Inclusion of ‘closing amount of Modvat’ in closing stock without modifying figures of purchases, sales & opening stock not justified

IN THE ITAT MUMBAI BENCH ‘D’

R.R. Kabel Ltd.

versus

Additional Commissioner of Income-tax, 7(2), Mumbai

IT APPEAL NOS. 1292 & 2106 (MUM.) OF 2011

[ASSESSMENT YEAR 2007-08]

MAY 2, 2012

ORDER

Dinesh Kumar Agarwal, Judicial Member

These cross appeals by assessee and Revenue are directed against the order dated 30.12.2010 passed by the ld. CIT(A) for the Assessment Year 2007-08. Both these appeals are disposed of by this common order for the sake of convenience.

2. Briefly stated facts of the case are that the assessee company is engaged in the business of manufacturing and sale of electrical cables, filed return declaring total income at Rs. 6,62,18,458/-. However, after making various additions/disallowances the assessment was completed at an income of Rs. 19,20,66,780/- vide order dated 30.11.2009 passed u/s 143(3) of the Income Tax Act, 1961 (in short the Act).

3. On appeal, the ld. CIT(A) partly allowed the appeal of the assessee.

4. Being aggrieved by the order of the ld. CIT(A) the assessee and Revenue both are in appeal before us.

ITA No.1292/Mum/2011 (By assessee)

5. Ground No. 1 and 2 are against the sustenance of adjustment of excise duty and VAT u/s 145A.

6. The brief facts of the above issue are that the AO observed that the assessee has not included the excise duty in the valuation of closing stock. Under the provisions of section 145A of the Act, the assessee should include the excise duty component of purchase price of raw material while valuing closing stock of raw material, Work-in-Progress (WIP) and finished goods. The assessee claimed that non-inclusion of the same will have no effect on its profits. The AO while rejecting the claim of the assessee applied the provisions of section 145A of the Act and discussed the issue at length at pages 2 to 13 of the assessment order and added Rs. 1,13,19,681/-, Rs. 283,50,504/-, Rs. 4,48,190/-, and Rs. 2,00,000/- to the total income of the assessee.

7. On appeal, the Ld. CIT(A) after considering the assessee’s submissions and the provisions of Section 145A has held as under :

“(i)  “Resultant change”, if any, will have to be added to the assessee’s income.

(ii)  Anomaly may arise because of the fact that the assessee has utilised PLA account instead of CENVAT/VAT credit available for payment of the Duty to the Govt. Account. The amount of payment made out of the PLA account to the extent of the Cenvat/Vat credit was still available in the Cenvat/VAT Register shall be added to the Cenvat/Vat set off/utilized during the year as above.

(iii)  VAT is payable at the time of sales and not on closing stock of finished goods.

(iv)  The addition on account of duty following the provisions of section 145A is principally called for. No adjustment in the opening stock is possible as held in the case of Melmould Corporation v. CIT 202 ITR 789 (Bom.). Besides, tax provisions u/s 145A came into effect from 1.4.1998, AY 2007-08 can’t be said to be transitional year. Hence the judgement of Mahavir Aluminium Ltd. 297 ITR 77 (Del.) shall not apply.

(v)  In view of the aforesaid directions, no separate addition in respect of the amount of Rs. 1,13,19,681/- as called for.

(vi)  The AO is directed to verify these facts and figures and make addition as per aforesaid directions.”

8. At the time of hearing, the Ld. Counsel for the assessee after referring to pages 195, 33, 67, 69 of the assessee’s paper book and the relevant pages of statement of facts filed before the Ld. CIT(A) to show that the working given by the assessee as per section 145A of the Act will have no effect on its profits i.e. revenue neutral. He further submits that this issue is fully covered in favour of the assessee by the order of the Tribunal in the assessee’s own case in R.R. Kabel Ltd. v. Addl. CIT and vice-versa [IT Appeal No. 4789/Mum/2009 & IT Appeal No. 5103/Mum/2009 (AY:2005-06) and IT Appeal No. 4790/Mum/2009 & IT Appeal No. 5104/Mum/2009 (AY:2006-07) order dated 11.1.2012]. He also placed on record the copy of the order of the said order of the Tribunal. He therefore, submits that the issue may be decided accordingly.

