TaxTMI 
TaxTMI 
2004 (10) TMI 278
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....sp; 3,19,41,668 (ii) R & D cess on vehicles 8,41,460 (iii) Excise duty on spare parts 6,76,075 2. Custom duty paid on imports for export purposes for which exports has not been made 22,46,88,464 3. Custom duty paid on import of components for which export has been made. 31,79,98,407 4. Excise duty paid and (CVD) paid on purchase of Components to be adjusted against excise duty Payable on finished products i.e. balance of RG 23-A Part-II.&nbs....
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....for this year also. 3. On appeal, it was noted by the CIT(A) at page 18 of her order that PLA balances were not relatable to any goods already manufactured. That meant that goods were still to be manufactured. Hence, no liability accrued under excise laws. Accordingly, the provisions of section 43-B could not be invoked. She also distinguished the judgment of Calcutta High Court in the case of CIT v. Berger Paints (India) Ltd. (No. 1) [2002] 254 ITR 498, the decision of the Tribunal in case of Indian Communication Network (P.) Ltd. v. IAC [1994] 50 ITD 411 (Delhi), ITO v. Food Specialities Ltd. [1994] 49 ITD 21 (Delhi)(SB), Modipon Ltd. v. IAC [1995] 52 TTJ (Delhi) 477 and Honda Siel Power Products Ltd. v. Dy. CIT [2001] 77 ITD 123 (Delhi) relied upon by the assessee. According to her, section 43B ignores the previous year in which liability to pay a sum is incurred in preference to the year in which such sum is paid. She further held that even presuming that PLA balances related to goods manufactured, these would have to be loaded to closing stock valuation in terms of section 145A and, therefore, closing stock would be enhanced and corresponding deduction as P & L debit would ....
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....ins to inventory. I am of the view that this amount needs to be added to the closing stock in view of section 145A and correspondingly to be added as part of purchases. This adjustment will be income neutral. Remaining amount of Rs. 18674072 pertains to goods in transit and is not an expenditure item as goods in transit are not routed through P & L Account and section 43B benefit can only be obtained for an item that is in the nature of expenditure." 7. Regarding claim of Rs. 8,39,13,307 on account of custom duty (CVD) paid on goods-in-transit, the CIT(A) rejected the claim of assessee by observing as under: "Further, duty paid on goods in transit at Rs. 8,39,13,307 is not tax deductible as goods in transit are not the expenditure of the year and have not been routed through the P & L account and section 43B deduction can only be obtained for an item that is in the nature of expenditure." For the similar reasons, the claim of assessee of Rs. 22,08,48,421 on account of custom duty paid in advance on goods in transit/under inspection was rejected. 8. Regarding the sum of Rs. 50,28,051 and Rs. 69,12,41,610 on account of custom duty included in closing stock, the claim of a....
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....irectly debited to a separate account and not taken to profit and loss account. Consequently, such element of duty is not included in the closing stock, which remained to be utilized in the process of manufacturing by the end of the year. The amount not debited to the Profit & Loss A/c is shown in the balance-sheet as loans and advances. In both the system of accounting, it was contended that profits of the assessee remains the same. He also demonstrated the same by examples. Hence, it was pleaded that none of the methods of accounting would come in the way of assessee's claim under section 43-B. 12. Proceeding further, Mr. Aggarwal made the following submissions in support of assessee's claim under section 43-B: (i) Section 43-B, being non obstante section, overrides all other provisions of the Act and consequently, deductions in respect of taxes and duties is allowable on payment basis irrespective of the method of accounting and the year in which liability to pay is incurred. Hence, it is entitled to deduction where advance payment is made by the assessee. Heavy reliance was placed on the judgment of Allahabad High Court in the case of CIT v. C.L. Gupta & Sons [2003] 259 I....
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....61 ITR 275. (iv) The CIT(A), though justified in allowing the deduction of Rs. 31,79,98,407 being the custom duty paid on the input, was not justified in nullifying the same on the ground that duty drawback accrued to assessee on the export would have to be assessed on accrual basis. It was pleaded by him that by virtue of section 28, such duty draw back is assessable on receipt basis. (v) Alternatively, it was pleaded that even where the provisions of section 145A are to be applied for valuing the closing stock, then valuation of opening and closing stock has to be done on consistent basis as observed by the courts in Lakhanpal National Ltd., Ahmedabad New Cotton Mills Co. Ltd. 4 ITC 245 (PC) and Indo Nippon Chemicals Co. Ltd.'s case. Heavy reliance is placed on the judgment of Privy Council for the contention that if the closing stock is to be loaded with duty paid then opening stock should also be loaded in similar manner. (vi) Alternatively, it has also been contended that if advance payment is not allowed as deduction then its claim should be allowed in the year where such payment is adjusted against the liability incurred. Hence, the advance tax paid in the preceding....
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....urt judgment, taxable event is not reached till goods reaches the custom barriers. Hence, any payment made when goods are in transit would not fall within the ambit of section 43-B. (v) In view of the above submissions, it was submitted that advance payment cannot be allowed as deduction under section 43-B. Reliance was placed on decision of the Tribunal in the case of Dy. CIT v. Amforge Industries Ltd. [2001] 79 ITD 49 (Mum.). He also drew our attention to recent decision of Special Bench of the Tribunal in the case of Dy. CIT v. CWC Wines (P.) Ltd. [2004] 89 ITD 1 (Hyd.) wherein it has been held that advance payment of duty without incurring the liability cannot be allowed as deduction under section 43-B. In fact, decision of the Tribunal in the case of Amforge Industries Ltd. has been approved. The decisions relied upon by assessee's counsel were distinguished. The judgment of Allahabad High Court in the case of C.L. Gupta was distinguished on the ground that their Lordships decided the issue on the basis of concession made by assessee. Further, the judgment of Supreme Court in the case of Garden Silk Mills Ltd. was not brought to the notice of the court. Even no arguments we....
