TaxTMI 
TaxTMI 
2021 (10) TMI 729
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....11. The first issue urged in the appeal filed by the revenue relates to the disallowance of claim of loss arising from Inventory write off amounting to Rs. 22,49,09,068/-, which was deleted by Ld CIT(A). 3.1 The facts relating to this issue are discussed in brief. During the course of assessment proceedings, the AO examined the copies of stock statements given to the Bank. The AO noticed that the value of inventory as on 31.3.2010 declared to the bank was Rs. 70.62 crores, while the value of inventory shown in the Balance sheet stood at Rs. 38.40 crores. Thus, there was difference between the stock value shown in books and bank statement to the extent of Rs. 32.22 crores. The AO noticed that the above said shortage included a sum of Rs. 22.49 crores written off by the assessee in its books of accounts as stock shortage/valuation difference. When questioned about the difference in stock values between books of accounts and bank statements, the assessee explained that the stock statements given to Bank were provisional statements and correct figures were later submitted to the bank through CMA data and audited Balance Sheet. It was explained that the stock shown in the Balance sheet....
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.... of Chairup Sampatram Vs. CIT (24 ITR 481)(SC) and also some more cases cited before the AO. Accordingly, the closing stock shown as on 31.3.2009 was brought forward in the current year. However, the opening stock value was reduced by the shortage and shown as a separate exceptional item. Accordingly, it was submitted that the sum total of Opening stock and exceptional item tallies with the preceding year's closing stock. It was submitted that the shortfall in the value of inventory has been shown as exceptional item in order to meet the requirements of Accounting Standards and Generally Accepted Accounting Principles. 3.4 The AO was not convinced with the explanations given by the assessee. Accordingly, he disallowed the claim of Rs. 22.40 crores with the following observations:- (a) The assessee has failed to explain the reasons for such huge write off. It has not given any evidence as to the nature and reason for the difference. (b) The assessee could not substantiate as to why the insurance claim was not made for the loss of inventory. (c) An item of missing asset becomes a loss of the year in which it is discovered. (d) The assessee company has not made available any ....
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....as inflated year after year in the past. During those periods, the assessee was using one ERP software developed in-house. Under the above software, the purchase and inventory modules were not integrated. Hence it allowed creation/manipulation of stock receipt entries for quantities in excess of the Purchase order quantity or even without reference to any Purchase order. Further "use ids" were not captured while posting of entries in the earlier ERP software. Because of these lacunae, the book stock has been inflated by creating multiple entries, wrong postings, improper valuation etc., by the persons handling inventories and accounts. These mistakes happened in financial years 2005-06, 2006-07 and 2007-08 across multiple inventory accounts. During the current year, the assessee decided to migrate to SAP software. After migration to SAP software, these mistakes came to be noticed and hence the assessee decided to set right all mistakes. Hence the assessee appointed M/s Earnest & Young to investigate into this matter vis-à-vis actual physical stock. The Special auditors have conducted a thorough review of the internal control procedures, inventory accounting and valuation met....
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.... Standards and accounting principles. 3.11 The Ld A.R submitted that the report on "shortage in the value of closing stock" was furnished by the Special auditors M/s Earnst &Young in July, 2010. The mistakes relating to stock inventory were found to be related to the earlier years. He submitted that AS-4 mandates that the adjustments to assets and liabilities should also be made for events occurring after the Balance sheet date but before the date on which the financial statements are approved, if those adjustments relate to the period prior to the Balance Sheet date. Accordingly, he submitted that the shortfall in the value of inventory pertained to the period prior to 31.3.2010 and hence, even if it is found only in July, 2010, the same is required to be given effect to on 31.3.2010 as per AS-4. Accordingly, the A.R submitted that the assessee has booked this as expenditure on 31.3.2010 as an exceptional item in compliance with Accounting Standards. With regard to the report of the special auditors M/s Earnst and Young, the Ld A.R submitted that the Ld CIT(A) has captured the relevant portion of the report, which clearly describes the circumstances which led to the over valuatio....
