TaxTMI 
TaxTMI 
2011 (6) TMI 563
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....J.D. Mistry has filed the orders of the Tribunal in his own case being I.T.A. No. 45/PN/1995 in Assessment Year 1994-95 dated 27.1.1998, in I.T.A. No.73/PN/2000 in the assessment year 1995-96 dated 24.5.2000 and in I.T.A. No. 580/PN/2000 in the assessment year 1996-97 dated 2-2-2001 wherein at page 11 para 22, page 18 para 6 and page 43 para 22 respectively of the paper book in all these assessment years, the issue of excise duty, sales tax and interest has been decided in favour of the assessee by following the decision of the Tribunal in the case of Sudarshan Chemical Industries Ltd. v. Dy. CIT [1997] 60 ITD 629 (Pune). It was further pointed out by the learned Authorised Representative of the assessee that the decision of the Tribunal in the case of Sudarshan Chemical Industries Ltd. (supra) had been affirmed by the Hon'ble Bombay High Court in the case of CIT v. Sudarshan Chemical Industries Ltd. [2000] 245 ITR 769. The learned Departmental Representative Shri G.S. Singh also accepted the same. This being so, this part of ground of appeal of the assessees which relates to inclusion of excise duty, sales tax payable and interest in the total turnover of the assessee is decided i....
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.... held to quote as under : "No distinction can be drawn between expenditure incurred on advertisement in souvenirs and other types of expenditure as the expenditure is incurred wholly and exclusively for purposes of business and no part of the expenditure can be disallowed u/s. 37(l) of the Income-tax Act, 1961. This view is reinforced by Circular No. 200 dated June 28, 1976, issued by the Central Board of Direct Taxes. Sub-section (4) of Sec.37 of the Income-tax Act, 1961, is no doubt a non obstante clause, but it is a non obstante clause vis-a-vis sub-section (l) and sub-section (3) of Sec. 37 only. If any expenditure or allowance is allowable under other sections of the Income-tax Act, 1961, the allowance cannot be withdrawn or denied to the assessee because of the prohibitory provisions in Sec.37(4) of the Income-tax Act, 1961. Therefore, the assessee will be entitled to depreciation on the premises used as guest house." Hence, it was his argument that since the Tribunal has not considered these judgments of the Bombay High Court while deciding the issue, in the present appeal, the Bench should take these decisions into consideration and decide the issue in favour of th....
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.... allow it in the year in which he is satisfied that in fact the amount became irrecoverable and is bad. In view of the provisions of Section 36(2)(iii) and (iv) it is imperative for the A.O. to give positive findings, whenever the claim for bad debts is made by the assessee as to which previous year, if any, the debt has become irrecoverable. If the A.O. comes to a finding that it has become irrecoverable in an earlier previous year, which is not beyond the period of 4 years immediately preceding the previous year of the "writing off", the A.O. has to take necessary action u/s. 36(2)(iv) and rectify the assessment of the previous year wherein in his opinion the debt became irrecoverable. If on the other hand, the A.O. comes to a finding that the debt becomes bad in later previous year he shall give the deduction when he makes the assessment for such relevant previous year. In any case, the A.O. has to give a finding as to the year in which the debt has become bad or irrecoverable. 6.1 In the present case the A.O. has not carried out this imperative exercise. Prima facie it is seen that the amounts shown as bad are premature claims since most of the invoices against which the deb....
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....ers of the lower authorities. From page 70 of the paper book filed by the assessee it is observed that the details of bad debts was as under : Rs. in lakhs Brought forward 75.38 Bad Debts as per list 41.59 116.97 Less : provision for Bad Debts written back during the year 45.13 Carried forward 71.84 Further, from the details of Misc. expenses of Rs. 414.07 lakhs filed at page nos. 194 and 195 of the paper book it is observed that the assessee has debited Rs. 41.59 lakhs under the head "provision for Bad Debts" and credited Rs. 45.13 lakhs under that head and thus, credited net amount of Rs. 3.54 lakhs under this head and reduced the miscellaneous expenses by amount of this Rs. 3.54 lakhs. From the details of Rs. 45.13 lakhs as given by the assessee in the above page, it appears that an amount of Rs. 25.25 lakhs was disallowed in the assessment of earlier years and Rs. 19.88 lakhs was allowed as deduction to the assessee in the earlier years. From the order of the assessment (pages 16 and 17) we find that the A.O. has duly allowed deduction of Rs. 25.25 lakhs in computing the taxable income of the year under considera....
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.... India in the guidance note on accounting treatment for MODVAT which has been reproduced by the A.O. in his note as Annexure 'A' of the assessment order. The A.O. found that from the full amount of excise duty of Rs. 9,18,17,000/- was actually paid in cash and for the balance of Rs. 78,89,000/- credit was taken of the MODVAT ingredient in the purchase price. The addition of Rs. 78,89,000/- has been made by the A.O. for the following reasons : (a) Purchase of raw-materials and value of closing stock should reflect the full purchase price inclusive of excise duty paid ; (b) Only the taxes which are paid in cash should be claimed as charged on profits and should be allowed as, deduction ; (c) MODVAT registers do not/cannot impinge with charge on profits; they are only instruments to determine cash out-go on account of excise duty and they should be used only for that purpose; (d) Income determined in consonance with (a), (b) and (c) above alone is the correct income, which is subject to charge of income tax. 12. In appeal, the CIT(A) has held that the correct method is the one held by the Bombay Tribunal in S.H. Kelkar & Co. which is as follows : (i) to debit purchas....
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.... 600 To excise duty 60 3 180 To G.P. 120 900 900 If however, the method suggested by the ICAI is not adopted, it is contended by the appellant's Representative that the profit and loss account would appear as under : Unit Rate Amount Unit Rate Amount To purchase of raw materials 100 12 1200 By sales 60 15 900 Less : Stock of raw-materials 40 12 480 720 To excise duty 60 3 180 To G.P. NIL 900 900 It has been emphasized that with such a method of accounting, the profit of Rs. 120/-, which is reflected in the illustration of the ICAI (supra), wo....
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....tion of cash flow. 17. As the benefit of MODVAT credit is allowed to be taken immediately, there is no need to carry forward the debit to the stocks to the next year. The treatment of MODVAT credit has to be compatible in both the profit and loss account and balance sheet. Hence, the conclusion of the A.O. that the figures in the register prescribed under the MODVAT are not to be considered for financial accounting is a complete contradiction not only with the mercantile system of accounting followed by the Company but also with the basis accounting principles. The A.O. has failed to note that if the amount of MODVAT credit availed is not to be claimed as excise duty payment, it will still have to be claimed as part of cost of purchase of raw materials and will be debited to the profit and loss account. In effect, therefore, there will be no impact on the taxable income for the year. 18. The amount of MODVAT credit availed is treated as part of the excise duty and claimed as a deduction on account of excise duty payment and not included in the cost of raw material which is accounted for net of MODVAT. There is no double adjustment of MODVAT credit in the accounts. 19. The ....
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.... ground of appeal of the Revenue. 21. The third ground in this appeal relates to deleting the addition of Rs. 2,88,46,000/- on account of excise duty payable on finished goods not included in the valuation of closing stock. The brief facts of the case are that a sum of Rs. 2,88,46,000/- was debited to the profit and loss account as excise duty payable on finished goods which was not included in the value of the closing stock of such goods. It was explained that the amount was excluded from the valuation of closing inventory because excise duty on finished goods is not a direct cost of manufacturing. It was further submitted by the assessee that its claim was supported by the consolidated order of decision of the Special Bench of the Delhi Tribunal, in the case of ITO v. Food Specialities Ltd. [1994] 49 ITD 21 and Indian Communication Network (P.) Ltd. v. IAC [1994] 49 ITD 56. The A.O. did not accept the explanation and the contention of the assessee and observed that (i) the method adopted by the assessee of not including the excise duty in valuation of closing stock is against the standard accounting practice provided by the institute of Chartered Accountants of India and (ii) ....
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.... the Hon'ble Supreme Court observed that excise duty is really imposed on goods when they have come into existence in the manufactured form. It could more appropriately be taken into consideration in determining the net profits than in calculating the cost of manufacture. Therefore, the excise duty on such finished goods is a post manufacturing expenditure not includible in the valuation of stock-in-trade. This proposition has not been dis-approved by the Hon'ble Supreme Court in British Paints Ltd. Thus, the CIT(A) held that the assessee's method of accounting of valuation of stock-in-trade by excluding the proportionate excise duty liability is correct, particularly in view of the Hon'ble Supreme Court decision in Saraswati Industrial Syndicate Ltd. (supra). Further, the CIT(A) has also examined the proposition that if the inclusion of excise duty in the valuation of stock-in-trade is for any reason to be sustained, the assessee has claimed that deduction of the amount of excise duty paid before filing of the return should be allowed as a deduction under Section 43B to negate the addition made on account of excise duty in the valuation of closing stock. However, in the circumstan....
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....h Court in the case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240 and two decisions of the Special Bench of the Tribunal, Delhi in the cases of Food Specialities Ltd. (supra) and Indian Communication Network (P.) Ltd. (supra). (f) In any event, if an addition is made to the closing stock in respect of a method of accounting consistently followed then in view of the ratio of the decision of the Tribunal in their own case, for the assessment year 1976-77, and the decision in CIT v. Ahmedabad New Cotton Mills Co. Ltd., the opening stock also be correspondingly revalued. (g) No profit arises from the valuation of stock on a consistent basis. There is no change in the method of valuation of stock and the opening and closing inventories are valued on the same basis. (h) The assessee values the stock of finished goods at the lower of cost or market. The cost is determined by applying the principle of direct costing. In other words, expenses, which are not in the nature of cost of manufacturing or production, are not taken into account. The decision of the Hon'ble Supreme Court in British Paints India Ltd.'s case (supra) does not, in any way, contradict the assessee's submi....
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....re of closing stock to the extent the goods remained unsold after having been cleared from the bonded warehouse and the Hon'ble Special Bench decided in favour of the assessee. Since no other contrary decision was cited before us, we have no option but to follow the aforesaid decision. Hence, respectfully following the same, we decline to interfere with the order of the learned CIT(A) and thus, this ground of appeal of the Revenue is dismissed. 26. The fourth ground of appeal relates to the direction of the learned CIT(A) to tax the net Interest received from the Income-tax Department. During the year under appeal, the assessee received interest of Rs. 45,90,876 from the Income-tax Department and paid interest of Rs. l,37,221 to the department. The assessee's claim is that only net interest should be charged to tax end for this, reliance is placed on the decision of Delhi Tribunal in the case of R.N. Aggarwal v. ITO [IT Appeal No. 3913 & 3914 (Delhi) 1980 & 620/(Delhi)/1981, dated 21-8-1981] and decision of the Bombay Tribunal in the case of Cyanamid India Ltd. v. ITO [IT Appeal No. 4561 (Bom.) of 1982 assessment year 1978-79, dated 23-5-1984]. The A.O. rejected the claim on the....
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....g on the decision of Delhi Tribunal in the case of R.N. Agarwal v. I.T.O and that of Bombay Tribunal in the case of Cynamide (India) Ltd. when in fact, the A,O. has rightly taxed the interest received by assessee of Rs. 45,90,976/- thereby rejecting the assessee's claim on the ground that the Interest charged on late payment of tax by department is not a business expenditure." 2. Briefly the facts to this ground of appeal as discussed by the A.O at page 15 of the assessment order are that during the course of examination it was found by the A.O. that the assessee has credited only the net interest received from the income-tax Department i.e. the interest paid to the Income-tax Department was deducted from the interest received on Income-tax refund. This claim was made by the assessee on the basis of two decisions of the Tribunal. The A.O after rejecting the assessee's claim was of the view that interest charged on late payment of tax by the Department is not a business expenses deductible for the purpose of computing income under the I.T Act and, therefore, interest charged by the Department Rs.1,37,225/- was added in the income of the assessee. On first appeal before the CIT(A)....
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....Chapter of the Act. I further find that the interest received from the Income-tax Department was not assessed by the A.O. as Income from other sources as it is found that under the head "income from other sources" only dividend from U.T.I. and H.D.F.C amounting to Rs. 33,l6,257/- was assessed. It is not the claim of the assessee, at any stage including the Tribunal, that the interest received from the income-tax Department be assessed under the head "income from other sources" and even otherwise no such plea or claim was admitted by the Bench during the course of hearing. The deduction of interest paid to the Department was claimed solely on the ground that there can be only one account between the parties. However, the LD A/R of the assessee has failed to show that under which provision of law such deduction of interest is allowable, therefore, such accounting method, as claimed by the Ld. A/R of the assessee, is contrary to law and it cannot over-ride the provisions of income-tax Act as held by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertiliser Ltd. v. CIT [1997] 227 ITR 172. 7. The Ld. A/R of the assessee has also failed to show any nexus betw....
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....rging his statutory obligation under the income-tax Act, which is calculated with reference to the tax on income cannot be allowed as deduction." 10. In the case of Raj Narain Agarwal v. CIT [2002] 259 ITR 720 (Delhi) it was held by the Hon'ble Delhi High Court that interest payable to Income-tax Department u/s.217 and section 220(2) cannot be allowed as business expenditure following the decision of the Hon'ble Supreme Court in the case of Bharat Commerce & Industries Ltd. (supra) 11. In the case of Fenner (India) Ltd. v. CIT [1997] 223 ITR 738 (Mad.) it was held by the Hon'ble Madras High Court (short note) that - "Where tax which is due from the assessee is based on profits and gains of business or profession any interest payable for non-payment of such tax should also be considered as levied on the basis of such profits or gains. It cannot be allowed as a deduction." 12. In the case of Fenner (India) Ltd. v. CIT (Mad.) it was again held by the Hon'ble Madras High Court following its earlier decision in Fenner (India) Ltd.'s case (supra) that interest paid u/s 220(2) is not an allowable deduction against profit of company. 13. In the case of Orissa Cement Ltd. v. ....
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....t cannot be held that the interest paid on income-tax to the Department is liable u/s 36(iii). It was also held that the assessee is not entitled for any deduction u/s 37. Copy of the Tribunal's order in the aforesaid case is enclosed as annexure-I. 18. After considering the decisions of the Hon'ble Supreme Court and High Courts including the later decision of Gauhati Bench of the Tribunal, I am of the view that with great respect of the earlier decisions of the Tribunal as relied upon by the Ld A/R of the assessee are distinguishable and not applicable to the facts of the present case, I am, therefore, respectfully following the decisions of the Hon'ble Apex Court as referred to above, of the view that the interest paid on delayed amount of income-tax is not allowable deduction as business expenditure or otherwise under the I.T. Act as such payment of interest is inextricably connected with the assessee's tax liability which itself is not allowable as deduction and accordingly the ground No. 4 taken by the Revenue in ITA No. 119/PN/1996 for the assessment year 1992-93 is allowed. 19. In respect of other grounds in both the appeals except the ground No. 4 in the Revenue's app....
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..... 45,90,876/-." The Hon'ble President has referred the matter under section 255(4) to me for decision as Third Member. 2. Ground No. 4 in the appeal - it is an appeal by the department - is as under: - "4. On the facts and in the circumstances of the case, the CIT(A) has erred in directing the AO to tax the net interest received from the I.T. Department relying on the decision of Delhi Tribunal in the case of R.N. Aggarwal v. ITO and that of Bombay Tribunal in the case of Cynamide (India) Ltd.; when in fact, the AO has rightly taxed the interest received by assessee of Rs. 45,90,876/- thereby rejecting the assessee's claim on the ground that the interest charged on late payment of tax by department is not a business expenditure." In respect of the aforesaid ground the learned Accountant Member who wrote the leading order understood the claim of the assessee to be that both the interest received and the interest paid should be set off against each other and only the net interest, if any, should be charged to tax. He accepted the contention of the assessee that between the two parties, namely, the assessee and the income tax department, there can be only one account and o....
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.... deduction under section 37 in computing the business income. 4. Thus, considering the judgments of the Supreme Court and the High Courts (supra) and the order of the Gauhati Bench of the Tribunal (supra), the learned Judicial Member held that the interest paid on the delayed payment of income tax was not allowable as a deduction as business expenditure or otherwise under the Income Tax Act, since such payment of interest is inextricably connected with the assessee's tax liability which itself is not allowable as a deduction. In this view of the matter he allowed the department's Ground No. 4, differing with the learned Accountant Member. 5. The reference was argued at great length by both the sides. The principal contentions of the learned CIT DR are as under: - (a) The principle of netting the interest paid and received cannot be accepted. (b) The receipt of interest is taxable but the payment of the interest is not allowable as a deduction as there is no provision in the Income Tax Act. (c) The principle of netting has to yield in any case to the statutory provisions. (d) It may be that so far as the assessee is concerned the interest is paid to and received fr....