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....re which per se are disallowable like penalties, taxes on capital goods etc., so that assessee does not take benefit of the overriding provisions to claim deduction in respect of even such expenses which are not allowable at all under the scheme of the Act. 3. Regarding Explanation 2 to section 43-B, it was submitted that such Explanation was introduced to avoid the hardship caused to various assesses due to certain judgments of the courts. Attention was drawn to the judgment of Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708 wherein it was held that for application of section 43-B, the liability not only should be incurred but also should be payable in the previous year as per the relevant status, like sales-tax/excise enactments. In order to avoid such hardships that provisions of Explanation 2 were introduced. Hence, reliance placed by the learned DR on this judgment regarding the construction of section 43-B is also misplaced. It was also pleaded that a judgment is an authority for only what is decided therein in a particular fact situation and principles laid down therein cannot be applied lo different fact situation.....
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....idered and fallaciously reasoned. Further, reliance was placed upon the judgment of Supreme Court in the case of Kesho Ram & Co. v. Union of India [1989] 3 SCC 151 wherein it was held that binding effect of a decision does not depend upon whether a particular argument was considered or not. 6. Regarding the construction of section 145A, it was submitted that it refers to valuation of inventory which would include opening as well as closing inventory and therefore, principle laid down by Privy Council would still be applicable. It was, therefore, contended that words of statute being plain and unambiguous, full effect should be given to its natural meaning and, therefore, section 145A would apply to opening and closing stock. Referring to CBDT Circular No. 772, it was submitted that intention of legislature was also not to restrict the applicability of the section to the closing stock. Such circular being binding on revenue, it cannot contend to the contrary. 7. Regarding duty draw back, without disputing the contention of revenue that it is taxable on accrual basis, it was submitted that right to receive the same did not accrue on the date of export but accrued only when clai....
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....hemicals & Plastics India Ltd. v. CIT [2003] 260 ITR 193, the revenue now cannot be allowed to challenge the ratio laid down by such courts. Therefore, indirectly, judgment of all the four High Courts stands upheld. So, in order to appreciate the contention of learned counsel for assessee, it would be appropriate to examine the facts on which the above three judgments were delivered. 16. In the case of Lakhanpal National Ltd. the Hon'ble Gujarat High Court noted the facts at page 243 as under: "The petitioner's chartered accountant thereafter wrote a letter to the respondent onDecember 20, 1984. Along with the said letter, he submitted a statement showing the total customs duty actually paid as Rs. 2,78,54,262 out of which the customs duty included in the valuation of the closing stock was deduction i.e. the amount of Rs. 1,24,94,085 was deduction and the remaining amount of Rs. 1,54,60,177 was debited to the profit and loss account. Similarly, in the statement with regard to excise duty, it was pointed out that the total excise duty that was paid was Rs. 5,25,68,931 out of which the excise duty included in the valuation of closing stock of finished goods at various depots, i....
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....ear corresponding to the assessment year 1984-85 imported materials required for the manufacture of the assessee's products. The assessee had paid import duty of Rs. 35,09,826. According to the assessee, the cost of the imported materials inclusive of duty was taken to the profit and loss account only on consumption basis. The balance of import duty of Rs. 11,58,833 paid on the raw materials held as closing stock, was taken into the balance-sheet and shown as part of current assets. Schedule 15 of the balance-sheet set out the current assets, loans and advances. In that Schedule under the heading 'inventories' the value of raw materials held in the stock was shown. The value of the raw materials stated therein, according to the assessee, includes this sum of Rs. 11,58,833.Similarly, excise duty paid on finished goods held as closing stock was shown as part of the inventory under the current assets in the balance-sheet." Perusal of the above facts clearly shows that there was no advance payment without incurring liability. In fact, duty had been paid after incurring the liability on imports. In each of the three cases, duties related to either the purchases of inputs which remain....
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....e been payable within that year under the relevant law." The perusal of above provisions clearly shows that before allowing any deduction under section 43-B on the basis of actual payment, the following conditions must be satisfied: 1. That deduction claimed by the assessee must be otherwise allowable under the other provisions of the Act. 2. Such deduction must relate to any sum payable by way of tax, duty, cess or fee. 3. That assessee must have incurred liability in respect of such tax, duty etc. If the above conditions are satisfied then, the claim of assessee shall be allowed in the year in which actual payment is made notwithstanding the year in which liability is incurred. The expression 'liability to pay such sum was incurred by the assessee' in the main provision of the section as well as the expression 'a sum for which the assessee incurred liability' in Explanation 2 also clarifies that payment must relate to the incurred liability. Unless the assessee incurred the liability, it did not become 'any sum payable'. At this stage, it would be useful to refer to the judgment of Andhra Pradesh High Court in the case of Sri kakollu Subba Rao & Co.'s case wherein ....
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....tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure." In view of the above ruling, the advance payment of duty cannot be considered as expenditure since it is neither irretrievably gone as it is liable to be refunded if ultimately liability is not incurred, nor relate to existing liability. Hence, advance payment is akin to loan and cannot be considered as expenditure for the purpose of deduction under section 37. If such sum is not deductible under section 37, then question of allowing any deduction under section 43B simply does not arise as allowability of deduction otherwise under the Act is the condition precedent. 22. In view of the above discussion, in our humble view, the advance payment of taxes or duties without incurring the liability to pay such taxes/duties cannot be allowed as deduction under section 43B. The view taken by us is also fortified by the decision of the Tribunal in the case of Amforge Industries Ltd. and of Special Bench in the case of CWC Wines (P.) Ltd. 23. The discussion on this issue would not be complete unl....
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....im on advance payment was deductible under section 43B. In para 18, it is stated that CIT(A) confirmed the order of Assessing Officer but reduced the addition to Rs. 61,992 as sum of Rs. 1,06,390 had already been confirmed in preceding year. Para 19 contains the submissions of learned counsel for assessee which inter alia included that payment made by assessee was gone forever and assessee was not entitled to refund in any case. Reference was also made to Rule 173G under which such payment was made. In para 20, the DR relied on order of Assessing Officer.Para21, which is the order of the Tribunal reads as under: "We have carefully considered the submissions of the learned representatives and have also gone through Rule 173G(1) of the Central Excise Rule, 1944. The scheme appears to be that excise duty is payable as soon as the goods are manufactured and the assessee is obliged to keep sufficient amount in the account with the Collector of Customs known as 'Account-current'. A debit entry has to be made in the account at the time of removal of goods. Excise duty is payable the moment any excisable goods are manufactured. The assessee has to deposit amounts as per Rule 173G. Such ....
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....ts manufacturing unit. In such cases, the advance payment has to be refunded. Besides, there may be fire or theft in the factory. The input may be destroyed due to natural calamities. In all such situations, the assessee may not be able to manufacture any goods for a considerable time and assessee may seek the permission to withdraw the amount under sub-rule (1A) of Rule 173G and the Commissioner would be under obligation to refund the same. Since such aspect was neither argued nor considered, the said decision should be restricted to the facts of that case, cannot be applied for universal application. Further, the aspects considered by us were not argued before the Chandigarh Bench. Hence, the said case is clearly distinguishable. 27. The only judgment which is in favour of assessee is the judgment of Allahabad High Court in the case of C.L. Gupta. On the other hand, contrary view has been taken by Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. As already observed by us, there is no binding judgment on this issue before us. The Full Bench Judgment of Bombay High Court in the case of CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 rules that judgment....
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....les and excise duty on spare parts respectively. 31. At this stage, let us also deal with the deduction of Rs. 69,30,00,248 under section 43-B which represents modvat credit of excise duty which remained un-utilized by the end of the year under consideration. After giving our due consideration to the respective arguments of both the parties, we are unable to uphold the claim of assessee. Let us first understand the nature of Modvat Credit. Modvat Credit Scheme is contained in Rules 57A onwards of Central Excise Rules, 1944. Rule 57A allows credit of any duty of excise or the additional excise duty paid on the goods used in or in relation to the manufacture of the final products which can be utilized towards payment of duty of excise leviable on final products. For example - Suppose an assessee pays excise duty of Rs. 30 on purchase of raw material which is to be used in manufacture of goods. If the excise duty payable on manufactured goods is Rs. 50 then assessee will be entitled to adjust Rs. 30 against liability of Rs. 50. Thus only balance Rs. 20 would be payable by assessee. As per rule 57C, such credit is not allowed if the final product is exempt from levy of excise duty. ....
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.... earlier as held by the Hon'ble Supreme Court in the case of Union of India v. Delhi Cloth & General Mills Ltd. AIR 1963 SC 791. As per the scheme of excise law discussed earlier, the assessee becomes entitled to set off the amount of modvat credit against the liability to pay excise duty which accrues on the date of manufacture. The amount of modvat credit is not refundable in any circumstance. Even assessee has no right to set off if ultimate goods manufactured is exempt from excise duty. In fact, in our opinion, the element of excise duty on the purchase of raw material is part of cost of raw material as also held by the Tribunal in the case of S.H. Kelkar & Co. Ltd. v. Dy. CIT [1993] 44 ITD 170 (Bom.) and, therefore, cannot be considered as payment of excise duty. On the other hand, it is the vendor manufacturer who is entitled to deduction under section 43-B in respect of excise duty charged by him from the customers like the assessee. Two persons cannot claim deduction under section 43-B in respect of the same amount, i.e., once by the manufacturer who manufactured the goods and again by the purchaser of raw material from such manufacturer on the basis of entries made in R.G.....
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....ax Recoverable A/c was actual payment of tax in advance. We have already rejected such contention in respect of modvat credit. For the similar reason, this claim of assessee is rejected. 38. However, we find merit in alternate contention that amount of Rs. 3,84,55,412 representing advance payment of sales-tax in preceding year should be allowed deduction in the year under consideration since the same has been adjusted against the liability incurred on sales in this year. We have already held that on the date of adjustment of liability against such credit, the assessee is deemed to have made actual payment. Therefore, the order of CIT(A) is modified and Assessing Officer is directed to allow the alternate claim after verification if such claim had not been allowed in the preceding year. 39. The next question for consideration is whether sum of Rs. 22,46,88,464, representing the custom duty paid on imports of inputs for export purposes but remained un-utilized by the end of the year, could be disallowed under section 43-B read with section 145A. In this regard, we are of the considered view that no disallowance under section 43-B could be made in view of the judgment of Gujarat....