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....on of the report of the special auditor has been extracted by Ld CIT(A) in his order. 3.16 The Special auditor has reported that the inflation of value of stock has happened over a period of time , i.e., from 31.3.2005 onwards and it has also been stated that the employee concerned has manipulated the inventory statement by adding dummy entries with codes like "999999", not pertaining to any item. Thus, it is established that the inventory, all along relied upon by the assessee, had dummy entries which resulted in declaring higher stock than the physical stock. 3.17 The AO has expressed the view that the assessee has failed to explain the reasons for such huge write off and the assessee has not given any evidence as to the nature and reason for the difference. The above said observation of the AO is contrary to the facts available on record. The discussions made in the earlier paragraphs would show that there was shortage in the value of stock due to manipulation done by an earlier employee and the same has resulted in declaration of higher value of stock over the years. Hence, the assessee has engaged the services of a leading professional, who has investigated the matter, found....
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....ase, the special auditors have reported that the manipulation in the value of stock has happened from FY 2004- 05 onwards. Hence the shortage of stock quantified relate to the conditions existing as on 31.3.2010 and it materially affects the determination of value of assets as on Balance Sheet date. Accordingly, as per AS-4, the effect of the same needs to be given as on 31.3.2010, even though the report of special auditors has been received only in July, 2010. Hence, it cannot be considered as a prior period expenditure as opined by the AO. It should be considered as current year loss only, since effect of shortage could be given in this year only. Accordingly, the assessee was justified in accounting the shortage during the year ending 31.3.2010. 3.21 Another important point to be noted is that the assessee has split the opening stock as on 1.4.2009 into two items, viz., opening stock and exceptional expenditure, i.e., the shortage has not been separately accounted for in the books of accounts. It has been duly disclosed in the Profit and Loss account by making corresponding reduction in the Opening stock value. There should not be any dispute that the closing stock of the prece....
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....s, I am of the view that the appellant has ended up paying more taxes in the preceding years (Prior FY 2005-2009). If, as claimed by the appellant, it is not allowed to adopt the actual physical stock so as to correct itself, it would be unfair, as the appellant has already returned increased income based on the inflated figures during the previous years. Considering the same, it is entitled to brought forward the closing stock as on 31.3.2009 to 01-04- 2009." 3.23 We notice that the Ld CIT(A) has concluded as under:- "4.2.10 Considering the above, I am of the view that the closing stock of the previous year should be considered as opening stock without any adjustment as per Hon'ble Supreme Court rulings quoted above. As stated earlier, the reduction of opening stock and disclosure of the same amount as exceptional item is only to meet the disclosure requirements of the Accounting Standards and the above accounting disclosure is revenue neutral and accordingly addition of Rs. 22.49 crores on account of shortfall of inventory is deleted." 3.24 Another important aspect, which is relevant for this issue is the valuation of closing stock as on 31.3.2010. As noticed earlier, the ass....
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....- out of interest expenditure. 4.3 Before Ld CIT(A), the assessee contended that the disallowance contemplated under proviso to 36(1)(iii) of the Act is in respect of 'acquisition of asset for extension of existing business'. It was submitted that the loans have been used for normal course of business and not for extension of business. It was submitted that the net addition to fixed assets was only Rs. 1.48 crores, while the aggregate value of net block of assets was Rs. 71.78 crores. Accordingly, it was contended that the above said addition has not resulted in any extension of business. It was also submitted that the assessee is having adequate own funds as on 31.3.2010, i.e. Rs. 91.30 crores. It was submitted that the amount of Rs. 6.03 crores included opening work in progress of Rs. 4.55 crores and hence the net addition to assets made during the year was only Rs. 1.48 crores. It was submitted that the assessee was having cash and balance of Rs. 25.51 crores as at the beginning of the year, i.e., as on 1.4.2009. Accordingly, it was contended that the disallowance u/s 36(1)(iii) is not warranted. 4.4 The Ld CIT(A) gave a finding that the addition to fixed assets has not result....
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....on rendered by Hon'ble Karnataka High Court in the case of Micro labs Ltd (383 ITR 490), it can safely be presumed that the acquisition of fixed assets has been funded out of own funds only. 4.8 In view of the above, we set aside the order passed by Ld CIT(A) and direct the AO to delete entire disallowance of Rs. 36,21,236/- made out of interest expenditure. 5.0 The next issue urged by the revenue relates to disallowance of Rs. 9,59,265/- out of interest expenditure as relatable to interest free loans given to associate concerns. The AO noticed that the assessee has advanced interest free funds to its associated companies and hence proposed to disallow part of interest expenses. The assessee submitted that it has got sufficient interest free funds and the advances to associated companies have been given out of interest free funds. It was further submitted that an identical disallowance made in AY 2008-09 has since been deleted by ITAT. However, the AO noticed that the assessee has accepted an addition of Rs. 9,59,265/- in its written submissions. Accordingly, he disallowed the same. 5.1 The Ld CIT(A) deleted the disallowance by following the decision rendered by the Tribunal in ....
