue by following the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case of preceding assessment years. Being aggrieved, the Revenue is in appeal before us.
12. During the hearing, the learned DR vehemently relied upon the order passed by the AO. On the contrary, the learned AR placed reliance upon the judicial precedent in assessee’s own case.
13. We have considered the rival submissions and perused the material available on record. We find that the Co-ordinate Bench of the Tribunal in assessee’s own case cited supra, for the assessment years 2010-11 and 201112 decided a similar issue in favour of the assessee, by observing as under:
“3.4 We have heard the rival submissions and perused the material before us. We find that the FAA had disallowed the claim made by the assessee u/s.32(1)(iia),that she was of the opinion that it was available for one year only i.e.in initial year, that the assessee had claimed 50% of the deduction as the machinery was used for a period less than 180 days in the last AY., that it had claimed the balance deduction in the year under appeal. We find that in the case of Rittal India Pvt. Ltd. -No. 1(supra) the Hon’ble Karnataka High Court has dealt the identical issue.
Facts of the case were that the assessee was an existing industrial undertaking, when it had acquired and installed new plant and machinery in the FY.2006-07,that it had claimed 50% of additional 20% depreciation (i.e.,10% additional depreciation) u/s.32(1)(iia) of the Act in the corresponding AY.2007-08,that the new machinery was acquired after 01/10/ 2006,that the machinery was put to use for the purpose of business for a period of less than 180 days, that u/s. 32(1)(iia), read with the second proviso to section 32(1)(ii) of the Act, for the AY. 2007-08, the assessee was granted benefit of 50% of the 20% of the amount of depreciation allowable. Dispute 6783-83/M/14910-11(11-12- Aarti Drug Limited 5 arose with regard to the allowance of the balance 10 % depreciation in the next AY. i.e. for the AY.2008-09.The AO, as well as the FAA disallowed the claim of the assessee, whereas the Tribunal, allowed the appeal of the assessee. Challenging the same, the Revenue filed appeal before the Hon’ble Court raising the following two substantial questions of law:
“(i) Whether the Tribunal is correct in extending the benefit of section 32(1)(iia) of the Act to the next AY. When the Income tax Act does not provide for such carryover, thereby violating the legal principles of ‘casus omissus’ which states that the courts cannot compensate for what the Legislature has omitted to enact?
(ii) Whether the Tribunal was correct in holding that additional depreciation allowed u/s.32(1)(iia) is a one-time benefit to encourage industrialisation and the relevant provisions has been construed reasonably and purposive without appreciating that the additional depreciation is allowed in the year of purchase and if in the year of purchase the assessee is eligible only for 50 per cent depreciation the balance 50 per cent cannot be carried forward for the subsequent year on the claim cannot be allowed in any other year ?”
The Hon’ble Court after referring to the provisions of section 32(1) dealt with the Clause (iia) of the section and held as under:
7. Clause (iia) of section 32(1) of the Act, as it now stands, was substituted by the Finance Act, 2005, applicable with effect from April 1, 2006. Prior to that, a proviso to the said clause was there, which provided for the benefit to be given only to a new industrial undertaking, or only where a new industrial undertaking begins to manufacture or produce during any year previous to the relevant AY.
8. The aforesaid two conditions, i.e., the undertaking acquiring new plant and machinery should be a new industrial undertaking, or that it should be claimed in one year, have been done away by substituting clause (iia) with effect from April 1, 2006. The grant of additional depreciation, under the aforesaid provision, is for the benefit of the assessee and with the purpose of encouraging industrialization, by either setting up a new industrial unit or by expanding the existing unit by purchase of new plant and machinery, and putting it to use for the purpose of business. The proviso to clause (ii) of the said section makes it clear that only 50 per cent of the 20 per cent would be allowable, if the new plant and machinery so acquired is put to use for less than 180 days in a financial year. However, it nowhere restricts that the balance per cent would not be allowed to be claimed by the assessee in the next AY.
9. The language used in clause (iia) of the said section clearly provides that “a further sum equal to 20 per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii)”. The word “shall” used in the said clause is very significant. The benefit which is to be granted is per cent additional depreciation. By virtue of the proviso referred to above, only per cent can be claimed in one year, if plant and machinery is put to use for less than 180 days in the said financial year. This would necessarily mean that the balance 10 per cent additional deduction can be availed of in the subsequent AY., otherwise the very purpose of insertion of clause (iia) would be defeated because it provides for per cent deduction which shall be allowed.
10. It has been consistently held by this court, as well as the apex court, that the beneficial legislation, as in the present case, should be given liberal interpretation so as to benefit the 6783-83/M/14910-11(11-12- Aarti Drug Limited 6 assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to only half of the same being granted in one AY., if certain condition was not fulfilled. But, that, in our considered view, would not restrain the assessee from claiming the balance of the benefit in the subsequent AY. The Tribunal, in our view, has rightly held, that additional depreciation allowed u/s.32(1)(iia) of the Act is a one-time benefit to encourage industrialisation, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. We are in full agreement with such observations made by the Tribunal.”
3.4.1 Respectfully, following the above judgment, we hold that the assessee was entitled to claim 10% additional depreciation during the year under appeal. Reversing the order of the FAA, we decide the second ground of appeal in favor of the assessee.”
14. The learned DR could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the order passed by the Coordinate Bench of the Tribunal in assessee’s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue, which has followed the judicial precedent in assessee’s own case. As a result, ground no.2 raised in Revenue’s appeal is dismissed.
15. The issue arising in grounds no.3 and 4, raised in Revenue’s appeal, is pertaining to the allowance of expenditure incurred towards obtaining ‘Certificate of Suitability’ and filing of ‘Drug Master File’ (‘DMF’).
16. The brief facts of the case pertaining to this issue are: During the assessment proceedings, it was observed that the assessee has debited a sum of Rs.6,49,509/- under the head ‘Sales Promotion’ and ‘Other Export Expenses’, the details of which are as under:
