IT: Where assessee-employer had deposited amount of employees share of PF and ESI admittedly before due date of filing return of income, payments were allowable as expenditure
IT: Where assessee had declared profits of eligible business on their transfer to warehouse on a predetermined price and computed income, irrespective of fact whether goods were sold or not, expenses relating to repair and maintenance, salary and wages, selling and distribution etc. should not to be taken into account for apportionment of expenses of head office to eligible unit
IT: Where Assessing Officer had failed to refer to any borrowed funds utilized for purposes of investment in fixed asset, disallowance of interest expenditure was to be deleted
IT: When total amount on account of freight has been paid during year itself and nothing is payable at close of year, no disallowance is warranted under section 40(a)(ia)
IT: Where assessee made investment in mutual funds and same was encashed after gap of four days and income arising thereof was offered to tax, no part of administrative expenses for aforesaid investment to be disallowed under section 14A
IT: Expenditure incurred on construction of building on land taken on lease cannot be held to be revenue expenditure
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[2013] 37 taxmann.com 455 (Chandigarh - Trib.)
IN THE ITAT CHANDIGARH BENCH 'B'
Amartex Industries Ltd.
v.
Additional Commissioner of Income-tax*
MS.SUSHMA CHOWLA, JUDICIAL MEMBER
AND MEHAR SINGH, ACCOUNTANT MEMBER
AND MEHAR SINGH, ACCOUNTANT MEMBER
IT APPEAL NOS. 1056 & 1118 (CHD.) OF 2010 & 687, 693 & 1116 (CHD.) OF 2011
[ASSESSMENT YEARS 2006-07 TO 2008-09]
[ASSESSMENT YEARS 2006-07 TO 2008-09]
JULY 30, 2012
I. Section 36(1)(va), read with section 2(24)(x), of the Income-tax Act, 1961 - Employees' contribution towards EPF and ESI [Time limits to deposit] - Assessment year 2006-07 - Whether where assessee-employer had deposited amount of employees share of PF and ESI admittedly before due date of filing return of income and in majority of cases even within grace period allowed under respective Acts payments were allowable as expenditure - Held, yes [Para 10][In favour of assessee]
II. Section 80-IC of the Income-tax Act, 1961 - Deductions - Special provisions in respect of certain undertakings or enterprises in certain special category States [Computation of deduction] - Assessment years 2006-07 to 2008-09 - Whether where assessee had computed profits of its business units not on sale price of goods manufactured by unit, but at a predetermined price on which goods were transferred to its head office, without accounting for margin of profits, which were being reflected in hands of head office and retail counters, which in turn accounted for expenses of head office & retail outlets, there was no merit for allocation of expenses of head office to eligible unit relating to repair and maintenance, salary and wages, telephone expenses especially because head office had shown profits at close of year - Held, yes - Whether further, where no part of borrowed funds were utilized for setting up of unit, financial expenditure could not be attributed to the running of unit - Held, yes - Whether only expenses to be considered for allocation were directors' salary, directors' travelling and conveyance, legal and professional expenses and auditors remuneration - Held, yes [Paras 30 to 32][Partly in favour of assessee]
III. Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital [Investment in Land] - Assessment year 2006-07 - Assessing Officer partly disallowed interest expenditure under section 36(1)(iii) on ground that assessee had made advance payment for purchase of land but since land was not put to use during year under consideration, proportionate interest was required to be capitalized - Whether since assessee had sufficient self generated funds and Assessing Officer had failed to refer to any borrowed funds utilized for the purposes of investment in said fixed asset, disallowance was to be deleted - Held, yes [Para 41][In favour of assessee]
IV. Section 194C, read with section 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to [Conditions precedent] - Assessment year 2006-07 - Whether where total payments during relevant year to individual truck owner on account of freight was less than Rs. 50,000, no disallowance was warranted for non-deduction of tax at source - Held, yes - Whether further, when total amount on account of freight has been paid during year itself and nothing is payable at close of year, no disallowance is warranted under section 40(a)(ia) - Held, yes [Para 47][In favour of assessee]
V. Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital [Interest-free advances] - Assessment year 2006-07 - Whether if advances given to sister concerns are on account of business transaction, no disallowance under section 36(1)(iii) is warranted - Held, yes [Para 52][Matter remanded]
VI. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Conditions precedent] - Assessment year Assessment year 2007-08 - Whether expenditure incurred for increase in authorized capital of company, being capital expenditure could not be allowed under section 37(1) - Held, yes [Para 54][In favour of revenue]
VII. Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income [Rule 8D] - Assessment years 2007-08 and 2008-09 - Whether rule 8D is prospectively applicable from assessment year 2008-09 onwards and, therefore, rule 8D cannot be applied for computing disallowance under section 14A prior to assessment year 2008-09 - Held, yes - Whether further, where assessee made investment in mutual funds and same was encashed after gap of four days and income arising thereof was offered to tax, no part of administrative expenses for aforesaid investment to be disallowed under section 14A - Held, yes [Paras 63 and 64] [In favour of assessee]
VIII. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Construction companies] - Assessment year 2007-08 - Whether expenditure incurred on construction of building on land taken on lease cannot be held to be revenue expenditure - Held, yes - Whether further, expenditure on air conditioners, coolers and mobile phones is purely capital expenditure and is not to be allowed as revenue expenditure - Held, yes [Paras 75 to 78][In favour of revenue]
IX. Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital [Proviso to section 36(1)(iii)] - Assessment year 2007-08 - Assessee had reflected capital work-in-progress at Rs. 1.79 crore as on 31-3-2007, as against opening capital work-in-progress amounting to Rs. 5.90 crore - Assessing Officer was of view that assessee had utilized various loans funds in creation of capital work-in-progress as assessee had raised Rs.16.80 crores on account of term loan and Rs.16.76 crores on account of cash credit account - He, accordingly, added back sum of interest capitalized at the rate of 4.34 per cent on monthly balances of capital work-in-progress - Whether since disallowance was worked out in accordance with proviso to section 36(1) (iii), same was to be affirmed - Held, yes [Para 86][In favour of revenue]
X. Section 36(1)(iii), read with section 37(1), of the Income-tax Act, 1961 - Interest on borrowed capital [Proviso to section 36(1)(iii)] - Assessment year 2008-09 - Assessing Officer having found that loan raised by assessee was utilized for purchase of land, disallowed interest payment on such loan - Assessee claimed that loan was taken against security of capital asset but was not utilized for purchase of land - Whether since finding of Assessing Officer that loan amount had been invested in land account was not supported by any evidence, matter was to be remanded back to decide issue de novo - Held, yes [Para 96][Matter remanded]
CASE REVIEW-IV
Merilyn Shipping & Transports v. Addl CIT [2012] 136 ITD 23/20 Taxmann.com 244 (Visakha)(SB)(para 47) followed.
CASE REVIEW -V
S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC) (para 52) followed.
CASE REVIEW-VI
Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC) (para 54) followed.
CASE REVIEW-VII
Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 63) and CIT v. Kings Exports [2009] 318 ITR 100/[2010] 2 taxmann.com 286 (Punj. &Har.) (para 64) followed.
CASES REFERRED TO
CIT v. Nuchem Ltd. [IT Appeal No. 323 of 2009, dated 2-2-2010] (para 8), Echjay Industries Ltd. v. Dy. CIT [2004] 88 TTJ 1089 (Mum.) (para 20), CIT v. Bhagwati Steels [2010] 326 ITR 108/[2011] 198 Taxman 275/9 Taxmann.com 266 (Punj. & Har.) (para 44), CIT v. Truck Operators Union [2011] 339 ITR 532/[2012] 20 Taxmann.com 848 (Punj. & Har.) (para 46), Merilyn Shipping & Transports v. Addl. CIT [2012] 136 ITD 23/20 Taxmann.com 244 (Visakha) (SB) (para 47), S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC) (para 51), CIT v.Rockman Cycle Industries Ltd. [2009] 176 Taxman 21 (Punj. & Har.) (para 51), Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC) (para 54), Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 60), CIT v. Kings Exports [2009] 318 ITR 100/[2010] 2 Taxmann.com 286 (Punj. & Har.) (para 61), Asstt. CIT v. Punjab State Co-operative Agriculture Development Bank Ltd .[IT Appeal No. 742(Chd.) of 2011], dated 19-9-2011] (para 61), Asstt. CIT v. Punjab State Co-op. Marketing Fed. Ltd. [2012] 25 Taxmann.com 424 (Chd.) (para 61), CIT v. Hi Line Pens (P.) Ltd.[2008] 306 ITR 182/175 Taxman 132 (Delhi) (para 75) and CIT v. Abhishek Industries Ltd.[2006] 286 ITR 1/156 Taxman 257 (Punj. & Har.) (para 89).
Parikshit Aggarwal for the Appellant. Manjit Singh for the Respondent.
ORDER
Ms. Sushma Chowla, Judicial Member - Out of these five appeals, two are cross-appeals filed by the assessee and Revenue against the separate orders of CIT(A), Chandigarh dt. 31st May, 2010 and 1st March, 2011 relating to asst. yrs. 2006-07 and 2007-08 against the order passed under section 143(3) of the IT Act, 1961.
2. The assessee is in appeal against the order of CIT(A), Chandigarh dt. 3rd Oct., 2011 relating to asst. yr. 2008-09 against the order passed under section 143(3) of the IT Act, 1961 (in short 'the Act').
3. All the five appeals relating to the same assessee on similar issues were heard together and are being disposed of by this consolidated order for the sake of convenience.
ITA No. 1056/Chd/2010: Assessee's appeal; Asst yr. 2006-07:
4. The learned Authorised Representative for the assessee pointed out that ground Nos. 1, 2, 5 and 6 are general in nature and hence the same are dismissed. The only effective grounds of appeal raised by the assessee in this appeal are as under:
"3. That the learned CIT(A), Chandigarh is not justified in not considering the correct legal position and submissions by the appellant's counsel and resultantly erroneously concurring with the orders passed by the AO under section 143(3) of the IT Act, 1961 and thereby confirming the action of learned AO in upholding an addition amounting to Rs. 1,23,327 regarding payment of PF and ESIC by wrongly invoking the provisions of section 43B of the IT Act, 1961.
4. That the learned CIT(A), Chandigarh is not justified in not considering the correct legal position and submissions by the appellant's counsel and resultantly erroneously concurring with the orders passed by the AO, under section 143(3) of the IT Act, 1961 and thereby confirming the action of learned AO in reducing the deduction under section 80-IC of the IT Act, 1961 by partly allowing the pleas of the appellant company which findings of the learned CIT(A) on the said issue are perverse and thus needs to be quashed and the claim of deduction under section 80-IC be allowed in full as so claimed by the appellant company being in consonance of statute as supported by legal pronouncements."
5. The issue in ground No. 3 raised by the assessee is against the disallowance made on account of employees' contribution to PF and ESI amounting to Rs. 1,23,327.
6. The brief facts relating to the issue are that during the course of assessment proceedings the AO noted that employees' contribution towards EPF and ESI were paid by the assessee beyond the due date. The assessee was show-caused to explain as to why sum of Rs. 17,92,477 being the total amount payable from April, 2005 to March, 2006 as tabulated at p. 3 of the assessment order, be not disallowed. The AO in the said table has adopted the due date of payment as 15th of each month and the dates of payments by the assessee are also tabulated in the said chart. The assessee had paid the said amount by 20th of succeeding month in respect of employees' share to PF and ESI. However, only in respect of one payment of June, the said (amount) was paid on 21st July, 2005. The AO made disallowance of Rs. 17,92,477 in this regard under section 2(24)(x) read with section 36(1)(va) of the Act.
7. The CIT(A) observed that the payments which were made within the grace period i.e. up to 20th of the next month are to be allowed as a deduction restricting the addition of Rs. 1,23,327 i.e. relatable to month of June, 2005.
8. The assessee is in appeal against the said addition of Rs. 1,23,327. We find the Revenue is in appeal against the deletion of addition of Rs. 16,06,150 vide ground No. 2 raised in ITA No. 1118/Chd/2010. The learned Authorised Representative for the assessee pointed out that the issue stands covered by the order of the Hon'ble Punjab & Haryana High Court in CIT v. Nuchem Ltd. in ITA No. 323 of 2009- date of decision 2nd Feb., 2010.
9. The learned Departmental Representative for the Revenue placed reliance on the order of the AO.
10. We have heard the rival contentions and perused the record. The issue in the present case is squarely covered by the ratio laid down by the jurisdictional High Court in Nuchem Ltd. (supra) under which it is provided that where the employees' share of contribution to ESI or PF is made before the due date of filing the return of income, no disallowance is warranted on this account. Similar is the case in respect of employer's share of contribution to PF and ESI. The assessee in the present case had deposited the said amount of employees share of PF and ESI admittedly before the due date of filing the return of income and in majority of the months even within the grace period allowed under the respective Acts. Only in respect of the month of June, 2005, the said amount was paid on 21st July, 2005 one day later than the grace period but before the due date of filing the return of income in the present case. In view thereof, the total amount is allowable as an expenditure in the hands of the assessee. Consequently, we direct the AO to delete the addition of Rs. 1,23,327 and allow ground No. 3 raised by the assessee.
11. We also uphold the order of the CIT(A) in allowing the claim of the assessee in respect of employees' share to PF and ESI paid within the grace period. Consequently, ground No. 2 raised by the Revenue in this regard is dismissed.
12. The issue in ground No. 4 raised by the assessee is in relation to the computation of deduction under section 80-IC of the Act.
13. The brief facts of the case are that the assessee was in the business of manufacturing, processing and trading of all kinds of fabrics and textile products. The head office of the assessee is at Panchkula. The assessee has five manufacturing units at Dera Bassi, Gurgaon, Ludhiana, Panchkula and Baddi. The central warehouse of the goods manufactured by the assessee is at Panchkula. The assessee claims to have retail counters in all cities of northern India and also in PAN cities of whole of India. The assessee further claimed that it had maintained separate books of account in respect of Baddi unit and also maintained separate balance sheet and P&L A/c of Baddi unit and head office but consolidated income was submitted at the close of the year. The assessee was eligible for the claim of deduction under section 80-IC of the Act in respect of Baddi unit only. The assessee had claimed deduction under section 80-IC of the Act amounting to Rs. 66,49,378.
14. During the course of assessment proceedings the AO in order to verify the claim of the assessee under section 80-IC of the Act asked the assessee to furnish various details regarding the said deduction and also to justify the extent of profits arrived from the said unit. Queries were raised by the AO to furnish distribution and common expenses incurred by the company from its head office at Chandigarh in order to work out actual profits of Baddi unit for computing quantum of deduction under section 80-IC of the Act. The claim of the assessee before the AO was that the purchases were centralized at the head office and stock of cloth was sent to Baddi unit by the head office. The garments manufactured at Baddi unit were then sent to the head office and were distributed to various retail outlets of the company through central warehouse at Panchkula. . The assessee also explained that the capital required for establishing the unit was invested by the head office. It was also brought on record that there were no debtors in the unit. The AO vide order-sheet entry dt. 8th Dec, 2008 gave final opportunity to the assessee to furnish distribution and common expenses incurred by the company from its head office at Chandigarh so that actual profits of Baddi unit could be worked out. In response thereto the assessee furnished working which is annexed as Annex. A-3 to the assessment order. The total of the expenses debited to the head office of Rs. 9,29,04,720 were considered for allocation between Baddi unit and the remaining business of the assessee. It was also pointed out by the assessee that the net sales of Baddi unit were 2.58 per cent of the total sales of the company. The AO vide para 8.2 observed as under :
"8.2. Replies of the assessee have duly been considered.
From the details furnished by the assessee following points emerge :
| (i) | Assessee has not maintained separate accounts for the eligible unit and other units. | |
| (ii) | All purchases are centralized and related expenses are debited to head office. Then stock is transferred to Baddi unit at cost for garment manufacturing, without taking into consideration the purchase expenses e.g. purchase commission, freight etc. | |
| (iii) | The manufactured goods from the Baddi unit are transferred to the head office after including profit margin and sales are then made by head office through its various retail outlets. No expenses relating to sales are taken into account for determining profits of the Baddi unit. The basis of profit margin has not been disclosed by the assessee. It is not known as to at what rate such items are finally sold in the market through retail outlets. Nothing has been brought on record by the assessee to show that the transaction between eligible unit and head office are at arm's length. | |
| (iv) | The source of entire capital used for Baddi unit was the head office and all financial expenses were debited to the books of head office and no such expense was taken into consideration for working profits of the Baddi unit. | |
| (v) | No administrative expenses relating to the management and administration of affairs of the company were taken into consideration for working the profits of the eligible unit. | |
| (vi) | Assessee has admitted that expenses to the extent of Rs. 23,96,941 (being 2.5 per cent of Rs. 9,29,04,720) debited to head office should have been allocated to Baddi unit and to that extent profits of the Baddi unit had been overstated. This also implies that assessee has admitted that to the extent of Rs. 23,96,941 the claim of deduction under section 80-IC was excessive." |
15. The AO thereafter analyzed the Annex. A3 and tabulated the expenses to be considered for allocation between Baddi unit and other business of the assessee. The said list of expenses as per tables 1 and 2 are tabulated at pp. 25 and 26 of the assessment order. The assessee had excluded certain expenses which were relatable to other units in entirety. The AO rejected the explanation of the assessee observing as under :
| "(a) | Various outlets of the assessee were being used for the business of entire sales of the assessee. The goods manufactured at Baddi unit were sold through various retail outlets. So the expenditure relating to the said outlets, as per the AO, had to be taken into account for the purposes of allocation of expenses relating to selling of the goods of the eligible unit. | |
| Thus all the expenses in table 2 i.e. column A were to be considered for the purposes of allocating of expenses to Baddi unit. The AO accepted the plea of the assessee with regard to exclusion of sales-tax of Rs. 2.27 crores. The total expenses as per table-2 for allocation were thus tabulated at Rs. 10,23,54,135. | ||
| (b) | The total purchase expenses debited to head office amounting to Rs. 97,50,89,394, as per the AO, included direct expenses relating to purchases which were to the tune of Rs. 2.14 crores. As the purchases were being made by the head office, the said expenses, as per the AO, were not transferred to Baddi unit during the stock transfer and hence the same were also to be included for allocation purposes. | |
| (c) | The AO also included the expenditure tabulated under Table-1 on account of directors' salary and other expenses i.e. insurance, legal and professional expenses, financial expenses and depreciation totalling Rs. 4,24,05,263 for the purposes of allocating the same to Baddi unit. Thus the total amount for allocation, as per the AO, worked out as follows : |
| As per Table 1 | 4,24,05,263 | |
| As per para 8.3(c) | 10,23,54,135 | |
| Total | 16,61,72,186 | |
| Less : disallowance as per Paras 2.1,5.0,6.7 and 7.1 (as above) | 10,48,843 | |
| Balance | 16,40,74,500" |
16. The AO held that 2.58 per cent of Rs. 16,51,23,343 amounting to Rs. 42,60,180 related to Baddi unit and profit of Baddi unit after this allocation would be Rs. 23,89,196 instead of Rs. 66,49,378 claimed by the assessee. The deduction under section 80-IC of the Act was accordingly reduced and was allowed to the extent of Rs. 23,89,196. The AO further held that profits of the company other than Baddi unit would increase by an amount of Rs. 42,60,182. Consequently, deduction under section 80-IC of the Act was allowed at Rs. 23,89,196.
17. The CIT(A) vide para 39 of the appellate order on considering the rival contention of the assessee observed that separate books of account and financial statement in respect of Baddi unit could not be relied upon and the profits of Baddi unit were required to be reworked. The CIT(A) allowed difference in allocation of repairs and maintenance expenses as per para 41. However, CIT(A) confirmed the order of the AO in refusing the claim of deduction under section 80-IC of the Act.
18. The assessee is in appeal against the order of CIT(A). The learned Authorised Representative for the assessee drew our attention to the provisions of section 80-IA(5) of the Act. The explanation of the assessee against reallocation of the expenses was that no such apportionment of expenses were being made because the expenses at head office and retail outlets were taken care of by transfer of reasonable profits from goods manufactured by all units including Baddi unit. The learned Authorised Representative for the assessee further submitted that the head office and retail outlets sell the products received from Baddi unit and other units at higher price and make marketing profit. From this profit, the expenses of head office and retail outlets are being met. Even after meeting these expenses, there were surplus in the accounts of head office and retail outlets. So the Baddi unit was already working as a separate profit center and a separate source of income and this financial methodology of the assessee was in accordance with provisions of section 80-IA(5) of the Act. The learned Authorised Representative for the assessee drew our attention to p. 38 of the paper book and pointed out that the goods were transferred from head office to retail counters. Our attention was further drawn to item No. 13 which was priced at Rs. 195. The learned Authorised Representative for the assessee pointed out that the said item was transferred from Baddi unit to head office at the price of 150 as is evident from the goods received note issued by the Panchkula office to Baddi unit enclosed at pp. 41 and 42 of the paper book. The learned Authorised Representative for the assessee further drew our attention to similar transfer of goods i.e. item No. 27 at p. 38 of the paper book and item No. 20 at p. 42 of the paper book. The explanation of the assessee in this regard was that the goods manufactured at Baddi unit were transferred to the head office at Panchkula and from thereon to various retail outlets and the difference in the pricing in the goods on transfer was about 20 per cent, which was attributable to the expenses incurred at head office and retail outlets on the sale of the said goods. The learned Authorised Representative for the assessee further stated that both the head office and the retail outlets were in profits and the margin in profits retained was reflected in the hands of the head office and retail outlets. The learned Authorised Representative for the assessee thus stated that in case apportionment of expenditure of head office and retail counter was to be made to the profits of the Baddi unit, similar exercise should be carried out in respect of the profits diverted from Baddi unit to head office and then the profits eligible for business should be computed to compute deduction under section 80-IC of the Act. The learned Authorised Representative for the assessee stressed that the manufactured items were transferred by Baddi unit to the head office at a price which in turn were sold at higher price and the reasonable profit was shared between Baddi unit and head office. The said was claimed to be in compliance of the provisions of section 80-IA(5) of the Act and consequently no addition was warranted in this case.
19. The learned Authorised Representative for the assessee further pointed out that there was anomaly in the order of the AO vis-a-vis admissions of the assessee. The observations in para 8.1 at p. 23 of the assessment order, wherein the AO had recorded that the assessee had agreed to apportionment of expenses up to certain level, was claimed to be totally incorrect. The assessee at no stage of proceedings agreed to any apportionment of expenses or addition on this issue. On being asked to provide the details of expenses booked on account of head office, the assessee provided a list thereof. The AO apportioned expenses using this information provided by assessee. The assessee provided the details of head office expenses in a totally different perspective. The usage of this information for apportionment could be a good ground for making addition but recording a fact that the assessee agreed to this addition during assessment proceedings was totally incorrect. This objection was raised before CIT(A) also, who as per learned Authorised Representative for the assessee had also erred in recording similar findings. The learned Authorised Representative for the assessee stressed that the assessee did not agree to any addition at the stage of assessment proceedings. The learned Authorised Representative for the assessee further referred to the list of expenses tabulated in Tables-1 and 2 and pointed out as under :
| (a) | That the unit at Baddi unit was established in the second year of operation and no borrowed funds were utilized for establishing the unit; | |
| (b) | The Baddi unit had no debtors whatsoever; | |
| (c) | That the expenses tabulated at p. 25 of the assessment order in Table 2 were so tabulated at the instance of the AO and the said tabulation was not on account of any admission made by the assessee for apportionment of any part of the said expenses of Head office to Baddi unit; | |
| (d) | In the alternative, in case any apportionment of expenses was to be made then profit which had been transferred to the head office should also be considered in the hands of Baddi unit for computing the profits of eligible business. |
20. The learned Authorised Representative for the assessee placed reliance on the ratio laid down by Mumbai Bench of the Tribunal in the case ofEchjay Industries Ltd. v. Dy. CIT [2004] 88 TTJ 1089.
21. The learned Departmental Representative for the Revenue in reply relied upon the observations of the AO and CIT(A) in this regard and pointed out that separate books of account maintained by the assessee for Baddi unit could not be relied upon because of the reasons mentioned in para 8.2 at p. 23 of the assessment order and para 39 at p. 23 of the appellate order.
22. The learned Authorised Representative for the assessee in rejoinder submitted that though the assessee had furnished the details and also the list of expenses but had never admitted to the apportionment of expenses of head office to the Baddi unit and the said plea was also taken before the CIT(A) as was apparent from para 36 at p. 21 of the appellate order but no finding in this regard had been given by the CIT(A).
23. We have heard the rival contentions and perused the record. The assessee is engaged in the business of manufacturing and trading of fabrics and garments. The head office of the assessee company was at Chandigarh and the centralized purchase and distribution centre was at Panchkula. The assessee had five manufacturing units at various locations i.e. Panchkula, Ludhiana, Baddi, Derabassi and Gurgaon. The assessee claimed that the separate books of account were being maintained at each of the units which are consolidated at the end of the year and final balance sheet was drawn. The assessee had claimed deduction under section 80-IC of the Act on the profits of Baddi unit.
24. The assessee was found to be eligible by the AO for claim of deduction under section 80-IC of the Act in respect of Baddi unit. The assessee claimed to have drawn up the profitability statement of the Baddi unit separately and supported by the audit report in From No. 10CCB, the assessee had computed quantum of deduction under section 80-IC of the Act. The AO while reworking the claim of deduction under section 80-IC of the Act vide para 8.2 enlisted various points on which the assessee was found to be ineligible for the said deduction and the same was reworked in the hands of the assessee. The first ground on which the claim of the assessee was found to be wanting was non-maintenance of separate accounts for the eligible unit and other units. We find that the CIT(A) in para 39 at p. 23 of the appellate order has given a finding that separate books of account have been maintained for Baddi unit. However, in view of the reasons elaborated upon by the CIT(A), the said financial statement in respect of Baddi unit, as per the CIT(A), could not be relied upon. The learned Departmental Representative for the Revenue has not controverted the findings of the CIT(A) in this regard. Accordingly, the conclusion of the AO that the assessee was not maintaining separate books of account was incorrect. The assessee having prepared separate profitability statement in respect of its profits of Baddi unit could not be denied the said deduction on mere surmises.
25. The modus operandi adopted by the assessee for carrying on its business was that all the purchases were being centrally made at Panchkula and the stock of raw material was transferred to the respective units. Baddi unit was manufacturing products like shirts and trousers and finished articles were transferred to Panchkula warehouse at a notional inter-unit transfer price. The assessee in the books of Baddi unit treated the said transfer price as it sale price for computing eligible profits of the business. The manufactured items received from all units by Panchkula controlling office were transferred to various retail outlets situated across the country at a price on which the said products were to be finally sold to the end consumer. The retail outlets sold the finished products to the ultimate consumer. The element of profit embedded in sales executed by the head office to its retail outlets and finally to the end consumer was not being transferred to Baddi unit, but was retained by the head office. The assessee had placed on record purchase invoices, transfer memos and sales invoices to prove and establish its modus operandi. At pp. 41 and 42 of the paper book, the assessee had enclosed goods receipt note issued by the warehouse at Panchkula for the goods received from the Baddi unit. Item No. 6 was gents shirt fancy 1644 mix 38 @ Rs. 150 per piece. The said garment had been transferred by the warehouse to the retails counter @ Rs. 195 per piece as is evident from the stock transfer note placed at p. 38 of the paper book. The said items were sold for Rs. 195 per piece. The abovesaid document enlists various types of garments, first being transferred from Baddi unit to warehouse and then from warehouse to the retail outlets. The assessee had also furnished manufacturing P&L a/c of Baddi unit and total sales of the company at p. 44 of the paper book. The total sales of Baddi unit were Rs. 2.94 crores as against total sales of company at Rs. 116.30 crores. The percentage of the sales at Baddi unit to the total sales of the company was 2.54 per cent, which is admitted and accepted position.
26. The AO while computing the profits of the eligible business of the assessee of Baddi unit had recomputed the said profits because of non-allocation of expenses of head office to Baddi unit. The reasons for the said reworking of the profits of the business are as under :
| "(i) | Assessee has not maintained separate accounts for the eligible unit and other units. | |
| (ii) | All purchases are centralized and related expenses are debited to head office. Then stock is transferred to Baddi unit at cost for garment manufacturing, without taking into consideration the purchase expenses e.g. purchase commission, freight etc. | |
| (iii) | The manufactured goods from the Baddi unit are transferred to the head office after including profit margin and sales are then made by head office through its various retail outlets. No expenses relating to sales are taken into account for determining profits of the Baddi unit. The basis of profit margin has not been disclosed by the assessee. It is not known as to at what rate such items are finally sold in the market through retail outlets. Nothing has been brought on record by the assessee to show that the transaction between eligible unit and head office are at arm's length. | |
| (iv) | The source of entire capital used for Baddi unit was the head office and all financial expenses were debited to the books of head office and no such expense was taken into consideration for working profits of the Baddi unit. | |
| (v) | No administrative expenses relating to the management and administration of affairs of the company were taken into consideration for working the profits of the eligible unit. | |
| (vi) | Assessee has admitted that expenses to the extent of Rs. 23,96,941 (being 2.5 per cent of Rs. 9,29,04,720) debited to head office should have been allocated to Baddi unit and to that extent profits of the Baddi unit had been overstated. This also implies that assessee has admitted that to the extent of Rs. 23,96,941 the claim of deduction under section 80-IC was excessive." |
27. Further, in para 8.3 of the assessment order the AO had tabulated the expenses of the head office and retail outlets for making the allocation of the expenses of the head office to the Baddi unit. Table-1 is as under :
Table-1
| Particulars | Amount used in allocation |
| Directors salary | 24,41,226 |
| Directors travelling & conveyance Exp | 7,64,146 |
| Insurance exp. | 9,05,686 |
| Legal & prof. expenses | 55,84,828 |
| Auditors remuneration | 1,98,360 |
| Newspaper & periodicals | 6,907 |
| Membership fee | 2,96,650 |
| Financial exp. | 2,22,97,826* |
| Depreciation | 99,09,634 |
| Total | 4,24,05,263 |
*expenses debited to head office were slightly higher.
28. Table-2 referred to by the AO is as under :
| A | B | ||
| Particulars | Amount debited to P&L a/c (H.O.)** | Amount used in Allocation | Remarks |
| Repairs and maintenance | 1,15,64,437 | 83,46,775 | Only expenses of head office at Chandigarh taken in (A) |
| Salary and wages | 3,97,34,005 | 1,29,44,603 | Only expenses of head office at Chandigarh taken in (A) |
| Selling and distribution | 2,77,11,901 | 2,19,79,540 | Only expenses of head office at Chandigarh taken in (A) |
| Misc Exp. | 7,09,120 | 2,38,020 | Only expenses of head office at Chandigarh taken in (A) |
| Printing and stationery | 19,99,645 | 17,38,238 | Only expenses of head office at Chandigarh taken in (A) |
| Staff and labour | 32,02,102 | 13,86,170 | Only expenses of head office at Chandigarh taken in (A) |
| Telephone | 20,93,351 | 13,81,822 | Only expenses of head office at Chandigarh taken |
| Travelling | 20,93,767 | 1,31,9750 | Only expenses of head office at Chandigarh taken in (A) |
| Rates, taxes and fees | 3,60,14,370 | 9,90,893 | Sales-tax and rent of outlets excluded in (B) |
| Total | 12,51,22,698 | 5,03,25,811 |
*Total expenses of company minus that shown for Baddi unit.
29. The claim of the assessee was that out of the total expenditure of Rs. 12.51 crores debited to the P&L a/c of the head office only Rs. 5.03 crores, if necessary, should be considered for allocation to the Baddi unit. The abovesaid chart though was prepared by the assessee but was at the instance of the AO. The AO, however, rejected the bifurcation proposed by the assessee and recomputed total expenditure debited to the P&L a/c of head office at Rs. 12.51 crores and only excluded the amount of sales-tax of Rs. 2.27 crores out of the total amount of sales-tax and fee of Rs. 3.60 crores. Accordingly, the AO considered Rs. 10.23 crores as per Table-2 on account of other expenses for the purposes of allocation of expenses of head office to Baddi unit.
30. The issue raised in the present ground of appeal is whether any part of the head office expenditure was attributable to the Baddi unit for determining eligible profits of the Baddi unit. We are of the view that common expenditure is to be allocated between the head office and the branch office in order to determine the eligible profits of business at Baddi unit. In the facts of the present case the assessee is one composite unit consisting of five manufacturing units, one head office, one central warehousing unit and more than 100 retail outlets within India. The assessee is entitled to the benefit of deduction under section 80-IC of the Act only in respect of Baddi unit. The assessee for the year under consideration had shown total turnover of Rs. 116.30 crores. The total income declared by the assessee for the year under consideration was Rs. 3.46 crores. The total turnover of Baddi unit was only Rs. 2.94 crores which was 2.54 per cent of the total turnover of the assessee. The deduction of Rs. 66,49,378 had been claimed by the assessee against the eligible profits of Baddi unit. The said profits were declared by the assessee by following the consistent method of accounting under which it had recorded its earning i.e. the sale value of the goods sold by it at predetermined price, which was recorded in its books of account for transfer of goods to the central warehousing unit. The goods therefrom are transferred to the retail outlets on the tag price of the goods i.e. the price to be charged from the end consumer. The difference in the sale price shown by Baddi unit and the tag price of the goods varies up to 20 per cent. The said gross profit was reflected in the account of head office and takes care of the various expenses incurred by the head office and the retail counters in order to ultimately sell the products manufactured by the assessee. The assessee was booking its sales on the transfer of the goods to the central warehousing units at a predetermined price, irrespective of the fact that the goods are sold in the market or not. The said goods were reflected as sold at a predetermined price in the Baddi unit and the balance profits were accounted for in the books of account of the head office. The Baddi unit has no sundry debtors. It is to be kept in mind that the consolidated profits of the company are assessed to tax in the hands of the assessee and only in respect of part of the turnover of Baddi unit, the assessee had claimed deduction under section 80-IC of the Act on the net profits of the said unit. In the entirety of the abovesaid facts and circumstances of the case where the assessee has computed the profits of its business units not on the sale price of the goods manufactured by the unit, but at a predetermined price on which the goods are transferred to its head office, without accounting for the margin of profits, which are being reflected in the hands of the head office and retail counters, which in turn accounts for the expenses of the head office and retail outlets, there is no merit for allocation of expenses of the head office to the Baddi unit from Table-2, especially because the head office had shown profits at the close of the year.
31. In view thereof where the assessee had declared profits of the eligible business on their transfer to warehouse, on a predetermined price and computed the income, irrespective of the fact whether the goods were sold or not, the expenses as tabulated in Table-2 are not to be taken into account for apportionment of expenses of the head office to the Baddi unit. In any case, the amounts debited to the P&L a/c of the head office were total expenses of the company i.e. all its units, manufacturing facilities and retail outlets minus the amount shown for the Baddi unit. The expenses considered in Table-2 as reproduced under para 27 of this order, are repair and maintenance, salary and wages, selling and distribution expenses, printing and stationery, staff welfare, telephone, travelling and rates, taxes and fees. The abovesaid expenditure except selling and distribution are the expenses attributable to different units being run by the assessee and no part of the said expenditure could be held to be attributable to the Baddi unit, even to the extent of its turnover to the total turnover. The direct expenses of other units, in no manner can be attributed to Baddi unit. Similarly the selling and distribution expenses are not to be considered in view of the fact that the Baddi unit is computing its income by reflecting sales of its manufactured items at predetermined price and transferring part of its margin of profits to the head office and retail units, which at the end of year had declared profits, which are assessable in the hands of assessee itself. In case these margin of profits are excluded from head office and included in the hands of Baddi unit, the resultant figure after debiting even the allocated expenditure on selling and distribution, would be eligible for the benefits of deduction under section 80-IC of the Act.
32. Now coming to Table-1, the expenses considered are the directors' salary, directors' travelling and conveyance expenses, insurance, legal and professional, Auditors remuneration, membership fee, financial expenses and depreciation. The plea of the assessee was that out of the total expenditure of Rs. 4.24 crores, sum of Rs. 2.22 crores was attributable to the financial expenses. The learned Authorised Representative for the assessee pointed out that no part of the borrowed funds were utilized for setting up the unit at Baddi and consequently the said financial expenses could not be apportioned between the head office and Baddi unit to compute the profits of Baddi unit. We find merit in the plea of the assessee that where no part of the borrowed funds were utilized for setting up of Baddi unit, the said financial expenditure could not be attributed to the running of Baddi unit. The AO has failed to bring on record any evidence to the contrary. Similarly, depreciation claimed on assets which are installed at different units of the assessee and their user could not be attributed to the Baddi unit. The only expenses to be considered for allocation are directors' salary, directors' travelling and conveyance, legal and professional expenses and auditors remuneration. In view of the orders of the authorities below in accepting the contention of the assessee that the turnover of Baddi unit was 2.54 per cent of the total turnover, we direct the AO to recompute the disallowance under section 80-IC of the Act by excluding 2.54 per cent of the total expenditure of directors' salary, directors' travelling and conveyance expenses, legal and professional expenses and auditors remuneration being attributable to Baddi unit. The balance deduction under section 80-IC is allowable in the hands of assessee. The AO shall afford reasonable opportunity of hearing to assessee. We find no merit in the orders of authorities below, that the said addition were made on agreed basis, in view of submissions of the learned Authorised Representative for the assessee before us and written submissions filed before CIT(A). Mere providing the details at the behest of AO does not imply agreed addition.
Ground No. 4 raised by the assessee is thus partly allowed. This plea of the assessee is thus allowed.
ITA No. 1118/Chd/2010 (Revenue's appeal) : Asst yr. 2006-07:
33. The Revenue has raised following grounds of appeal:
| "(1) | That on the facts and circumstance of the case and in law, learned CIT(A) has gravely erred in deleting the addition made by the AO in disallowing and capitalizing interest amounting to Rs. 6,50,911 as per provisions of section 36(1)(iii) of the IT Act, 1961. | |
| (2) | That on the facts and circumstances of the case and in law, learned CIT(A) has gravely erred in deleting the addition made by the AO by treating employees' contribution towards EPF amounting to Rs. 17,92,477 as income as per provisions of section 2(24)(x) and not allowing deduction of the same as per section 36(1)(iii) of the IT Act, 1961. | |
| (3) | Whether on the facts and circumstances of the case CIT(A) was right in holding that assessee was not liable to deduct the TDS as there was no written or oral agreement between the alleged parties even in the light of amendment in statute w.e.f. 1st Oct., 2004 in section 194C(3) whereby it is amended to cover instances where total payments made to a person during a financial year for work contract exceeds Rs. 50,000. In such a case it will not matter whether there is single contract or multiple contract. | |
| (4) | That on the facts and circumstances of the case and in law, learned CIT(A) has gravely erred in deleting the addition made by the AO by disallowing proportionate interest amounting to Rs. 3,39,642 as non-business expenses out of financial expenditure claimed in relation to interest-bearing loans." |
34. The issue in ground No. 1 raised by the Revenue is against the deletion of addition made under section 36(1)(iii) of the Act amounting to Rs. 6,50,911.
35. The brief facts relating to the issue are that the AO vide para 2 noted that the assessee had made advance payment for purchase of land. The assessee was asked to explain as to whether the interest paid up to the date when the said assets were put to use had been capitalized or not. In reply, the assessee submitted that the fixed assets were purchased in connection with the existing business and were by way of expansion. Further it was explained by the assessee that the reserve and surplus of the assessee company had increased from Rs. 4.82 crores to Rs. 8.39 crores and also the assessee had sold commercial site for Rs. 6 crores and money was utilisied for purchase of fixed assets. The AO observed that as the assessee had made advance payment for purchase of land but since the land was not put to use during the year under consideration, the proportionate interest was required to be capitalized. The AO accordingly disallowed sum of Rs. 6,50,911 under section 36(1)(iii) of the Act.
36. The CIT(A) deleted the addition made by the AO in the absence of any nexus being established between the payment made for purchase of land having direct bearing with the secured or unsecured loans obtained by the assessee.
37. The Revenue is in appeal against the order of the CIT(A). The learned Departmental Representative for the Revenue placed reliance on the order of the AO.
38. The learned Authorised Representative for the assessee pointed out that under the proviso to section 36(1)(iii) of the Act where the borrowed funds were utilized for the investment in the assets, and where the assets were not put to use, disallowance is to be made; but in the absence of any nexus of borrowed funds being utilized, no disallowance is warranted.
39. We have heard the rival contentions and perused the record. Under the provisions of section 36(1)(iii) of the Act, while computing the income from the profits and gains of business deduction is allowed on account of amount of interest paid in respect of capital borrowed for the purposes of business or profession. The proviso under the said sub-section further provides that the interest relatable to the capital borrowed for acquisition of assets for expansion of existing business or profession, for any period beginning from the date on which capitals were borrowed till the date on which the said assets were put to use, shall not be allowed as deduction.
40. As per the proviso to section 36(1)(iii) of the Act, the first step to be seen is whether any capital borrowed for the acquisition of an asset for expansion of the existing business and interest paid on such borrowed funds is to be disallowed for the period up to the date on which the asset is first put to use. In the absence of any borrowed borrowals for the purchase of the land on which interest is being paid, no disallowance is warranted where no part of the borrowed funds are utilized for the purposes of investment in such assets. In the facts of the present case before us the assessee had made investment in land. The claim of the assessee was that the possession of the land was very much with the assessee company during the year under consideration and all the documents relating to the ownership and possession of land were furnished before the AO during the course of assessment proceedings. The said land was claimed to be business asset of the assessee and was declared in the schedule of fixed asset at serial No. 1.
41. The next plank of argument of the assessee was that it had sufficient funds of its own for the purposes of investment in the said assets. The assessee claims to have sold one commercial site in sector 43B, Chandigarh for Rs. 6 crores during the year under consideration and the said money was said to be utilized for purchase of the fixed assets. The total investment in the land reflected by the assessee was at Rs. 2.12 crores. In addition, during the year under consideration the reserves and surplus of assessee company had increased from Rs. 4.81 crores to Rs. 8.39 crores implying thereby generation of funds by the assessee company itself out of its business activities. The AO has failed to bring on record any evidence to justify the disallowance under the proviso to section 36(1)(iii) of the Act. The AO has failed to refer to any borrowed funds utilized for the purposes of investment in the said fixed asset and in the absence of the same and in view of the facts of the present case where the assessee had sufficient self-generated funds, we find no merit in ground No. 1 raised by the Revenue and the same is dismissed.
42. The issue in ground No. 2 raised by the Revenue has been adjudicated by us along with ground No. 3 raised by the assessee in ITA No. 1956/Chd/2010 in the paras hereinabove. Following the same, we dismiss ground No. 2 raised by the Revenue.
43. The issue in ground No. 3 raised by the Revenue is in relation to the payment of freight in and freight out. The AO from the details furnished by the assessee noted that payment exceeding Rs. 50,000 were paid to two persons i.e. M/s Canter Transport Operators Union of Rs. 4,38,415 and M/s Bharat Motors (P) Co. of Rs. 95,048. The assessee explained that M/s Canter Transport Operators Union was a booking agent which used to provide trucks as per requirement. The payment of freight was claimed to be made on vouchers to the truck owner and no payment to a truck owner was more than Rs. 50,000 and hence not liable to TDS. The AO held the assessee liable to deduct tax at source on the payment related to transportation of goods and in the absence of the same the AO disallowed a sum of Rs. 5,33,463 under the provisions of section 40(a)(ia) of the Act.
44. The CIT(A) allowed the claim of the assessee following the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT v. Bhagwati Steels[2010] 326 ITR 108/[2011] 198 Taxman 275/9 taxmann.com 266.
45. The learned Departmental Representative for the Revenue placing reliance on the order of the AO fairly admitted that the aforesaid amount was fully paid and nothing was payable at the close of the year.
46. The learned Authorised Representative for the assessee placed reliance on the ratio laid down in Bhagwati Steels (Supra) and also in CIT v. Truck Operators Union [2011] 339 ITR 532/[2012] 20 Taxmann.com 848 (Punj. & Har.).
47. We have heard the rival contentions and perused the record. The assessee during the year under consideration claimed to have made freight payments directly to the truck owners, which were booked through M/s Canter Transport Operators Union, Panchkula. The said concern was a booking agent which was providing trucks as per the requirement of the assessee. However, the payment of freight amount was being paid to the truck owners and to none of the said truck owners, the cumulative payment exceeded Rs. 50,000 during the year. The requirement of section 194C of the Act is that where the assessee has paid freight to a person totalling more than Rs. 50,000 in a year or more than Rs. 20,000 per transaction, is liable to deduct tax at source. In case of non-deduction of tax at source, in view of the provisions of section 40(a)(ia) of the Act, such amount on which the assessee was liable to deduct tax at source and the same having not been deducted by the assessee, such amount is disallowable in the hands of the assessee. However, where the cumulative payment made to a particular person during the year under consideration is less than Rs. 50,000, no disallowance is warranted for non-deduction of tax at source. In the facts of the present case before us the assessee claimed that it has not violated provisions of section 194C of the Act because the total payments during the year to the individual truck owner was less than Rs. 50,000. We also find that in relation to the disallowance under section 40(a)(ia) of the Act, the Special Bench of Visakhapatnam in Merilyn Shipping & Transports v. Addl CIT [2012] 136 ITD 23/20 Taxmann.com 244 has laid down the proposition that where the amount payable to the payee has been paid during the year under consideration itself and no amount is payable at the close of the year, no disallowance is warranted under section 40(a)(ia) of the Act for non-deduction of tax at source. In the facts of the present case and as admitted by both the authorized representatives, the total amount on account of freight has been paid during the year itself and nothing is payable at the close of the year; consequently no disallowance is warranted under section 40(a)(ia)) of the Act. We dismiss ground No. 3 raised by the Revenue.
48. Ground No. 4 raised by the Revenue is against the deletion of addition of Rs. 3,39,642 being interest relatable to the interest-free loans and advance given by the assessee to persons under section 40A(2)(b) of the Act. The AO noted that though the assessee had made advances to its sister concern M/s Shivam Industries and M/s Alfa Fabrics (P.) Ltd., no interest was charged from the said concerns though the assessee was utilizing interest-bearing funds for running its business. The explanation of the assessee was that the said amounts were being advanced in the course of carrying on the business as the assessee was making both the purchase/sale transactions with the said concerns. The explanation of the assessee was rejected by the AO and disallowance of Rs. 3,39,642 was made.
49. The CIT(A) allowed the claim of the assessee both on account of availability of funds and by way of increase in reserve and surplus and also the AO having failed to give credit for the amount deducted in the account of Shivam Industries on account of sale/purchase transactions.
50. The learned Departmetal Representative for the Revenue placed reliance on the order of the AO.
51. The learned Authorised Representative for the assessee vehemently opposed and pointed out that the said concerns were not related persons as per the provisions of section 40A(2)(b) of the Act and the amounts outstanding were in the course of regular business between the assessee and the said concerns and consequently application of provisions of section 36(1)(iii) of the Act was incorrect. The learned Authorised Representative for the assessee placed reliance on the ratio laid down in S.A. Builders Ltd. v. CIT(Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC) and in CIT v. Rockman Cycle Industries Ltd. [2009] 176 Taxman 21 (Punj. & Har.).
52. We have heard the rival contentions and perused the record. The contention of the assessee before us was that the parties were not related parties under section 40A(2)(b) of the Act and the said point had been raised during the proceedings before the authorities below and have not been considered by them. Though the plea of the assessee before the authorities below was that the advances made to the said parties were not loan accounts and the assessee was having purchase/sale transactions with these concerns during the year under consideration, the CIT(A) had allowed the claim of the assessee both on account of availability of funds with the assessee and also the non-consideration of the entries debited to the account of M/s Shivam Industries. We are of the view that the issue raised by the assessee needs to be relooked by the AO by considering the plea of the assessee and in view of the ratio laid down by the Hon'ble Supreme Court in S.A. Builders Ltd. (supra) that in case the advances between the assessee company and two concerns were on account of business transactions, no disallowance was warranted under section 36(1)(iii) of the Act. We remit the issue back to the file of the AO to decide the same in accordance with law after affording reasonable opportunity of hearing to the assessee. The AO shall also consider the plea of the assessee in respect of the entries in the respective accounts of the parties on account of purchase/sale transaction and allow credit for the same to compute the balances due between the parties. The ground of appeal No. 4 raised by the Revenue is partly allowed.
ITA No. 693/Chd/2011(Assessee's appeal) :Asst yr. 2007-08
53. The assessee has raised following grounds of appeal:
| ''(1) | On the facts and in the circumstances of the case and in law, the learned CIT(A), Chandigarh in Appeal No. 595/P/2009-10 through order dt. 31st March, 2011 has erred in confirming the addition of Rs. 2,87,500 made by Addl. CIT, Range-I, Chandigarh as disallowance of expenditure incurred for increase in authorised capital of the company by treating the same as capital expenditure instead of revenue expenditure allowable under section 37(1) of the IT Act, 1961. | |
| (2) | On the facts and in the circumstances of the case and in law, the learned CIT(A), Chandigarh has erred in applying the provisions of section 14A of the IT Act, 1961 and confirming the addition of Rs. 2,00,750 made by Addl. CIT, Range-I, Chandigarh as disallowance by applying r. 8D(2)(iii). | |
| (3) | On the facts and in the circumstances of the case and in law, the learned CIT(A), Chandigarh has gravely erred in confirming the addition of Rs. 1,32,02,180 out of total Revenue Expenses of Rs. 2,53,99,069 claimed in the return of income by disallowing Rs. 1,07,49,5237 spent on construction of building on land taken on lease as capital expenditure instead of revenue expenditure claimed in the return and Rs. 19,99,620 spent on Electrical Equipment, Office Equipment etc. at various retail outlets by treating it as capital expenditure instead of revenue expenditure claimed in the return and further disallowing Rs. 14,56,0007 spent on modification of premises (retail outlets) taken on lease by treating it as capital expenditure instead of revenue expenditure claimed in return. | |
| (4) | That the appellant craves to submit any additional facts/evidences in support of their grounds of appeals with the permission of the Hon'ble Tribunal, Chandigarh, before or at the time of hearing/final disposal of the appeal. | |
| (5) | That the appellant craves to submit any additional facts/evidences in support of their grounds of appeals with the permission of the Hon'ble Tribunal, Chandigarh, before or at the time of hearing/final disposal of the appeal. | |
| (6) | That the appellant craves to submit any additional facts/evidences in support of their grounds of appeals with the permission of the Hon'ble Tribunal, Chandigarh, before or at the time of hearing/final disposal of the appeal." |
54. Ground No. 1 raised by the Revenue (sic-assessee) is against the addition on account of expenditure incurred for the increase of various capital of the assessee company. The learned Authorised Representative for the assessee fairly admitted that the issue is covered against the assessee by the ratio laid down in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC). In view thereof, ground No. 1 raised by the assessee is dismissed.
55. The alternate plea of the assessee for considering the said expenditure under section 35D of the Act is also dismissed.
56. The issue raised by the assessee vide ground No. 2 is against the application of provisions of section 14A of the Act.
57. The brief facts relating to the issue are that during the course of assessment proceedings the AO noted from the balance sheet that the assessee had made investment of Rs. 8,01,50,000 as on 31st March, 2007 in shares of various companies, which comprised of the investment in shares of M/s Amartex Infrastructure Ltd. of Rs. 1,50,000 and in SBI Mutual Fund of Rs. 8 crores. The assessee was asked to furnish the details of dividend income from SBI Mutual Fund. The explanation of the assessee was that the investment in SBI Mutual Fund was made only on 30th March, 2007 and no dividend income was received during the year. In view thereof, it was pleaded that when no dividend income has been received, the provisions of section 14A of the Act are not to be applied. The AO observed that in order to apply the provisions of section 14A of the Act it is not necessary that there should be positive exempt income. The AO applied provisions of rule 8D for working out the disallowance under section 14A of the Act and disallowed sum of Rs. 23,50,478 as computed under para 3.11 at p. 18 of the assessment order. The CIT(A) held that only rule 8D(2)(iii) was applicable and thus the addition under section 14A of the Act was reduced to Rs. 2,00,750 and relief of Rs. 21,49,728 was allowed to the assessee.
58. The assessee is in appeal against the addition of Rs. 2,00,750. The Revenue is in appeal against the aforesaid relief allowed by the CIT(A) vide ground No. 3 raised in ITA No. 687/Chd/2011.
59. We proceed to dispose of ground No. 2 raised by the assessee and ground No. 3 raised by the Revenue. Disallowance under section 14A of the Act is warranted where the assessee has earned exempt income. During the year under consideration i.e. at the close of the assessment year, the assessee had made an investment of Rs. 8 crores with SBI Mutual Fund on 30th March, 2007. The said investment was encashed by the assessee on 3rd April, 2007 and income of Rs. 1,18,507 was offered to tax in the succeeding year. As against the said investment of four days the disallowance under section 14A of the Act was made by the AO of Rs. 23,50,478 in asst. yr. 2007-08 and Rs. 17,66,255 in asst. yr. 2008-09. The assessee has placed on record documents relating to the investment and/ encashment of the SBI Mutual Fund at pp. 46 to 48 of the paper book.
60. The AO had applied the provisions of rule 8D(2)(ii) on account of disallowance of interest and further the provisions of rule 8D(2)(iii) for computing the amount disallowable on account of administrative and other expenses, in both the years i.e. asst. yrs. 2007-08 and 2008-09. The investment was made by the assessee on 30th March, 2007 and was held on 1st April, 2007 and consequently the said allowance was worked out under section 14A of the Act for both the asst. yrs. 2007-08 and 2008-09. The learned Authorised Representative for the assessee at the outset pointed out that first of all in asst. yr. 2007-08 the provisions of rule 8D could (sic—not) be applied for computing the said disallowance under section 14A of the Act in view of the ratio laid down in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.).
61. The second plea of the learned Authorised Representative for the assessee was that there was no question of invoking provisions of section 14A of the Act as the income was offered to tax. Reliance was placed in the case of CIT v. Kings Exports [2009] 318 ITR 100/[2010] 2 Taxmann.com 286 (Punj. & Har.) and in the case of Asstt. CIT v. Punjab State Co-operative Agriculture Development Bank Ltd . (ITA No. 742/Chd/2011) order dt. 19th Sept., 2011. The next plank of argument of the learned Authorised Representative for the assessee was that the disallowance under section 14A of the Act cannot exceed the income derived from its investment i.e. Rs. 1,18,000 as held by the Chandigarh Bench of the Tribunal in Asstt. CIT v. Punjab State Co-op. Marketing Fed. Ltd. [2012] 25 Taxmann.com 424 Chd. Further it was pointed out that the interest @ 12 per cent on borrowing of Rs. 8 crores for a period of four days comes to Rs. 97,000 only, against which disallowance under rule 8D has been computed at Rs. 37 lakhs for two captioned assessment years. The learned Authorised Representative for the assessee stated that no borrowed funds were utilized for the said investment.
62. The last plea of the learned Authorised Representative for the assessee was that no administrative expenditure was incurred for investment in the said mutual fund and even thereof disallowance of Rs. 4 lakhs in both the assessment years under appeal for investment in mutual funds of four days was very excessive.
63. We have heard the rival contentions and perused the record. The issue raised in cross-appeals is in relation to computation of disallowance under section 14A of the Act in respect of the investment made by the assessee in SBI Mutual Funds on 30th March, 2007 which was encashed on 3rd April, 2007 i.e. after gap of four days. The disallowance has been computed in the hands of the assessee by applying the provisions of r. 8D{2)(ii) and r. 8D(2){iii) of the IT Rules. As held by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd., (supra) the provisions of rule 8D which were introduced by Notification dt. 24th March, 2008 were held to be prospectively applicable from asst. yr. 2008-09 onwards. In view thereof, we find no merit in the orders of the authorities below in applying the provisions of rule 8D for computing the disallowance under section 14A of the Act in the hands of the assessee relating to asst. yr. 2007-08. In any case, the investment made by the assessee was on 30th March, 2007 and for a period of two days of holding, we find no merit in disallowing any part of the administrative expenses for the aforesaid investment made by the assessee, which was encashed in the subsequent assessment year and income arising therefrom was offered to tax. Consequently, ground No. 2 raised by the assessee in asst. yr. 2007-08 is allowed and ground No. 3 raised by the Revenue in asst. yr. 2007-08 is dismissed.
64. We further address the disallowance made by the AO in asst. yr. 2008-09 in this regard by applying provisions of rule 8D and section 14A of the Act. Though the provisions of rule 8D are applicable w.e.f. asst. yr. 2008-09, there is no merit in invoking the provisions of section 14A of the Act in asst. yr. 2008-09 where the income from the said investment in SBI Mutual Funds has been offered to tax. The assessee had made the investment on 30th March, 2007, which was encashed on 3rd April, 2007 and income of Rs. 1,18,508 was offered to tax. The provisions of section 14A of the Act are to be invoked where the assessee had earned exempt income from its investment. The assessee has not earned any exempt income from the said asset by holding it for a total of about four days and encashed the same during the asst. yr. 2008-09 and offered the income to tax. Following the ratio laid down by the Hon'ble Punjab & Haryana High Court in Kings Exports (supra), we hold that there is no merit in invoking the provisions of section 14A of the Act in asst. yr. 2008-09. We are not addressing the alternate pleas raised by the learned Authorised Representative for the assessee in this regard in view of our holding so. Ground No. 3 [sic—2) raised by the assessee in asst. yr. 2008-09 is thus allowed.
65. Ground No. 3 raised by the assessee in asst. yr. 2007-08 is against the disallowance of Rs. 1,32,02,108 (Rs. 98,96,460 + Rs. 18,49,648 + Rs. 14,56,000).
66. The brief facts relating to the issue are that the assessee had claimed revenue expenditure of Rs. 2,53,99,069, in its computation of income. The said revenue expenditure were not claimed in the books of account by the assessee company. Out of the total expenditure of Rs. 2.53 crores, sum of Rs. 1.07 crores was spent on construction on plot No. 365, Industrial Area, Phase-I, Panchkula, which was taken on lease from Shri Arun Grover, managing director of the company on nominal rent by paying him interest-free deposit of Rs. 75 lakhs. The assessee claimed the said expenditure on construction of building to be non-reimbursable and the same was claimed as revenue expenditure. Further no expenditure was claimed on the said cost of the plot on leasehold.