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.... showing the closing stock inclusive of such duty. Such method of accounting was in consonance with the method now prescribed in section 145 A. The assessee had claimed deduction under section 43-B equal to the amount of custom duty included in the closing stock but such claim was disallowed by Assessing Officer on the ground that such claim stood allowed by debiting the purchases in the trading account. However, the Tribunal allowed the claim of assessee by holding as under: "According to the accounting principles whenever the raw material purchased is shown in the closing stock and carried forward to the next year in the form of opening stock, it cannot be said that the cost of purchase has been allowed. For the similar reason the custom duty paid by the assessee has been added to the cost of raw material and the same has been shown in the closing stock and carried forward to the next year in the form of opening stock. Therefore, it cannot be said that the expenditure on account of customs duty stands allowed to the assessee in the year under consideration. Therefore, following the decision of the Special Bench, the assessee is entitled to deduction of the aforesaid amount und....
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....terial on record, it is not possible for us to record a finding whether goods were in transit between port and assessee's place of business as contended by assessee or whether goods had not crossed the custom barrier as contended by learned counsel for revenue. Further, the legal position as contended by learned counsel for the revenue was never considered by the CIT(A). In these circumstances, we set aside the order of CIT(A) on this aspect of the issue and restore the same to his file for fresh adjudication after considering the material or evidence which may be placed by assessee or gathered by the department. 43. For the reasons mentioned in the above paras, it is further held that CIT(A) was not justified in upholding the disallowances of Rs. 69,12,41,610 and Rs. 50,28,051 made by Assessing Officer in respect of custom duty debited to Profit & Loss account and included in the closing stock either with the assessee or with the vendors. The only reason given by the CIT(A) (Para 9.19) is that claim of assessee under section 43-B stands allowed when P & L account is debited by the custom duty paid. We have already rejected such reasoning of CIT(A) by following decisions of vari....
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....sonable opportunity to assessee to place necessary materials. If the Assessing Officer finds, the assessee had incurred the liability to pay such duty in the year under consideration, he shall allow the claim of assessee. 45. Now coming to the addition of Rs. 31,79,98,407 in respect of duty drawback against exports made by assessee, we are of the view that issue has not been decided by the CIT(A) in the right perspective for the reasons given hereafter. Originally, the addition was made by Assessing Officer under section 43-B which has been held to be untenable by the CIT(A). To that extent the finding has become final in the absence of any challenge by Assessing Officer. However, the CIT(A) has upheld the addition on the ground that income had accrued to the assessee by way of duty draw back on account of exports made by assessee. The CIT(A) has proceeded on the footing that such income accrued to assessee automatically the moment exports were made. In our opinion, such approach is erroneous and cannot be upheld for the reasons mentioned hereafter. 46. Initially, there was divergence of opinion on the issue whether the receipt on account of duty draw back was capital receipt....
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....antile system of accounting. Having chosen mercantile system of accounting, the assessee is now not permitted to compute income of duty draw back on cash system of accounting. Therefore, it has to be computed on accrual basis only. 48. However, that is not the end of the matter. The question still remains whether there was accrual of income in the year under consideration. The CIT(A) proceeded on the footing that duty draw back accrued to the assessee the moment exports were made by assessee. This view of CIT(A) is contrary to the settled legal principle. Section 28(iiic) provides the taxable event where such duty becomes repayable. An amount cannot be said to accrue unless enforceable debt is created in favour of assessee. Reference can be made to the judgment of Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27. Their Lordships at page 51 observed as under: "That the words 'arising or accruing' are general words descriptive of a right to receive profits... If the assessee acquires a right to receive the income, the income can be said to have accrued to him. Though it may be received later on it being ascertained. The basic conception is th....
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....aim of assessee was accepted in the year under consideration, then to that extent, the addition would be retained. However, in the later situation, the addition would have to be deleted in the year in which it has been offered for taxation if such claim of deduction is made before the appropriate authority. The reason is that double addition cannot be made on the same account. The assessee is also directed to place all the relevant materials before the Assessing Officer to enable him to ascertain this factual aspect. 51. Now we take up the last disallowance of Rs. 8,39,13,307, we are of the view that the issue cannot be adjudicated in the absence of any relevant material on record. The CIT(A) had proceeded on the footing that goods being in transit, the said amount did not constitute even the expenditure and, therefore, the amount paid being advance payment could not be allowed as deduction. On the other hand, the stand of assessee is that goods in transit was in the sense that they were on the way from Port to assessee's destination and therefore, payment was actual payment of duty and thus was allowable deduction. However, there is no material on record to resolve this factual....
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....r payment of custom duty on shortfall in export obligation only arises when the appellant agrees to pay the custom duty which the appellant did in this case on28-4-1999". According to CIT(A), the liability did not incur in the year under consideration and, therefore, no depreciation could be allowed in the year under consideration. Aggrieved by the same, the assessee is in appeal before the Tribunal on this issue. 53. The learned counsel for assessee has submitted (i) that liability to pay custom duty did not arise on payment of such duty but had arisen during the year under consideration on account of failure to meet its export obligation. Reliance was placed on judgment of Apex Court in the case of E.D. Sassoon & Co. Ltd. (ii) since expenditure related to capital goods, it was necessarily to be capitalized; (iii) that custom duty so paid is an expenditure related to acquisition of capital asset and, therefore, the same should be added to the cost as and when assessee becomes liable to pay the same. Reliance was placed on Bombay High Court decision in the case of Habib Hussein v. CIT [1963] 48 ITR 859; (iv) that written down value has to be determined afresh every year taking i....