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.... the record. The Ld D.R submitted that the assessee had furnished purchase and consumption of details of loose tools etc., before the AO in AY 2008-09. However, the assessee has not furnished those details during the year under consideration. Accordingly, she submitted that the decision rendered in AY 2008-09 is distinguishable. On the contrary, the Ld A.R submitted that the assessee has been following above said method of writing of loose tools is followed by the assessee for the past 20 years. The same was not accepted for the first time only in AY 2008-09. However, the ITAT has accepted the method followed by the assessee and deleted the disallowance. He submitted that the furnishing of details was not an issue before the Tribunal in AY 2008-09. 6.3 We notice that the co-ordinate bench of ITAT has deleted an identical disallowance made in AY 2008-09 with the following observation:- "14. Having heard both the parties and having considered their rival contentions, we find that the Revenue has not disputed the incurring of expenditure by the assessee in purchase of the tools. The only reason for the disallowance is that it is not revenue in nature but is of capital in nature. It....
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.... Mahindra Electric Mobility (ITA No.641/Bang/2017 dated 14.09.2018) that Form no.3CL was not mandatory for claiming deduction u/s 35(2AB) of the Act. Further the co-ordinate bench has considered in the case of Kumar Organic Products Ltd vs. DCIT (ITA Nos. 1057 to 1062/Bang/19 dated 19-07-2019) and held that the decision in the case of Tejas Network Ltd (supra) has been rendered by Hon'ble Karnataka High Court on a different point and accordingly distinguished the same. Further, following the decision rendered in the case of Mahindra Electric Mobility (supra), the Tribunal held that Form no.3CL is not mandatory for claiming weighted deduction for the year under consideration. In these cases that Form 3CL has become mandatory with effect from 1.7.2016 only and prior to that date, there is no legal sanctity for Form 3CL. Accordingly the Ld A.R submitted that the disallowance of weighted claim is not in accordance with law. 7.4 The Ld D.R, on the contrary, supported the order passed by Ld CIT(A) on this issue. Further, the Ld D.R placed here reliance on the following case laws and contended that Form No.3CL has been held to be mandatory in these cases for claiming weighted deduction u....
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....al precedents on identical issue rendered by various benches of ITAT and Hon'ble High Courts. 14. For AY 2012-13, the previous year is FY 2011-12 i.e., the period from 1-4-2011 to 31-3-2012. The facts on record go to show that the Assessee's in-house R & D facilities was approved by the DSIR, Govt. of India, Ministry of Science and Technology for AY 2012- 13 vide their letter dated 20-5-2009, a copy of which is placed at Page-30 of the Assessee's paper book. The approval is for the period 1-4-2009 upto to 31-3-2012. Therefore, the condition for allowing deduction u/s.35(2AB) of the Act has been fulfilled by the Assessee. The claim of the revenue, however, is that the approval by the prescribed authority in form No. 3CM is not final and conclusive and the quantum of expenditure on which deduction is to be allowed is to be certified by DSIR in form No. 3CL. There is no statutory provision in the Act which lays down such a condition. We shall therefore examine what is Form No. 3CL. 15. DSIR has framed guidelines for approval u/s.35(2AB) of the Act. The guidelines as on May, 2010 which is relevant for AY 2012-13, in so far as it is relevant for the present appeal, was a....
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....ssessee, it has complied with all the requirements of the guidelines for issue of Form No. 3CL, but the DSIR has issued Form No. 3CL dated 5-4-2018 for AY 2014 & 15 & 2015-16 but no Form No. 3CL was issued for AY 2012-13. Though there has been no communication to the Assessee in this regard, the learned counsel for the Assessee submitted that since the audited accounts were not submitted by 31st October of the succeeding AY, as is required under Guideline 5 (vi), the Assessee's application would not have been considered by the DSIR. 17. Rule-6(7A)(b) of the Rules specifying the prescribed authority and conditions for claiming deduction u/s.35(2AB) of the Act has been amended by the Income-tax (10 th Amendment) Rules, 2016 w.e.f. 1-7-2016, whereby it has been laid down that the prescribed authority, i.e., DSIR shall quantify the quantum of deduction to be allowed to an Assessee u/s.35(2AB) of the Act. Prior to such substitution, the above provisions merely provided that the prescribed authority shall submit its report in relation to the approval of in-house R & D facility in Form No. 3CL to the DGIT (Exemption) within 60 of granting approval. Therefore prior to 1-7- 2016 there....