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.... assessee's claim as the facts and the controversy in that case were different. He pointed out that in the present case the interest receipt and the payment are of the same type and therefore nettable. As regards the order of the Gauhati Bench of the Tribunal relied on by the learned Judicial Member, the learned counsel for the assessee submitted that it is a case where the interest paid and received were on different accounts unlike the present case. He also pointed out that the order of the Gauhati Bench was not put to the assessee for rebuttal by the Bench. The learned counsel also drew my attention to the fact that the question framed by the learned Judicial Member actually does not arise out of the proceedings nor is the ground of appeal filed by the department clear, nor is the decision of the CIT(A) on the point. 7. Mr Mistri also took me through the judgment of the Hon'ble Bombay High Court in the case of Aruna Mills Ltd. v. CIT [1957] 31 ITR 153 and explained how that decision indirectly supported his case that both the interest received and paid should be adjusted against each other and only the net, if any, should be assessed. I will refer to this decision later. Acco....
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....ch represented interest paid by the assessee and adjusted against the interest received. In Ground No. 7 before the CIT(A), the assessee pointed out that it received interest of Rs. 45,90,876/- from the income tax department and paid to the said department interest of Rs. 1,37,225/- and that the claim was based on the orders of the Delhi Bench of the Tribunal in the case of R N Aggarwal (supra) and the Bombay Bench of the Tribunal in the case of Cynamide (India) Ltd. (supra); according to which only the net amount of interest received from the department was taxable. The CIT(A) dealt with the issue in paragraph 9 of his order. He has accepted the assessee's submission in view of the orders of the Tribunal cited by the assessee. In Ground No. 4 taken before the Tribunal the department has challenged the finding of the CIT(A) by pointing out that the Assessing Officer was right in rejecting the assessee's claim on the ground that the interest charged by the department for late payment of tax was not business expenditure. The point of difference proposed by the learned Accountant Member highlights the issue whether it is the gross interest of Rs. 45,90,876/- that should be taxed or it....
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....cision. 12. Thus the question as to whether the interest paid to the income tax department under the provisions of the Income Tax Act can be deducted while computing the business income of the assessee has to be decided against the assessee. 13. The next question which arises is whether on general principles and on the principle of real income the interest received from and paid to the income tax department can be adjusted or netted against each other. On this question there are two judgments, one of the Supreme Court in Dr V P Gopinathan (supra) and the other of the Bombay High Court in the case of Aruna Mills Ltd. (supra), both of which are against the assessee. In the case of Dr V P Gopinathan (supra), the assessee placed monies in a fixed deposit with the bank and earned interest. He took a loan from the bank on the security of the fixed deposit and paid interest on the loan. The interest received on the fixed deposit was more than the interest paid on the loan by Rs. 27,034/-. The assessee's case was that he should be taxed only on the difference of Rs. 27,034/- under the residuary head whereas the case of the revenue was that the entire interest received should be broug....
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....usiness income and in this view of the matter I must decide that the rule of netting does not apply to the case before me and that the assessee is properly assessable on the gross interest of Rs. 45,90,876/- and not merely on the net interest of Rs. 44,53,655/-. 14. I must also refer to the judgment of the Hon'ble Bombay High Court in the case of Aruna Mills Ltd. (supra), where this very argument has not found favour. One of the arguments advanced on behalf of Aruna Mills Limited before the High Court was that the Court must look at the payment of interest by the assessee company and the receipt of interest by the assessee company as a single indivisible transaction and when it is so looked, the transaction should be held to have resulted only in the company receiving the excess of the interest received over the interest paid and only such excess would be liable to tax. It was further argued that it was not proper to sever the transaction, i.e. to tax the interest received and not to allow any credit for the amount of interest paid. Dealing with this argument, the Hon'ble Bombay High Court held that in their opinion there was no relationship whatever between the receipt of inter....
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.... and though the Assessing Officer did not accept the claim of the assessee for netting, he did not dispute the assessee's claim that the interest should be dealt with under the head "Business". In the case before me also the Assessing Officer has taken an identical stand. 15. I am therefore of the considered opinion that on the question of netting or adjustment of the interest received and interest paid and on the question of real income, the judgment of the Supreme Court in the case of Dr V P Gopinathan (supra) and that of the Bombay High Court in the case of Aruna Mills Limited (supra) are against the assessee. 16. In view of the above legal position, I am unable to give effect to the order of the Delhi Bench of the Tribunal in the case of R N Aggarwal (supra) and the order of the Bombay Bench of the Tribunal in the case of Cynamide India Ltd. (supra). In this case (order dated 23.05.1984), the Tribunal accepted the assessee's submission that the interest received from the income tax department and the interest paid to the income tax department should be adjusted against each other and only the net interest received can be brought to tax as income. In the light of the judgm....