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....port was made by assessee. In the present case, such exemption was allowed to assessee subject to the condition that assessee would export 11000 cars in financial year 1995-96 and 21500 cars for each of the next six years. In case of failure to export such cars, the assessee was liable to pay proportionate custom duty in terms of the exemption order. Such order was made under the law of custom and, therefore, such liability arose on account of non compliance of such exemption order. Since the liability was statutory one, it accrued the moment there was non compliance of such order. Even assuming that it was a contractual liability, still it arose on the failure of assessee to export cars which took place in the year under consideration. There is distinction between incurring of liability and discharge of the same. It was discharge of liability which took place in next year. In view of the above discussion, it is held that liability to pay custom duty was incurred in the year under consideration and, therefore, payment of duty formed part of the actual cost. Accordingly, the assessee was entitled to claim depreciation in respect of such amount. The order of CIT(A) is, therefore, set....
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....icer, without much discussion, held that interest paid by assessee could not be allowed. He calculated interest at the rate of 18 per cent on the total investment in shares of Rs. 217,80,27,000 at Rs. 39.20 crores and accordingly the same was disallowed. 56. The matter was carried in appeal before the CIT(A) before whom it was submitted (i) the company had sufficient interest free funds for making such investment and there was no direct nexus between the earning of tax free income and expenditure incurred; (ii) the use of term 'in relation to' under section 14A requires a direct nexus in view of Supreme Court judgment in the case of Madhav Rao Jiva Ji Rao Scindia v. Union of India [1971] 1 SCC 85 and Navin Chemicals Mfg. & Trading Co. Ltd. v. Collector of Customs [1993] 4 SCC 320; (iii) that the investment in shares actually amounted to Rs. 193,80,27,000 because a sum of Rs. 24 crores was on account of investment made in debentures of Maruti countrywide Automobiles Finance Ltd. interest on which is taxable; (iv) that the Assessing Officer calculated interest at the rate of 18 per cent for the full year while interest if any to be disallowed should have been computed on day-to-da....
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....judgment in the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 for the proposition that once three conditions are satisfied then deduction must be allowed; (vi) that the appellant company had owned interest free funds of the company at the beginning of the year of Rs. 2143.35 crores and at the close of the year Rs. 2622.37 crores and, therefore, the net own funds of the company were far in excess of the investments made by the appellant company of Rs. 217 crores to earn the tax free income. Further, the assessee had net profit of Rs. 975 crores which alone far exceeded the investment in shares. Hence, no inference could be drawn that investment in shares was out of borrowed funds. Reliance was also placed on Calcutta High Court judgment in the case of Indian Explosives Ltd. v. CIT [1984] 147 ITR 392 as well as Madras High Court judgment in the case of CIT v. Hotel Savera [1999] 239 ITR 795; (vii) that merely the fact that on the date of investment, the bank account had borrowed funds, it could not be said that borrowed money had been used for making investment in shares; (viii) that provisions of section 14A could not be applied to the year under consideration since it was i....
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....would become redundant. He also submitted that in the case of mixed account, theory of apportionment can be applied. Reliance was placed on judgment of Supreme Court in the case of Continental Construction Ltd. v. CIT [1992] 195 ITR 81. Reference was also made to Rule 7 of Income-tax Rules, 1962. 59. Rival submissions of the parties have been considered carefully in the light of case law referred to and the material placed before us. The first aspect of the issue relates to the scope of section 14A. Prior to insertion of section 14A, the legal position regarding allowability of expenditure was like this: "Where an assessee is carrying on one indivisible business and a part of income is either excluded or is exempt under any provision of the Income-tax law, it is not permissible to disallow the proportionate part of the expenditure attributable to such exempted or excluded income". Reference can be made to the judgments of Supreme Court - CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajas than State Warehousing Corpn.'s case. However, where different activities do not constitute one and the same business and income from some activity is not taxable, the composite ....
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....o judgment of Punjab & Haryana High Court in the case of Saraswati Industrial Syndicate Ltd. v. CIT [1982] 136 ITR 361. In the present case, it is the revenue who wants to disallow the expenditure under section 14A. Hence the onus is on the revenue to prove that interest paid by assessee on borrowed funds related to acquisition of shares yielding tax free income. 61. Another aspect of the matter relates to the meaning of the words 'in relation to' used by the legislature in section 14A. In our humble opinion, the meaning of any expression or words should be construed in the light of the context and the purpose intended to be achieved by the legislature. The purpose of the legislature is to disallow the expenditure which has been incurred by the assessee for earning tax free income. Therefore, the words 'in relation to' would include any expenditure which is proved to have nexus directly or indirectly with the utilization of funds for earning tax free income. However, as already stated, the burden is heavy on the revenue to prove the same. 62. In the light of the above legal position, let us examine the facts of the case. We have examined the material placed before us. The Ass....