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....hich recognition has been given to the facility, then thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) of the Act. Accordingly, we hold so. Thus, we reverse the order of Assessing Officer in curtailing the deduction claimed under section 35(2AB) of the Act by Rs. 6,75,000/-. Thus, grounds of appeal No.10.1, 10.2 and 10.3 are allowed." (ii) The Hyderabad ITAT in the case of M/S. Sri Biotech Laboratories India Ltd. v. ACIT ITA No. 385/Hyd/2014 for AY 2009-10 order dated 24-9-2014 took the view (vide Paragraph-13 of the order) that when the Assessee's R & D facility is approved the deduction u/s.35(2AB) of the Act cannot be denied merely on the ground that prescribed authority has not submitted report in Form 3CL. 19. The question of allowing deduction u/s.35(2AB) of the Act was considered by the Hon'ble Delhi High Court in the case of CIT v. Sadan Vikas (India) Ltd. [2011] 335 ITR 117 (Del) where AO refused to accord the benefit of the weighted deduction to the assessee under s. 35(2AB) on the ground that recognition and approval was given by the DSIR in Februar....
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....duction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of s. itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up research and development facility in India, the legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction." 20. From the above discussion it is clear ....
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....ectronics Corpn. Of India Ltd (supra) related to the amount of deduction to be granted. It was held therein that the weighted deduction has to be granted on the amount mentioned in Form 3CL, i.e., the quantum of R & D expenditure mentioned in Form 3CL cannot be tampered with by the Tribunal. Thus, the question whether Form 3CL is mandatory or not was the issue before the Hyderabad bench of Tribunal. In the case of PDP Chemicals (P) Ltd (supra), the issue before Mumbai bench of Tribunal was whether the deduction u/s 35(2AB) could be granted without an approval from the prescribed authority? Hence the issue considered by Mumbai bench of Tribunal is totally different. 7.7 The assessment year under consideration is AY 2010-11 and hence the decision rendered by the co-ordinate bench in the case of Kumar Organic Products Ltd (supra) shall apply to the assessee for AY 2010-11. Following the same, we hold that Form No.3CL is not mandatory for the year under consideration and hence the weighted deduction claimed by the assessee cannot be rejected. Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to allow weighted deduction as claimed by the assessee. 8.0 The next ....
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....the paper book, wherein the list of machineries whose erection and commissioning is pending as at the year end. He submitted that the assessee has also furnished sample copies of invoices, wherein it is clearly mentioned that Commissioning of machinery including freight shall be carried out at free of cost. He invited our attention to a copy of invoice, purchase order and commissioning report placed in page 118 - 123 of the paper book in support of the above said submission. He submitted that the assessee is making provision for erection and commissioning @ 1% to 3% of the sale value of machinery, depending upon the nature of machinery and the estimated expenditure that may be incurred on erection and commissioning. He submitted that the above said percentage has been determined by the assessee on the basis of past experience. Accordingly, he submitted that the assessee is following scientific method for making this provision. He submitted that the provision made as at the yearend is reversed in the succeeding year as per accounting principles. Accordingly he submitted the decision rendered in AY 2009-10 is not applicable to the year under consideration. He submitted that this disa....
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....lising it. This issue has been examined and decided by us while adjudicating the ground raised by the revenue. We have held that the entire interest disallowance has to be deleted. Accordingly, the interest disallowance partially confirmed by Ld CIT(A) is liable to the deleted. We order accordingly. 10.0 In the next ground, the assessee has claimed that depreciation on the amount of interest capitalised should be allowed, if the interest disallowance is confirmed by Ld CIT(A). This ground has become infructuous, since we have deleted the interest disallowance. 11. The last issue urged in this year relates to non-adjudication of grounds relating to Capital gains by Ld CIT(A). Since the Ld CIT(A) has not adjudicated this issue, we restore this ground to the file of Ld CIT(A) for adjudicating the same after affording adequate opportunity to the assessee. ASSESSMENT YEAR : 2011-12 (C) REVENUE'S APPEAL - 2011-12 12.0 The first ground urged by the revenue in this year relates to disallowance of interest expenditure relatable to the interest free advances given to sister concerns. 12.1 The facts prevailing in this year are discussed in brief. The AO noticed that the assessee has adv....