67. The second aspect of the expenditure was the amounts spent on furniture/fixtures/fittings/interiors/temporary structures at retail outlets. The expenditure incurred by the assessee was claimed to be the minimum requirement of carrying on the business by the assessee company and not creation of new asset. Sum of Rs. 1.05 crores was spent on repairs of retail outlets and was claimed as revenue expenditure under section 30(a)(i) of the Act. The assessee further spent sum of Rs. 19,99,620 on plant and machinery, electric equipment, electric installation, office equipments. The assessee had further transferred sum of Rs. 20,50,000 from salary and wages account which was capitalized in the books of account and was claimed as revenue expenditure in the computation of income. The total expenditure claimed was Rs. 2.54 crores. The AO rejected the claim of the assessee in respect of all the items. The expenditure on construction of the head office on leasehold land amounting to Rs. 1.07 crores was held to be capital expenditure, on which depreciation @ 10 per cent was allowed to the assessee. Similarly, the expenditure of Rs. 19,99,620 on plant and machinery, electric equipment, etc. was held to be capital in nature and depreciation was allowed on the same. The assessee had spent a sum of Rs. 1.05 crores on furniture, fixtures, fittings, etc. out of the total expenditure, the assessee had failed to furnish the bills or vouchers totalling Rs. 14,56,000, which was disallowed under section 37(1) of the Act and the balance expenditure was allowed by the AO. Further the expenditure on salary and wages totalling Rs. 20,50,000 debited under the head 'revenue expenditure' by the AO. Thus after allowing depreciation on the various assets capitalized, the total disallowance was worked out to Rs. 1,32,02,180 by the AO.
68. The CIT(A) upheld the order of the AO on all the accounts totalling Rs. 1,32,02,190.
69. The assessee is in appeal against the order of the CIT(A). The learned Authorised Representative for the assessee pointed out that in respect of the expenditure of Rs. 1,07,49,523, the assessee had taken on lease plot of land for a period of 12 years from its managing director and had spent the aforesaid amount in the renovation of the leasehold property. In respect of electric equipment totalling Rs. 19,99,620 the learned Authorised Representative for the assessee pointed out that it had more than 100 retail counters and the abovesaid expenditure was in the nature of replacement of bulbs, etc. as detailed at pp. 53 to 59 of the paper book. The learned Authorised Representative for the assessee fairly admitted that no bills were available with the assessee for expenditure of Rs. 14,50,000.
70. The learned Departmental Representative for the Revenue placed reliance on the orders of the AO/CIT(A).
71. We have heard the rival contentions and perused the record. The assessee during the year under consideration had debited revenue expenditure totalling Rs. 2.53 crores, comprising as under :
| S.No. | Particulars | Amount |
| 1. | Construction of building on leasehold land | 1,07,49,523 |
| 2. | Construction on expansion/extension of existing business or retail. | |
| (a) | Furniture/fixture/fittings | 1,05,99,926 |
| (b) | Plant and machinery/electrical equipment, electrical installation/office equipment | 19,99,620 |
| (c) | Salary and wages | 20,50,000 |
| Total | 2,53,99,069 |
72. The AO disallowed the abovesaid expenditure as under :
| S. No. | Particulars | Amount |
| 1. | Construction of building on leasehold land(after depreciation) | 98,96,460 |
| 2. | Construction on expansion/extension of existing business or retail. | |
| (a) | Furniture/fixture/fittings (no bills/vouchers) | 14,56,000 |
| (b) | Plant and machinery/electrical equipment, electrical installation/office equipment (after depreciation) | 18,49,648 |
| (c) | Salary and wages | (allowed) |
| Total: | 1,32,02,108 |
73. The assessee is in appeal against the abovesaid disallowance made by the AO which was upheld by the CIT(A).
74. The first item of expenditure is the renovation expenditure incurred by the assessee. The assessee had taken on lease plot No. 365, Industrial Area, Phase-I, Panchkula from its managing director Shri Arun Grover on nominal rent by paying him Rs. 75 lakhs and had constructed the building on the said land for its centralized controlling office. The explanation of the assessee both before the AO and the CIT(A) was as under :
"During the financial year 2003-04, the company had taken land—Plot No. 365, Industrial Area, Phase-I, Panchkula, on lease from Shri Arun Grover, managing director of the company on nominal rent by paying him Rs. 75.00 lakhs as interest-free deposit. As the company was expanding at a rapid pace, it was decided to establish a centralized controlling office (head office) building on the leased premises.
During the year under consideration, an amount of Rs. 1,07,49,523 has been spent on construction.
The assessee has put up construction of building on leasehold land and no building has been taken on lease. The assessee has not acquired any capital asset viz. land but put up a building for business advantage. As the amount spent on construction of building as per lease deed is non-reimbursible, the same has been claimed as revenue expenditure.
The assessee has not claimed any depreciation on Rs 1,07,49,523 under the IT Act 1961 during the year under consideration."
75. The perusal of the abovesaid explanation fairly establishes that the assessee had spent sum of Rs. 1.07 crores on the construction of building on land taken on lease from its managing director. The said expenditure on the construction of the building cannot be held to be revenue expenditure in the case of the assessee. We are in conformity with the orders of the authorities below that the said expenditure incurred by the assessee is capital expenditure and the assessee is entitled to the claim of depreciation on the said assets. Reliance placed by the assessee on the ratio laid down in CIT v. Hi Line Pens (P.)Ltd. [2008] 306 ITR 182/175 Taxman 132 is misplaced as the Hon'ble Delhi High Court had allowed the claim of the assessee on account of expenditure on repairs and renovation of rented premises, whereas in the present facts of the case before us, the assessee had incurred the said expenditure on the construction of the building itself from which it had carried on its business in the later period. Consequently, we find no merit in the claim of the assessee vis-a-vis the expenditure of Rs. 1.07 crores.
76. The second item of expenditure is the amount spent on electric equipments totalling Rs. 19,99,620. As referred to by us in the paras hereinabove the assessee was running more than 100 retail outlets in whole of India and the break-up of the said expenditure is as under :
| Name of Ledger | Expense |
| Electrical/Office equipments : | |
| Electrical equipment | 8,43,022 |
| Electrical installation | 2,30,028 |
| Office equipment | 76,191 |
| Air-conditioner/cooler | 7,48,089 |
| Mobile | 1,02,297 |
| Total | 1,999,627 |
77. The assessee had furnished the details of the respective expenditure under various sub-heads at pp. 53 to 59 of the paper book. The first expenditure is on electrical equipment placed at pp. 54 and 55 of the paper book. The assessee had purchased 80 fans for Rs. 60,000 on 12th May, 2006. Further there are other bills raised for ceiling fans for different offices as find mention in the ledger account placed at pp. 54 and 55 of the paper book. The assessee had also spent Rs. 1,54,441 on 15th Jan., 2007 for electric installation at Faridabad. In the totality of the nature of the expenditure incurred by the assessee we find no merit in the claim of the assessee vis-a-vis electric equipment totalling Rs. 8,43,022. The second item of expenditure is the office equipment totalling Rs. 76,191, break-up of which is placed at p. 56 of the paper book which is the expenditure on water dispenser, water cooler, water filter, etc. which are items of fittings and are in the nature of capital expenditure. The detail of expenditure on electric installation of Rs. 2,30,028 is placed at p. 58 of the paper book and perusal of the same reflects the purchase of exhaust fans, electric goods for different units except for the expenditure of 8500 tubes and 14677 of lights. In the totality of the facts and circumstances, we find no merit in the claim of the assessee and the same is rejected in respect of expenditure of Rs. 2,30,028.
78. The next head of expenditure is on air-conditioners and coolers totalling Rs. 7,48,089 and mobile phones totalling Rs. 1,02,297, placed at pp. 57 and 59 of the paper book. The abovesaid expenditure incurred by the assessee is purely capital expenditure and is not to be allowed as revenue expenditure, though the assessee is entitled to the claim of depreciation on the said asset. Upholding the order of the AO in this regard we dismiss the claim of the assessee vis-a-vis expenditure of Rs. 12,99,620.
79. The last item of expenditure is totalling Rs. 14,56,000 spent on modification of premises of the assessee company. The assessee failed to produce bills in respect of the said expenditure. In the absence of the same, we find no merit in the claim of the assessee and hence the same is rejected. Thus ground of appeal No. 3 raised by the assessee for asst. yr. 2007-08 is dismissed.
80. Ground No. 4 raised by the assessee is identical to ground No. 4 raised in ITA No. 1056/Chd/2010 and following our reasoning given in paras hereinabove shall apply mutatis mutandis to ground No. 4 raised by the assessee and the AO shall recompute the deduction under section 80-IC of the Act, in line with our directions.
81. Ground Nos. 5 and 6 raised by the assessee being general are dismissed as such.
ITA No. 687/Chd/2011 : Revenue's Appeal: Asst yr. 2007-08:
82. The Revenue has raised the following grounds of appeal :
| "(1) | That on the facts and circumstances of the case and in law, learned CIT(A) has gravely erred in deleting the addition made by the AO in disallowing and capitalizing interest amounting to Rs. 6,50,911 as per provisions of section 36(i){iii) of the IT Act, 1961. | |
| (2) | That on the facts and circumstances of the case and in law, learned CIT(A) has gravely erred in deleting the addition made by the AO by disallowing proportionate interest amounting to Rs. 3,39,642 as non-business expenses out of financial expenditure claimed in relation to interest-bearing loans. | |
| (3) | That on the facts and circumstances of the case and in law, learned CIT(A) has gravely erred in deleting the addition made by the AO on the issue of applying the provisions of section 14A of the IT Act, 1961 on investment of Rs. 8,00,00,000 in SBI Mutual Fund and disallowing proportionate interest and administrative expenses amounting to Rs. 23,50,478 by applying rule 8D. | |
| (4) | The appellant craves to add or amend any ground of appeal before the appeal is heard or disposed of. | |
| (5) | It is prayed that the order of the learned CIT(A) be cancelled and that of the AO may be restored." |
83. Ground No. 3 raised by the Revenue has been decided by us along with ground No. 2 raised by the assessee in asst. yr. 2007-08 and following our decision in paras hereinabove ground No. 3 raised by the Revenue is thus dismissed.