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....ailed to discharge. Accordingly, the order of CIT(A) is set aside on this issue and consequently, the addition of Rs. 4,59,08,287 sustained by her is hereby deleted. 63. The next issue relates to the disallowance of Rs. 14,74,78,000 in respect of warranty expenditure. This issue has been disallowed by Assessing Officer in para 5.9 of his order. It is observed that above claim was made on accrual basis while upto assessment year 1993-94 it was being claimed on the basis of actual expenditure. This change had not been accepted in part by his predecessor. It was also observed that CIT(A) had allowed the change but the said order was not accepted and appeal is pending before the Tribunal. Accordingly, he did not accept the claim of assessee on accrual basis. Since the assessee did not file the details of actual expenditure, the entire claim was disallowed. 64. On appeal, it was contended before CIT(A) that as per technical evaluation and based on past experience, the assessee was scientifically able to estimate the warranty claims. Reliance was placed on Supreme Court judgment in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 as well as judgment of Privy Council in the ca....
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....bsp; Rs. 1,39,91,022 (b) Expenditure incurred on upgradation of software Rs. 7,23,229 (c) Expenditure incurred on maintenance of software Rs. 18,64,026 -------------------  ....
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....ry processing 12,000 ----------- 1,39,91,022 &nbs....
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....ountantseffective from1-4-2003. He also relied on the following decision for the proposition that expenditure on software was revenue expenditure: (1) Bank of Punjab Ltd. v. Dy. CIT [2002] 122 Taxman 235 (Chd.) (Mag.) (2) Media Video Ltd. v. Joint CIT [2002] 122 Taxman 28 (Chd.) (Mag.) (3) Business Information Processing Services v. Asstt. CIT [1999] 106 Taxman 116 (Jp.) (Mag.) (4) Gurudev Engineers (P.) Ltd. v. ITO [1990] 34 ITD 297 (Mad.) (5) ITC Classic Finance Ltd. v. Dy. CIT [2000] 112 Taxman 155 (Cal.) (Mag.) (6) CIT v. K & Co. [2003] 181 CTR (Delhi) 378 (7) Dy. CIT v. TCIL Bellsouth Ltd. [2003] 130 Taxman 37 (Delhi) (Mag.) Proceeding further, it was also submitted that expenditure in respect of ERP application software be allowed as a business since it was not found to be feasible to implement in the instant year. 71. On the other hand, the learned counsel for revenue has reiterated the reasonings given by the CIT(A) and also relied on the judgment of Rajasthan High Court in the case of CIT v. Arawali Constructions Co. (P.) Ltd. [2003] 259 ITR 30 for the proposition that expenditure on acquisition of software is capital expenditure. 72. Rival su....
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....chase of software is a capital expenditure. There is no contrary judgment on this aspect of issue. Hence, it has to be held that software is an asset. Admittedly, the assessee is not in the business of software. Hence, we are further of the view that software was a capital asset as far as the present assessee is concerned. The Income-tax Rules, 1962 as amended w.e.f.1-4-2003rather helps the revenue and not the assessee in as much as it provides for depreciation on software at the rate of 60 per cent. By providing higher depreciation, it cannot be said that prior to1-4-2003, it was revenue expenditure. It was always a capital asset. Prior to1-4-2003, the assessee was entitled to normal rate of depreciation which was enhanced to 60 per cent by the amendment considering the rapid wear and tear. The judgment of Supreme Court in the case of Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 also supports the view taken by us in as much as their Lordships held that know how is part of plant and machinery and assessee is entitled to depreciation thereon. Before concluding this issue, we would like to refer to one more judgment of Supreme Court in the case of Arvind Mills Ltd. v. CI....
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....espect of ERP Application Software. We are in agreement with the reasoning given by the CIT(A). The expenditure was admittedly not incurred in the year under consideration. It has been merely written off in this year as it was not found feasible. Even assuming, for the sake of argument, that expenditure was of revenue character, it could be allowed only in the earlier years where actual payments were made. Hence, question of allowing as business loss in this year does not arise. Business loss can be allowed only with regard to trading asset which is not the case before us. We have already held that expenditure related to capital asset. Hence, loss, if any, was capital loss and could not be allowed as deduction. 76. In view of the above discussion, it is held that disallowance was rightly made by Assessing Officer and sustained by CIT(A). The order of CIT(A) is, therefore, upheld on this issue. 77. The next issue relates to the disallowance of Rs. 32,41,870 in respect of litigation expenses. It was found by CIT(A) that expenditure was made in connection with CBI cases against its employees - Pramod Kumar Minocha and Ambuj Jain. Hence, following Supreme Court judgment in the ca....
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....connected with criminal activity of employees i.e. misappropriation of funds of assessee company. Such criminal activity was an offence for which one of the two employees was convicted and sentenced to imprisonment for 5 years. It was also submitted that criminal proceedings were not against company and, therefore, it could not be said that expenses was incurred for protecting the goodwill and image of the company. Hence, it was submitted that expenses was disallowable in view of Supreme Court judgment relied on by CIT(A). 81. Rival submissions of the parties have been considered carefully in the light of material placed before us and the case law referred to. The disallowance has been made by the Assessing Officer and sustained by the CIT(A) on the footing that expenditure in respect of litigation in the criminal proceedings is not allowable in view of the Supreme Court judgment in the case of H. Hirjee. In our opinion, the said judgment was delivered on the facts of that case and that judgment is not an authority for the proposition that litigation expenses in connection with the criminal proceedings are per se disallowable. This position has been clarified by the Hon'ble Supr....