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....e Ld CIT(A) noticed that the assessee is making provision for warranties every year and the percentage of provision on sales work out to less than 1% and further they are very near each other. The Ld CIT(A) also referred to the decision rendered by Hon'ble Supreme Court in the case of Rotork Controls (314 ITR 62)(SC) in this regard. He further noticed that he had allowed identical disallowance made in AY 2010-11 and AY 2008-09. Accordingly, he deleted the disallowance made in AY 2011-12 also. 14.2 The Ld CIT-DR supported the order passed by the AO on this issue. The Ld A.R submitted that the Ld CIT(A) has given a finding that the provision created forms a fraction of the sales value. Further, the assessee has been making provision on a scientific basis every year and in the past years, the provision has been allowed. 14.3 Having heard rival contentions on this issue, we are of the view that the decision rendered by Ld CIT(A) on this issue does not require interference, since the Ld CIT(A) has followed his decision rendered in AY 2008-09 and 2010-11, which has since been accepted by the revenue. Further, the ld CIT(A) has given a finding that the provision for warranty made by the....
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....n the hands of non-resident recipients and since they do not have permanent establishment in India, the same is not taxable in India as per Article 7 read with Article 5 of Indo-German DTAA. Accordingly, he set aside the order passed by the AO u/s 201(1) of the Act. 17.3 Relying on the above said decision of Ld CIT(A), the Ld A.R submitted that there is no liability to deduct tax at source from the exhibition charges and hence the voluntary disallowance made by the assessee on mistaken belief should be deleted. 17.4 The Ld D.R, on the contrary, submitted that the assessee is making fresh claim without filing revised return of income, which is contrary to the decision rendered by Hon'ble Supreme Court in the case of Goetz India Ltd (284 ITR 323)(SC). 17.5 We heard the parties on this issue and perused the record. The assessee is making a fresh claim for removal of disallowance voluntarily made u/s 40(a)(i) of the Act in the return of income filed by it. Even though the Hon'ble Supreme Court has held in the case of Goetz India Ltd (supra) that the assessee can make fresh claim only through revised return of income, yet the Hon'ble Supreme Court has specifically held that its order....
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....A) has held in the proceedings initiated u/s 201(1) of the Act that the assessee is not liable to deduct tax at source from the payments made towards exhibition charges. In that case, there is no necessity to invoke provisions of sec.40(a)(i) of the Act. Accordingly, we direct the AO to delete the disallowance made by the assessee voluntarily u/s 40(a)(i) of the Act in respect of exhibition charges. 18.0 The next issue urged by the assessee by way of additional ground relates to claim of set off of short term capital loss brought forward from earlier year. Since this issue requires factual verification, we restore this issue to the file of the AO. ASSESSMENT YEAR 2012-13 (E) REVENUE'S APPEAL - 2012-13 19.0 The first ground urged by the revenue in this year relates to disallowance of interest expenditure relatable to the interest free advances given to sister concerns. 19.1 The facts prevailing in this year are discussed in brief. The AO noticed that the assessee has advanced interest free loans to its sister concerns and a sum of Rs. 21,40,68,782/- was outstanding as on 31.3.2012. The AO took the view that the assessee has diverted interest bearing loans to sister concerns int....
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....tical issue has been examined by us in AY 2010-11 and the matter has been restored to the file of AO with certain directions. Following the same, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO with similar directions. 22.0 In the next ground, the assessee has claimed that depreciation on the amount of interest capitalised should be allowed, if the interest disallowance is confirmed by Ld CIT(A). This ground has become infructuous, since we have deleted the interest disallowance. 23.0 The next issue urged by the assessee by way of additional ground relates to claim of set off of short term capital loss brought forward from earlier year. Since this issue requires factual verification, we restore this issue to the file of the AO. ASSESSMENT YEAR 2013-14 (G) REVENUE'S APPEAL 2013-14 24.0 The first ground urged by the revenue in this year relates to disallowance of interest expenditure relatable to the interest free advances given to sister concerns. 24.1 The facts prevailing in this year are discussed in brief. The AO noticed that the assessee has advanced interest free loans to its sister concerns and a sum of Rs. 21,40,68,782/- w....