84. The issue in ground No. 1 raised by the Revenue is against the deletion of addition on account of interest relatable to capital work-in-progress. The assessee had reflected capital work-in-progress at Rs. 1.79 crores as on 31st March, 2007, as against opening capital work-in-progress amounting to Rs. 5.90 crores. The AO was of the view that the assessee had utilized various loans funds in the creation of capital work-in-progress as the assessee had raised Rs. 16.80 crores on account of term loan and Rs. 16.76 crores on account of cash credit account. The total investment in the purchase of fixed asset was amounting to Rs. 9.88 crores. The AO vide the deliberation at pp. 76 to 81 added back sum of Rs. 6,89,945 being interest capitalized @ 4.34 per cent on monthly balances of capital work-in-progress. The CIT(A) vide paras 45 to 48 at pp. 37 and 38 of the appellate order allowed the claim of the assessee in view of the similar plea being allowed in asst. yr. 2006-07.
85. The Revenue is in appeal against the said disallowance. The learned Authorised Representative for the assessee pointed out that no disallowance is warranted as the work-in-progress related to its retail outlets.
86. We find that the issue in the present case is covered by the proviso to section 36(1)(iii) of the Act which clearly provides that where borrowed funds have been utilized for investment in the fixed assets for the period from the date of utilization of the funds till the date of putting the assets to use, interest relatable to such deployment of funds is to be disallowed. We find that the AO had applied the abovesaid provisions to work out the disallowance of Rs. 6,89,945 as per Schedule at p. 81 of the assessment order. We are in conformity with the order of the AO and reversing the order of the CIT(A) we allow ground No. 1 raised by the Revenue.
87. The issue in ground No. 2 raised by the Revenue is against the deletion of addition of Rs. 3,58,125. The AO had invoked provisions of section 36(1){iii) of the Act in respect of advances made to M/s Shivam Industries and disallowed a sum of Rs. 2,33,038. Further there was imprest account of the directors and other related concerns of the assessee as tabulated at p. 75 of the assessment order and the AO worked out the disallowance at Rs. 1,25,087. The CIT(A) allowed the claim of the assessee.
88. We find that the first issue of disallowance of interest relatable to the advances made to M/s Shivam Industries is identical to the issue raised vide ground No. 1 in the appeal of the Revenue relating to asst. yr. 2006-07. Following our reasoning in the paras hereinabove we confirm the order of the CIT(A) in respect of the deletion of addition of Rs. 2,33,038.
89. The next item of disallowance of Rs. 1,25,087 is in respect of imprest account of the directors of the assessee company and certain advances made to other concerns. The CIT(A) allowed the claim of the assessee in respect of advance made to M/s Shivam Industries being identical to the preceding year. In respect of the interest-free advance made to sister concern, the CIT{A) held the assessee to have sufficient funds for making the said advance. We find no merit in the said order of the CIT(A) vis-a-vis interest-free advances made to sister concern and to the directors of the assessee company. Following the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1/156 Taxman 257 (Punj. & Har.) we confirm the disallowance of Rs. 1,25,087. Ground No. 2 raised by the Revenue is thus partly allowed.
ITA No. 1116/Chd/2011 (Assessee's appeal) :Asst yr. 2008-09
90. The assessee has raised following grounds of appeal:
| "(1) | On the facts and in the circumstances of the case and in law, the worthy CIT(A) in Appeal No. 695/2010-11 dt. 3rd Oct., 2011 has erred in passing that order in contravention of the provisions of section 250(6) of the IT Act, 1961. | |
| (2) | That on facts, circumstances and legal position of the case, the worthy CIT(A) vide para 3 of his order, has erred in confirming addition of Rs. 78,97,238 made by learned AO wherein he had wrongly held that interest on loan from India Bulls is disallowable under section 36(1)(iii) of the Act. | |
| (3) | That on facts, circumstances and legal position of the case, the worthy CIT(A) vide para 4 of his order, has erred in confirming addition of Rs. 17,66,255 made by learned AO wherein he had wrongly held that provisions of section 14A are applicable over investment in SBI Mutual Funds and others. Further he erred in making a wrong computation of quantum of disallowance under section 14A of the Act. | |
| (4) | That on facts, circumstances and legal position of the case, the worthy CIT(A) vide para 5 of his order, has erred in confirming addition of Rs. 6,58,853 made by learned AO wherein he had restricted the deduction under section 80-IC of the Act by notionally apportioning the unapportionable head office expenses to the Baddi unit of the appellant. | |
| (5) | That on facts, circumstances and legal position of the case, the worthy CIT(A) vide para 6 of his order, has erred in confirming addition of Rs. 8,37,466 made by learned AO wherein he had wrongly held that provisions of proviso to section 36(1)(iii) is applicable over closing work-in-progress of the appellant. | |
| (6) | That the appellant craves leave for any addition, deletion or amendment in the grounds of appeal on or before the disposal of the same." |
91. Ground Nos. 1 and 6 raised by the assessee being general are dismissed.
92. Ground No. 2 raised by the assessee is against the addition of Rs. 78,97,238 under section 36(1)(iii) of the Act. The brief facts relating to the issue are that the assessee had borrowed Rs. 500 lakhs from M/s India Bulls Housing Finance Ltd. for purchase of land and interest on this land was capitalized in the books of account but was claimed as a deduction by the assessee in its computation of income. The claim of the assessee before the AO was that the interest of Rs. 78,97,238 was paid to M/s India Bulls Housing Finance Ltd. and the same being a business asset was so declared in the schedule of fixed asset. Further claim of the assessee was that the interest paid on the funds borrowed for investment in land for business purposes was an allowable business expenditure notwithstanding the facts that the assessee had capitalized the interest on capital borrowed to the land account, the same was allowable as an expenditure in the hands of the assessee, despite entries in the books of account. The AO has given a finding that the loan raised from M/s India Bulls Housing Finance Ltd. was utilized for the purchase of land and consequently the nature of interest payment amounting to Rs. 78,97,238 was capital in nature as the funds raised were utilized for creation of fixed asset. The CIT(A) upheld the order of the AO.
93. The assessee is in appeal against the aforesaid addition of Rs. 78,97,238. The learned Authorised Representative for the assessee pointed out that the basis of the order of the AO that the loan raised from M/s India Bulls Housing Finance Ltd. has been utilized for purchase of land is incorrect. The loan was taken against security of capital asset but was not utilized for the purchase of land. The learned Authorised Representative for the assessee made reference to the written submissions furnished before the CIT(A) which are reproduced under para 3.2 at p. 2 of the appellate order.
94. The learned Departmental Representative for the Revenue placed reliance on the orders of the authorities below.
95. We have heard the rival contentions and perused the record. The assessee during the year under consideration had raised loan of Rs. 500 lakhs from M/s India Bulls Housing Finance Ltd. against security of SCO Site No. 2, Pocket No. 1, Mani Majra, U.T., Chandigarh. The claim of the assessee is that the said property was acquired from auction held on 21st Jan., 2004 and instalments were paid in asst. yrs. 2003-04 and 2005-06. The last instalment was paid during the financial year 2006-07 and the conveyance deed was executed in the financial year 2006-07. The assessee has placed on record the sanction letter of M/s India Bulls Housing Finance Ltd. at p. 35 of the property (sic) under which it is stated that it is a loan against property. The amount was released in the account of Mr. Arun Grover, Managing Director, who was co-applicant on 16th March, 2007 as per the document placed at pp. 35 and 36 of the paper book. The assessee has thereafter placed on record current account of the assessee company at pp. 37 onwards, under which the amount was transferred from the account of Mr. Arun Grover to the assessee company and thereafter utilized for the purpose of business. Out of the total loan received by the assessee, the last instalment of Rs. 93.15 lakhs was paid in financial year 2006-07 and the balance amount was utilized for running the business of the assessee. The claim of learned Authorised Representative for the assessee is that the proviso to section 36(1)(iii) of the Act cannot be invoked in the present case as the said instalment was paid in asst. yr. 2007-08 and not during the year under consideration i.e. asst. yr. 2008-09. The said asset was business asset utilized by the assessee. Further plea of the learned Authorised Representative for the assessee was that in view of the utilization of the amount in running the business of the assessee firm, there was no merit in disallowing any part of the interest expenditure.
96. We find from the perusal of the orders of both the authorities below that the issue has not been considered by the authorities below in proper perspective and the addition has been made merely because the loan had been raised by the assessee company. The finding of the AO in this regard that the amount has been invested in the land account, does not come out from the documents filed by the learned Authorised Representative for the assessee. In the interest of justice and in order to decide the issue we deem it fit to restore this issue back to the file of the AO to decide the same de novo after taking into consideration the various documents filed by the assessee before us and also plea of the assessee in establishing its case of expending the same amount for the purposes of business activities of the assessee company. Reasonable opportunity of hearing shall be afforded to the assessee by the AO. Ground No. 2 raised by the assessee is allowed for statistical purposes.
97. Ground No. 3 raised by the assessee is identical to ground No. 2 raised by the assessee in ITA No. 693/Chd/2011 and our decision in ground No. 2 raised by the assessee in ITA No. 693/Chd/2011 shall apply mutatis mutandis to ground No. 3 raised by the assessee in ITA No. 1116/Chd/2011. The AO shall recompute the deduction under section 80-IC of the Act.
98. Ground No. 4 raised by the assessee is identical to ground No. 4 raised in ITA No. 1056/Chd/2010 and our decision in ground No. 4 raised by the assessee in ITA No. 1056/Chd/2010 shall apply mutatis mutandis to ground No. 4 raised by the assessee in ITA No. 1116/Chd/2011. The AO shall recompute the deduction under section 80-IC of the Act.
99. The issue in ground No. 5 is against the addition of Rs. 8,37,446 by invoking the provisions of proviso to section 36(1)(iii) of the Act on the capital work-in-progress. The said issue is identical to the issue raised by the Revenue vide ground No. 1 in ITA No. 687/Chd/2011. In view thereof, we reverse the order of the CIT(A) and uphold the addition made by the AO by applying the proviso to section 36(1)(iii) of the Act. Ground No. 5 raised by the assessee is thus dismissed.
100. In the result, all the three appeals of the assessee relating to asst. yrs. 2006-07 to 2008-09 are partly allowed and appeal of Revenue relating to asst. yr. 2006-07 is dismissed and relating to asst. yr. 2007-08 is partly allowed.
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