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.... was duly approved by the various resolutions. In our opinion, if the employees had acted in good faith then it is the duty of the employer to defend them against any proceedings initiated against such employees otherwise the goodwill and image of the company would be spoiled in the commercial world and no person in future would join such company. Further, there may be unrest among the employees if the employer does not defend the case of employees who had acted in good faith on behalf of the employer. It is not the case of misappropriation of funds by the employees. It is a case where the transactions were effected between the assessee company and UCO Bank through a broker Harshad Mehta. In fact, the company had appreciated the work of Pramod Kumar by giving him promotion. As far as Ambuj Jain is concerned, he has gone on training and, therefore, had no involvement in such transactions. In fact, he was acquitted on this ground. Considering the facts of the case, we are of the view that the company had incurred the expenditure to safeguard its goodwill and image by defending its employees and, therefore, such expenditure can be said to have been incurred for the purpose of business....
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....bsp; Rs. 54,81,82,016 Less: Tax free interest Rs. 19,22,97,530 Rs. 35,58,84,486 (d) Interest on other deposits Rs. 28,37,39,548 (e) Misc. receipts Rs. 29,32,76,087 &nbs....
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....of the view that matter should go back for fresh adjudication. The Assessing Officer as well as CIT(A) had not discussed anything regarding such interest. Whether such interest should be assessable as business income or income from other sources would depend on the facts of each case. Since, no query had been made by Assessing Officer in this regard, there was no question of furnishing any material in this regard. In the interest of justice, we set aside the order of CIT(A) in respect of such income and remit the matter to the file of Assessing Officer for fresh adjudication in the light of material which may be placed before him by the assessee. 88. The next issue relates to the addition of Rs. 643.34 crores on account of excess consumption of raw materials and inputs. 89. Briefly stated, the facts are that the assessee is engaged in the business of manufacture and sale of motor cars of various models. Since the process of manufacture is subject to the excise law, the assessee was required to maintain statutory registers i.e., RG-23 A Part I & II for claiming Modvat credit. According to the Scheme of Excise Law, the assessee is entitled to claim Modvat credit equal to the am....
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.... the Central Excise Department was correct. In view of the same, the assessee accepted the said liability amounting to Rs. 108.39 crores and paid the same. It also filed a petition before the Settlement Commission of Central Excise and Custom regarding waiver of interest/penalty for such default and immunity from prosecution. The Settlement Commission, vide order dated6-5-2002, admitted the petition and ordered that it deserved immunity from prosecution for offences relating to this case. It also granted full immunity from the levy of penalty, interest and fine under the Central Excise Act and Rules made thereunder in relation to the case covered by the petition. 91. During the course of income-tax assessment proceedings, the Assessing Officer took note of these facts. When he questioned the appellant about the charges levied by the Central Excise Department regarding excess consumption to the extent of Rs. 643.34 crores, the appellant moved a petition under section 144A of the Income-tax Act, 1961 to the Addl. Commissioner of Income-tax to intervene and for necessary directions. The Addl. Commissioner, vide his direction dated 28-3-2002 observed that from the facts of the case ....
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.... by the Representative of M/s. Price Water House Cooper in the statement recorded by the excise authorities and extracted in para 22 and 23 of the show-cause notice of the Commissioner of Central Excise dated 14-9-2001, the auditors have relied on the physical verification conducted by MUL and the observation of the same done by them to record consumption of raw material and components in the books of account. It was admitted on behalf of the Auditors that as per the guidance note on the inventories issued by Institute of Chartered Accountants of India (ICAI) the responsibility for properly determining the quantity and value of inventories vested with the Management and they had only carried out a verification on a test-basis. The fact that the accounts were audited is, therefore, not sufficient to explain the discrepancy in view of the very nature of audit which was confined to the financial accounts. Further, Delhi High Court in the case of Goodyear India Ltd. v. CIT 246 ITR 116 affirmed that 'merely because an audit report is available there is no fetter on the power of the Income-tax Officer to require the assessee to justify its claim with reference to the records, materials a....
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.... which carried on business in timber logs was found in possession of a register wherein certain stock of timber and poles was recorded. The claim of the assessee was that the register was only the property mark register maintained for the purpose of obtaining transport permits from the Forest Deptt. and that the quantity as shown in the register was only an approximate quantity and all the purchases and sales were not entered in the register. The Tribunal concluded that the property mark register could not be considered as a stock register. The High Court, however, took note of the fact that forest authorities had verified the stock as per this register. The High Court was of the view that this was a quantity stock register maintained by the assessee in the course of its business and under-valuation of closing stock could be determined with reference to this register. On similar reasoning RG-23A Register could be considered as a contemporaneous record of consumption in the case of the appellant. 5.4 It is relevant to note that the physical inventory with reference to book inventory based on bill of material consumption also revealed discrepancies in certain instances of inventor....
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.... closing stock. It was emphasized by him that none of the figures has been disputed by any of the authorities in any proceedings either under the Central Excise Act or under Income-tax Act. It was also submitted by him that the stock at the end of the year is taken and arrived at on the basis of physical verification. The purchases are also totally vouched. Therefore, where all these figures are accepted as correct then the question of rejecting consumption of raw material as shown by the assessee does not arise since such consumption is based on these figures. According to him consumption of raw material shown by the assessee can be rejected only if it is shown that assessee has made sales of such raw material outside the books of account. However, there is no such allegation by any of the authorities. Hence, the accounts of the assessee could not be rejected. 94. Secondly, it was submitted that assessee was maintaining the record of components by way of computerized system of accounting. However, in view of the large number of components used by the assessee (being 12,000 approximately), it was not practicable for the assessee to save and retain the day to day record of the st....
