TaxTMI 
TaxTMI 
2021 (10) TMI 729
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....he appeal filed by the revenue for Asst. Year 2010-11. 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 wa....
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....k value of preceding year is usually brought forward as opening stock of the next year, as held in the case 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 ....
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.... 3.8 The Ld A.R, on the contrary, submitted that the order passed by Ld CIT(A) does not call for any interference. He submitted that the value of inventories was 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-&agra....
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....at the AO should not have rejected the method of disclosing the opening stock, which was done with the purpose of giving true and fair disclosure as per Accounting 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 You....
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.... in the current year." 3.15 We have noticed earlier that the assessee has engaged the services of a Special Auditor, viz., M/s Earnst & Young to investigate and quantity the discrepancies. The relevant portion 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 b....
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.... statements are approved. Ordinary fluctuations in market values do not normally relate to the conditions of the investments at the balance sheet date, but reflect circumstances which have occurred in the following period." 3.20 In the instant case, 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 h....
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....sing the so called inflated figures and visualizing the impact on the net income of each of these years; income disclosed in the P&L account would have been less by that amount by which the closing stock has been reduced by eliminating the inflated entry. Thus, 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 ....
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....2 Before AO, the assessee submitted that the fixed assets have been acquired out of interest free funds and hence no disallowance is called for out of interest expenditure. The AO did not accept the explanations of the assessee and accordingly disallowed a sum of Rs. 36,21,236/- 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....
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....r cash flow statement furnished in the Annual report, which is available at page 14 of the paper book, the assessee has generated net cash of Rs. 28.33 crores, while the net investment made in acquisition of capital asset was only Rs. 1.48 crores. Hence, as per the decision rendered by the decision 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 disallowanc....
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....ccordingly, the AO disallowed the above said claim of the assessee. 6.1 The Ld CIT(A) noticed that an identical disallowance made by the AO in AY 2008-09 has been deleted by the Tribunal in the assessee's own case in ITA No.1185/Bang/2011 dated 21.12.2012. 6.2 We heard the parties on this issue and perused 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 ....
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....ishing of Form 3CL is mandatory for claiming weighted deduction. In this regard, the Ld CIT(A) took support of decision rendered by Hon'ble Karnataka High Court in the case of Tejas Network Ltd vs. DCIT (2015)(60 taxmann.com 309)(Kar). Accordingly, the Ld CIT(A) confirmed the disallowance. 7.3 The Ld A.R submitted that the co-ordinate bench has held in the case of 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. A....
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....f given by the prescribed authority in Form no.3CL. 10. The jurisdictional Tribunal in the case of M/s Mahindra Electric Mobility Ltd (supra) held as follows:- '13. We have heard the rival submissions. The learned DR relied on the order of the AO/CIT(A). The learned counsel for the Assessee reiterated submissions as were made before the revenue authorities and placed reliance on some judicial 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....
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.... guideline 10 Documents required to be submitted by 31 st October of each succeeding year of approved period to facilitate submission of Report in Form 3CL (2 sets) are Complete details as per annexure-IV of DSIR guidelines. 16. The Assessee applied for issue of Form No. 3CL to the appropriate authority on 24-3-2017, after the order of the CIT(A). The application so made by the Assessee is at page 43 to 65 of the Assessee's paper book. According to the Assessee, 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 Amendme....
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....consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No. 3CL. We find no merit in the said order of authorities below. 46. The Courts have held that for deduction under section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which 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....
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.... and development facility is to be approved from a particular date and, in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction 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 ....
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....allow the appeal of the Assessee.' 10. We find that the proposition of law laid down in this order of the ITAT applies on all fours to the facts of the case on hand. Hence we respectfully follow the order of the co-ordinate bench of ITAT on this issue." 7.6 We have gone through the case laws relied upon Ld CIT-DR. The decision rendered by Hon'ble Karnataka High Court in the case of Tejas Network has been distinguished by the co-ordinate bench in the above said case. The decision rendered by Hyderabad bench of Tribunal in the case of Electronics 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 ....
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....ecided this issue in AY 2009-10 against the assessee mainly for the reason that the assessee has failed to demonstrate that the liability has accrued during the year and further substantial provision was reversed in the subsequent years. He submitted that the facts prevailing in this year are totally different. 8.4 The Ld A.R submitted that the assessee has furnished to the AO the details of machinery which have been sold, but whose erection and commissioning is pending as on 31.3.2010. He also invited our attention to the details placed in page 116 to 117 of 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 ....
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....st experience. Accordingly, we are of the view that this claim of the assessee may be allowed after examining relevant sale bills and the computation of provision so created. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore this issue to the file of the AO for examining the claim of the assessee by duly considering relevant sales invoices and computation of quantum of provision so made. 9.0 The next issue contested by the assessee relates to the decision of Ld CIT(A) in partially confirming disallowance of interest expenses by capitalising 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....
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....As the facts are identical in this year also and since the Ld CIT(A) has followed the decision rendered by the Tribunal on an identical issue in AY 2008-09, we confirm the order passed by Ld CIT(A) on this year. 14.0 The last issue urged by the revenue in AY 2011-12 is disallowance of warranty provision. The assessee had created "Provision for Warranty" and claimed the same as expenditure. The net provision made during the year was Rs. 66,77,354/-. The AO took the view that the assessee has not followed scientific method for making provision and accordingly disallowed the claim. 14.1 The 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....
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.... 17.2 The AO initiated proceedings u/s 201(1) of the Act for failure of the assessee to deduct tax at source from the above said payments and held that the assessee is an assessee in default. Accordingly the AO raised demand u/s 201(1) and charged interest u/s 201(1A) of the Act. The assessee challenged the said order by filing appeal before Ld CIT(A), who disposed of the same, vide his order dated 11-03-2019 passed in ITBA No.10012/CIT(A)-9)/2018- 19. The Ld CIT(A) held that the above said payment does not fall within the purview of Royalty or FTS. He further held that the it constitutes business receipts in 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 assesse....
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....7 of the treaty. The revision petition against this decision was dismissed by the Hon'ble Supreme Court in 300 ITR 5. The appellant also relied on the decision of Hon'ble Supreme Court in the case of DIT (International taxation) s. Morgan Stanley & Co Inc 292 ITR 417, the Hon'ble Supreme Court held that a non-resident cannot be taxed in respect of the business profits in India unless it has PE in India. In view of the above, I agree with the claim of the appellant. 37. Therefore, I do not find any reason for the appellant to deduct tax thereon. The grounds of appeal 4 & 6 are accordingly, allowed." 17.7 Thus, we notice that the Ld CIT(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 forwar....
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.... identical issue in AY 2008-09, we confirm the order passed by Ld CIT(A) on this year. (F) ASSESSEE'S APPEAL 2012-13 21.0 The first issue contested by the assessee relates to the disallowance of expenditure claimed under the head "Provision for Erection and Commissioning works". As in last year, the AO disallowed the claim of Rs. 65,02,352/- holding that the assessee has failed to furnish scientific basis for creation of such provision. The Ld CIT(A) also confirmed the disallowance by following his decision rendered in AY 2010-11, wherein he had followed the decision rendered by ITAT in AY 2009-10. The ITAT had confirmed the disallowance in AY 2009-10. 21.1 Identical 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....