9. On the other hand, the Ld. DR supports the order of the AO and the Ld. CIT(A).

10. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that the A.O. while making the addition of Rs. 1,13,19,681/-, interalia, observed that the similar addition was made in A.Y. 2006-07 and the ld. CIT(A) has granted relief against which the Department has filed appeal before the Tribunal. We further find that it is also not in dispute that the Tribunal on the appeal filed by the Revenue has upheld the order of the ld. CIT(A) in deleting the addition made by the A.O. vide finding recorded in paragraph 22 of its order dated 11.01.2012 (supra) wherein it has been held as under:-

“22. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the consistent view of the Tribunal and keeping in view that the assessee is following consistent method of accounting and there is no change in accounting system followed by the assessee in the year under consideration, we hold that the ld. CIT(A) was fully justified in deleting the addition of Rs. 11,08,904/- made by the AO u/s 145A of the Act. The grounds taken by the Revenue are therefore rejected.”

11. In the absence of any contrary material placed on record by the Revenue, we respectfully following the order of the Tribunal (supra) and the consistent view of the Tribunal and also keeping in view that the assessee is following consistent method of accounting and there is no change in system of accounting followed by the assessee in the year under consideration, we hold that the Ld. CIT(A) was fully justified in deleting the addition of Rs. 1,13,19,681/-.

12. As regards the other additions of Rs. 283,50,504/-, Rs. 4,48,190/- and Rs. 2,00,000/- we find that it has been observed by the A.O. that the said additions are not covered by the appellate order of the earlier years. We further find that the Ld. CIT(A) while deleting the addition of Rs. 1,13,19,681/- has directed the A.O. to verify the facts and figures and make addition as per aforesaid directions.

13. Section 145A was inserted by the Finance (No. 2) Act, 1998 with effect from 1.4.1999. It provides that the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be in accordance with the method of accounting regularly employed by the assessee and further adjusted to include the amount of any tax, duty, cess etc. paid or incurred by the assessee to bring the goods to the place of its location as on the date of valuation. According to the prescription of this section, which is applicable to the year under consideration, the amount of tax, duty, cess etc. is liable to be included in the value of purchases, sales, opening and closing stock. It is not appropriate to include the closing Modvat in the figure of closing stock without modifying the figures of purchases, sales and opening stock. The Hon’ble jurisdictional High Court in CIT v. Mahalaxmi Glass Works (P.) Ltd. [2009] 318 ITR 116 (Bom.) and the Hon’ble Delhi High Court in CIT v. Mahavir Aluminium Ltd. [2008] 297 ITR 77/168 Taxman 27 have held to this extent.

14. Since the facts and figures filed before the Ld. CIT(A) of the issue pertaining to the additions of Rs. 2,83,50,504/-, Rs. 4,48,190/- and Rs. 2,00,000/- have not been examined by the Revenue authorities and keeping in view that the Ld. CIT(A) has set aside the matter to the AO for verification, we respectfully following the above decisions, consider it fair and reasonable that in the interest of justice the matter should go back to the file of the A.O. and accordingly we set aside the orders passed by the Revenue Authorities on this account and send back the matter to the file of the A.O. to decide the same afresh in the light of our observations hereinabove and according to law after providing reasonable opportunity of being heard to the assessee. The grounds taken by the assessee are, therefore, partly allowed for statistical purpose.

15. Ground No. 3 is against the sustenance of disallowance of deduction u/s 80IB in respect of interest income of Rs. 5,12,420/-.

16. The brief facts of the above issue are that the AO observed that the assessee has claimed deduction u/s 80IB in respect of interest income of Rs. 5,12,420/- (interest on fixed deposit for margin money Rs. 2,96,290/- and interest from sundry debtors Rs. 2,16,130/-). The AO did not allow the claim of the assessee on the ground that the interest income cannot be said to have been derived from industrial undertaking even if it is assessed under the head business income. However, he assessed the interest income of Rs. 5,12,420/- under the head income from other sources as the assessee is not in the business of money lending. On appeal, the Ld. CIT(A) while following certain decisions including the decision in the case of Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC) held that interest being income from other sources, not derived from industrial undertaking, therefore, the assessee is not entitled to deduction u/s 80IB, and hence upheld the disallowance made by the AO.