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....Act, which are important for determining the profits of the company. Hence, such records could not be ignored by the CIT(A) in as much as the excise record can never be a substitute of the financial record. Proceeding further, it was submitted that the CIT(A) failed to appreciate the reasons for discrepancies pointed out by the assessee to the excise authorities i.e., posting errors, pilferage, obsolescence, transfer of O.E parts to spare part division etc. and also the errors creeping into the software for maintaining RG-23A Register. Attention was also invited to page 4032 of Paper Book J where reasons for discrepancies are mentioned. It was, therefore, submitted that RG-23A Register could not be relied upon for determining the consumption of raw material and rejection of the trading result. If this evidence is discarded then there is no adverse material to disapprove the consumption shown by the assessee. Hence, no addition was justified. 96. Fourthly, it was submitted that the CIT(A). failed to consider the engineering estimate of consumption of raw material required to manufacture 3,33,198 cars during the year under consideration as per the report of the Price Water House C....
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....-23A Register as only reliable stock record of the assessee then in such case they should have also debited the opening stock of the raw material and components as per stock register which amounted to Rs. 1362 crores approximately as is evident from page 1966 of Paper Book C-3. According to him, a uniform basis was required to be adopted by the lower authorities. Reliance was placed on the judgment of Privy Council in the case of Ahmedabad New Cotton Mills Co. Ltd. judgment of Gujarat High Court in the case of Lakhanpal National Ltd. and the judgment of Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. 101. Lastly, it was submitted that excessive consumption, if any, was allowable as deduction under section 37. According to him, the assessee may be inefficient in carrying on his business but on that account if there is any excessive consumption then it has to be allowed as deduction. 102. In reply, the learned counsel for revenue, Mr. Kapila, has strongly supported the order of CIT(A) by meeting each point canvassed by Mr. Aggarwal. Firstly, he stoutly opposed the contention of learned counsel for assessee that any computerized stock was ever maintained. According t....
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....er and failure to reconcile the difference would lead to only conclusion that assessee has failed to prove consumption as shown in the books of account and accordingly, addition made was justified. 106. In rejoinder, the assessee's counsel has filed written submissions running into 218 pages. Most of the submissions are repetition of what has already been submitted in main reply. In fact, it is amplification of earlier submissions. So we will not narrate the same again. However, we would narrate briefly only those submissions which are made for the first time. The same may be narrated as under: (i) That assessee purchases about 12000 items but reconciliation could be made only for 600 items. The difference of Rs. 1100 crores could be explained on this account after devoting a long period of 2 years. Rest of the items could not be reconciled as it was not practical considering the man hours to be employed. Therefore, on that account, no adverse inference could be drawn against assessee. (ii) That proper opportunity was not given by Assessing Officer to adduce relevant evidences and, therefore, it applied for admission of additional evidence before CIT(A) who had permitted t....
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....e entire submissions, and, therefore, we have tried to narrate the gist of submissions of both the parties. But that should not be understood to mean that any of such submissions have been ignored. We have kept in mind the written submissions from both sides while adjudicating the issue. 108. At this stage, we may mention that after the hearing was concluded, the learned counsel for the assessee vide letter dated 23-8-2004 furnished a copy of the order of the Custom, Excise and Service Tax Appellate Tribunal, New Delhi dated 29-6-2004 in assessee's own case for the year 2001-2002 and submitted that this may be considered while disposing the issue regarding addition of Rs. 643.34 crores. The copy of the same was forwarded to the learned counsel for revenue for comments. In response to the same, he objected to the admission of such evidence at such a later stage. Further, it has been submitted that such decision is distinguishable on facts of the case. 109. Rival submissions of the parties have been considered carefully in the light of materials placed before us and the case law referred to. The question to be considered is whether the assessee has shown excess consumption of r....
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....wn by the assessee can be rejected. Hence, the contention of assessee's counsel that maintenance of stock register is not sine qua non for determining true and correct profits of a manufacturing concern has to be rejected. 111. There is no dispute that assessee had maintained RG-23A register which is akin to stock register. However, this register cannot be considered as reliable evidence to support the consumption shown by the assessee in the Profit and Loss account for various reasons: Firstly, it has been found by the excise authorities that it was not properly maintained. It was found that the stock of the raw material was more by Rs. 1754 crores in comparison to stock as per physical inventory as on 28-2-1999. Even, assessee itself admitted that there were so many errors in the maintenance of such register and on reconciliation, the above difference was reduced to Rs. 643 crores which remained unexplained. Secondly, it is a register containing details of excisable raw materials and did not contain the particulars of imported raw materials. 112. Coming to the computerized stock register, there has been a great debate about its existence. However, in our opinion, such debat....
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....cal verification at 800 components then derivated figure, as per assessee's formula would come to 2200 components (500 + 2500 - 800) as against actual consumption of 2000 components (20 x 100). This difference of 200 components, unless explained by the assessee in a satisfactory manner, would definitely reduce the profits of assessee by the value of 200 components." In view of the above example, it cannot be said that derivated figures of consumption are sacrosanct. Hence, the provisions of section 145(3) can be invoked in the absence of satisfactory explanation. 114. On the other hand, the approach of the lower authorities, in our opinion, is also erroneous and entire addition cannot be upheld. There is no dispute that in RG-23A register, the huge difference of Rs. 1754 crores pointed out by the excise authorities pertained to various years. The errors pointed out by the assessee and accepted by excise authorities also related to various years. Hence, by no stretch of imagination, it can be said that entire difference of Rs. 643 crores pertained to this year only. In such a situation, the Assessing Officer/CIT(A) should have adopted the opening stock as per RG-23A register a....