17. At the time of hearing, the Ld. Counsel for the assessee, at the outset, submits that the assessee is not entitled to deduction u/s 80IB in respect of the above interest. However, since the interest has been assessed under the head as income from other sources, therefore, following the decision of the Tribunal in assessee’s own case (supra), the assessee is entitled to deduction of interest paid on borrowed funds. He, therefore, submits that to this extent the relief may be allowed to the assessee.

18. On the other hand, the Ld. DR supports the order of the AO and the Ld. CIT(A).

19. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the Ld. Counsel for the assessee that since the interest income has been assessed under the head income from other sources, therefore, the assessee is entitled to the deductions u/ 57(iii) of the Act in view of the decision of the Tribunal in the assessee’s own case (supra), wherein vide paragraph 9, it has been held as under :

“9. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the FDRs were made out of borrowed funds. According to the AO since borrowal is for the purpose of assessee’s manufacturing activity, therefore, there is no nexus between the borrowing activity and the interest generation. Per contra, the claim of the assessee is that the since the FDRs were made out of borrowed funds, interest on borrowed funds be reduced from the interest income while determining the income from other sources. Since there is no dispute that the FDRs were made out of borrowed funds, there is a direct nexus between the borrowings and the interest generation. This being so and keeping in view the provisions of section 57(iii) of the Act which provides that in computing the income under the head income from other sources any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income, we are of the view that the assessee is entitled to the deduction of interest paid on borrowed funds and accordingly, the AO is directed to allow the same. The grounds taken by the assessee are, therefore, partly allowed.”

20. Respectfully following the above decision, we direct the AO to allow deduction u/s 57(iii) of the Act out of interest income assessed under the head as income from other sources. The ground taken by the assessee is, therefore, partly allowed.

21. Ground No.4 is against the sustenance of disallowance of netting of interest Rs. 5,12,420/-.

22. On this issue, there is no discussion in the assessment order. However, from the order of the Ld. CIT(A), we find that the assessee has raised this issue before the Ld. CIT(A) vide paragraph 4.2 appearing at page 14 of the order, passed by the Ld. CIT(A) but the Ld. CIT(A) has not adjudicated the above issue. In the absence of any finding we are of the view that in the interest of justice, the matter should go back to the file of the Ld. CIT(A) and accordingly, we restore the matter to the file of the Ld. CIT(A) to decide the same afresh and according to law after considering the recent decision of the Hon’ble Supreme Court in the case of ACG Associated Capsules (P.) Ltd. v. CIT [2012] 205 Taxman 136/18 taxmann.com 137 (SC) (Mag.) with CIT v. Bharat Rasayan Ltd. [2012] 205 Taxman 136/18 taxmann.com 137 (SC) (Mag.) and also after providing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purposes.

23. Ground No. 5 is against the sustenance of disallowance of software expenses Rs. 1,23,749/-. Ground No. 6 is against the sustenance of disallowance of business loss on discontinuation of assignment for installation of software system Rs. 5,00,000/- as capital loss and Ground No. 7 is against the disallowance of website expenses Rs. 80,000/-.

24. The brief facts of the above issues are that the AO noted that the assessee has claimed Rs. 6,23,749/- as software expenses which includes Rs. 5,00,000/- for ERP and software advances and initial study report which was never acquired by the assessee and Rs. 80,000/- for website development. The AO after considering the details filed by the assessee and the claim of the assessee that the software purchased has short useful life, hence, they are allowable as Revenue expenditure, however, treated all these expenses as capital expenditure and made net disallowance of Rs.6,42,624/- (Rs. 5,00,000/- + Rs. 2,03,749 – depreciation at the rate of 30% Rs. 61,125/-). On appeal, the Ld. CIT(A) following the decisions in (a) CIT v. Arawali Construction Co. (P.) Ltd. [2003] 259 ITR 30/[2002] 124 Taxman 146 (Raj), (b) CIT v. Elecon Engg. Co. Ltd. [1987] 166 ITR 66 (SC) and (c) CIT v. Premier Automobiles Ltd. [1994] 206 ITR 1/[1993] 70 Taxman 459 (Bom.) has held that the software purchased was lumpsum investment which would give enduring benefit to the assessee and the assessee has not been able to prove/bring any evidence on record that the benefit of the software would be available only for one year/it will not have any enduring benefit, confirmed the disallowance made by the AO.

25. At the time of hearing, the Ld. Counsel for the assessee submits that all these expenses/claims are allowable as revenue expenditure in view of the decisions in (a) CIT v. Asahi India Safety Glass Ltd. [2011] 203 Taxman 277/15 taxmann.com 382 (Delhi), (b) decision of the Hon’ble Bombay High Court in CIT v. Raychem RPG Ltd. [2012] 21 taxmann.com 507 and (c) CIT v. Amway India Enterprises v. Dy. CIT [2008] 114 TTJ 476/111 ITD 112 (Delhi)(SB) approved by the Hon’ble Delhi High Court in CIT v. Amway India Enterprises [2012] 207 Taxman 103/22 taxmann.com 22 (Mag.). In respect of business loss and website expenses he placed reliance on (a) Cisco Systems (India) (P.) Ltd. v. ACIT [IT Appeal No.431/Bang/2010 (AY:2002-03) order dated 28.4.2011], (b) Radial Marketing (P.) Ltd. v. ITO [IT Appeal No. 3868 (Mum.) of 2008, dated 19-5-2009], (c) Polyplex Corpn. Ltd. v. ITO [2009] 122 TTJ (Delhi) 949/176 Taxman 56 (Delhi) (Mag.) and (d ) CIT v. Indian Visit.com (P.) Ltd. [2009] 176 Taxman 164 (Delhi).

26. On the other hand, the Ld. DR supports the order of the AO and Ld. CIT(A).

27. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the Ld. Counsel for the assessee that the expenditure incurred by the assessee on software are allowable as revenue expenditure.

28. In Asahi India Safety Glass Ltd. (supra), the issue was as to whether the expenditure incurred by the assessee on account of software and professional expenses was a revenue expenditure. Their Lordships while observing that the expenses ought not give a colour to the expenditure incurred as one expended on capital account, decided the issue in favour of the assessee.

29. In Raychem RPG Ltd. (supra), it has been held that the software expenditures are allowable as revenue expenditure.

30. In Amway India Enterprises (supra), Their Lordships following the decision in Asahi India Safety Glass Ltd. (supra), decided the issue against the Revenue.

31. Respectfully following the above decisions we are of the view that the software expenditure incurred by the assessee are revenue in nature and hence the same are allowable as business expenditure and the Ld. CIT(A) was not justified in sustaining the disallowance made by the AO.

32. As regard the sustenance of disallowance of business loss of Rs. 5,00,000/- we find that the claim of the assessee that the payment of Rs. 5,00,000/- was made to Techsol Information Technology Pvt. Ltd for installation of software system (ERP). After initial study report, the assessee thought to discontinue the said assignment as the same may not be in line with the company’s requirement and technically fit, hence the said loss was incurred in the course of carrying of business and the same is allowable as business deduction or in the alternative, as business loss. Since the above expenditure has been incurred by the assessee for installation of software system (ERP) which was discontinued due to commercial expediency as going on ahead with such system may not be in line with the company’s requirement, therefore, the loss incurred by the assessee is allowable as a business loss.

33. In the case of Cisco Systems (India) (P.) Ltd. (supra) on the issue that the Ld. CIT(A) has erred in law by holding that the loss on Campus Project was in the nature of capital loss, it has been held that such loss is not a capital in nature.

34. In B. Nagi Reddy v. CIT [1993] 199 ITR 451 (Mad.), it has been held that any sum incurred by the assessee in production of films which were subsequently abandoned was to be allowed as deduction.

35. In the light of the aforesaid judgment it is clear that the amount in question cannot be considered as capital loss but has to be allowed as deduction as Revenue loss and accordingly we allow the same.

36. As regard the website expenses, the assessee relied on following decisions:-

37. In Radial Marketing (P.) Ltd. (supra), it has been held that “Domain booking charges, web hosting charges, web development charges, which are of the character of revenue expenses; therefore, they are allowable as revenue expenditure. However, software development charges at Rs. 7,500 is capital expenses.”

38. In Polyplex Corpn. Ltd. (supra), it has been held that “Business expenditure -Capital or revenue expenditure—Expenditure on development of web-site-Is allowable revenue expenditure-Creating a website promotes the business activity-Assessee has not acquired any software though the software itself may be needed to access the website”

39. In Indian Visit.com (P.) Ltd. (supra), it has been held that expenditure on development of website with a view to disseminate information about assessee’s business activities amongst its clients is revenue expenditure even though resulting in enduing benefit.

40. Respectfully following the above decisions, we are of the view that website expenditures are allowable as Revenue expenditure and accordingly, we while deleting the disallowances of software expenses, website expenses and business loss, direct the AO to allow same as Revenue expenditure after withdrawing the depreciation allowed by him. The grounds taken by the assessee are, therefore, allowed.

ITA No.2106/Mum/2011(by Revenue)

41. Ground No. 1 and 1(a) are against the relief allowed by the Ld. CIT(A) in allowing export incentives of Rs. 1,31,42,063/-.

42. The brief facts of the above issue are that the AO observed and held that the assessee has reduced the income of Export Incentives of Rs. 1,31,42,063/- from raw material cost rather than showing it as separate income. This income pertains to rebate on import duty similar to DEPB etc and allows the assessee to claim the same while importing material on the basis of Exports made by it. This income is separately assessed under section 28 and deduction u/s 80IB is not allowed in respect of the same as this income has not been derived from industrial undertaking even if it is incidental to Industrial Undertaking.

43. On appeal, the Ld. CIT(A) held that in the Grouping “M” in respect of Schedule M manufacturing and other expenses to the Schedule M forming part of the balance sheet as on 31.3.2007 and Profit and loss account for the period of 31.3.2007, the aforesaid export incentives has been reflected as under :

Manufacturing and other Expenses

Thus, consumption of raw material and packing has been increased by the provisions of export incentives of Rs.(13,142,053). Thus, deduction u/s 80IB stands reduced accordingly. The AO has erred in treating the aforesaid expenses as income.

44. At the time of hearing, the Ld. DR supports the order of the AO.

45. On the other hand, the Ld. Counsel for the assessee submits that the AO has misinterpreted the facts, hence the order passed by the Ld. CIT(A) be upheld.

46. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the Ld. CIT(A) after examining the material has deleted the addition made by the AO. In the absence of any contrary material placed on record by the Revenue against the findings of the Ld. CIT(A), we decline to interfere with the order of the Ld. CIT(A) on this account. The grounds taken by the Revenue are, therefore, rejected.

47. Ground No. 2 and 2(a) are against the deletion of disallowance of foreign currency loss of Rs. 7,82,000/-.

48. The brief facts of the above issue are that the AO has not allowed loss on account of foreign exchange rate difference of Rs. 7,82,000/- considering the same as capital account. On appeal, before the Ld. CIT(A), it was pointed out by the Ld. Counsel for the assessee that the foreign exchange difference loss of Rs. 7,82,000/- is on account of conversion of CC limit to FCNRB (DL) working capital loan Account. The Ld. CIT(A) after examining the matter held that the foreign currency exchange loss relates to the working capital loan and thus, allowable and accordingly he deleted the disallowance made by the AO.

49. At the time of hearing the Ld. DR supports the order of the AO.

50. On the other hand, the Ld. Counsel for the assessee while reiterating the same submissions as submitted before the AO and the Ld. CIT(A) also relied on the decisions in (a) CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 (SC), and (b) Oil & Natural Gas Corpn. Ltd. v. CIT [2010] 322 ITR 180/189 Taxman 292 (SC).

51. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the Ld. Counsel for the assessee.

52. In Woodward Governor India (P.) Ltd. (supra), it has been held that loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowance under section 37(1) in the year of accrual.

53. In Oil & Natural Gas Corpn. Ltd. (supra), it has been held that assessee having maintained accounts on mercantile system of accounting, loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance sheet in respect of loans taken for revenue purposes is allowable as expenditure under s. 37(1), notwithstanding the fact that the liability has not been actually discharged in the year in which the fluctuation in the rate of foreign exchange has occurred.

54. Respectfully following the above decisions, we decline to interfere with the order of the Ld. CIT(A) on this account and accordingly grounds taken by the Revenue are rejected.

55. In the result, assessee’s appeal is partly allowed for statistical purposes and the Revenue’s appeal stands dismissed.