ACIT RG 1(1), MUMBAI V. CHEMSPEC CHEMICALS P. LTD, MUMBAI

ITA 3793/MUM/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4216 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 04-10-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 11-06-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P M DEVADASAN
• Assessee Lawyers: D V LAKHANI
• Keywords: Depreciation
• Section: 234B

Judgement Text

INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH: C BEFORE SHRI R.S.SYAL, ACCOUNTANT MEMBER AND SHRI V.DURGA RAO, JUDICIAL MEMBER ITA NO.3793(MUM)/2009 (ASSESSMENT YEAR: 2005-06) ASST. COMMISSIONER OF INCOME-TAX MUMBAI. VS. APPELLANT M/S.CHEMSPEC CHEMICALS P. LTD. COMMERCE UNION HOUSE, 2 ND FLOOR, 9 WALLACE STREET, FORT, MUMBAI-400 001. PAN: AAACC 3620 K RESPONDENT AND ITA NO.3151(MUM)/2009 (ASSESSMENT YEAR: 2005-06) M/S.CHEMSPEC CHEMICALS P. LTD. MUMBAI. VS. APPELLANT ASST. COMMISSIONER OF INCOME-TAX, MUMBAI-400 001. RESPONDENT REVENUE BY : SHRI P.M.DEVADASAN. ASSESSEE BY : SHRI D.V.LAKHANI. O R D E R PER V.DURGA RAO, JM: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-I, MUMBAI, DATED 30-3-2009 FOR THE A SSESSMENT YEAR 2005-06. SINCE COMMON ISSUES ARE INVOLVED, BOT H THESE APPEALS WERE HEARD AND DISPOSED OF BY THIS COMMON O RDER FOR THE SAKE OF CONVENIENCE. ITA 3793 & 3151/MUM/2009 PAGE 2 OF 9 ITA 3151(MUM)/2009 (ASSESSEES APPEAL) : 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING OF FINE CHEMICALS AND BULK DRUGS INTE RMEDIARIES. THE ASSESSEE HAS RAISED FIVE GROUNDS OF APPEAL. GRO UND NO.1 THAT THE CIT(APPEALS) HAS PASSED THE ORDER WITHOUT GIVING AN OPPORTUNITY OF HEARING TO THE ASSESSEE, WAS NOT PRE SSED AT THE TIME OF HEARING AND HENCE THE SAME IS DISMISSED. 3. GROUND NO.2 RELATES TO DISALLOWANCE OF INTEREST OF ` .4,74,000/-. FACTS IN RELATION TO THIS GROUND ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD MADE INVESTMENT OF ` .47,40,000/- IN THE SHARES OF BHAICHAND AMOLUK INSURANCE SERVICES PVT. LTD. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY INTEREST SHOULD NOT BE DISALLOWED ON SHARE INVESTMENT OF ` .47.40 LAKHS. IT WAS EXPLAINED BEFORE THE AO THAT THE ASSESSEE HAS MADE INVESTMENT OUT OF INTEREST FREE FUNDS AND RESERVES. THE AO DID NOT AGREE WITH THE ASSESSEE. HE WORKED OUT THE INTEREST AT 10% OF THE ABOVE INVE STMENT WHICH WORKS OUT TO ` .4,74,000/- AND DISALLOWED THE SAME. ON APPEAL, THE CIT(APPEALS) RESTRICTED THE DISALLOWANC E TO ` .2,57,192/- BEING AGGRIEVED, THE ASSESSEE IS IN FU RTHER APPEAL BEFORE US. THE REVENUE HAS COME IN APPEAL BEFORE U S RAISING GROUND NO.1 AGAINST GRANT OF PART RELIEF TO THE ASS ESSEE. 4. AT THE TIME OF HEARING, BOTH THE PARTIES SUBMITT ED THAT THE ISSUE INVOLVED IN THIS APPEAL IS COVERED BY THE TRI BUNAL ORDER ITA 3793 & 3151/MUM/2009 PAGE 3 OF 9 DATED 5-9-2009 IN ITA NOS.521/MUM/08 FOR ASSESSMENT YEAR 2003-04, THE RELEVANT PARAGRAPH OF THE TRIBUNAL ORD ER IS EXTRACTED HEREUNDER: 12. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL CONTENTIONS. IT IS OBSERVED FROM THE LET TER LACED AT PAGE NO.25 OF THE PAPER BOOK THAT THE ASSESSEE H AD PLEADED BEFORE THE CIT(A) THAT NO DISALLOWANCE OF INTEREST IS WARRANTED ON THE INVESTMENTS MADE IN TH E TWO COMPANIES OF ` .46 LAKHS AND ` .1,40,000/-. AS AN ALTERNATE GROUND, THE ASSESSEE HAD PLEADED THAT IF AT ALL ANY DISALLOWANCE IS WARRANTED, THEN THE DISALLOWANC E WORKS OUT TO ` .1,62,591/- ON THE BASIS OF NUMBER OF DAYS THE INVESTMENTS WERE WITH THE RESPECTIVE COMPANIES AND THE RATIO BETWEEN THE NET WORTH AND THE BORROWINGS OF THE COMPANY. THEREFORE, THERE IS NO QUARREL WITH TH E CALCULATION MADE BY THE CIT(A) OF THE DISALLOWANCE OF ` .1,62,591/- FROM THE ASSESSEES POINT OF VIEW. THE CONTENTION ON BEHALF OF THE REVENUE THAT THE CIT(A) OUGHT TO HAVE EXAMINED THE NEXUS BETWEEN THE BORROW ED FUNDS AND THE INVESTMENTS MADE DOES NOT APPEAL TO U S IN SO FAR AS THE ASSESSING OFFICER HAD THE BOOKS OF AC COUNT AVAILABLE TO HIM FOR SCRUTINY AND HE HAS NOT BEEN A BLE TO FIND ANY NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENTS MADE BY THE ASSESSEE. IN THE ABSENCE OF NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENT S OR THE ASSESSEES OWN INVESTMENTS, IT IS NOT PERMIS SIBLE TO SE THE NET WORTH OF THE COMPANY VIS--VIS THE BORROWINGS AND DETERMINE THE DISALLOWANCE IF AT ALL WARRANTED. 13. SO, HOWEVER, IF THE ASSESSEE IS ABLE TO ESTABLISH THAT THE INVESTMENTS HAD NOT BEEN MADE OU T OF THE BORROWED FUNDS, NO DISALLOWANCE COULD BE JUSTIF IED. IN THIS CASE, THE ASSESSEE HAS NOT BEEN ABLE TO EST ABLISH THAT THE INVESTMENTS MADE IN THE TWO COMPANIES WERE OUT OF ITS OWN FUNDS. THE CIT(A) WORKED OUT THE DISALLOWANCE OF THE BASIS OF THE NET WORTH OF THE C OMPANY VIS--VIS THE TOTAL BORROWINGS. THE DECISION OF TH E BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. (SUPRA) IS INAPPLICABLE TO T HE FACTS OF THIS CASE IN SO FAR AS CONCURRENT FINDINGS OF FA CT HAD BEEN RECORDED BY THE CIT(A) AND THE TRIBUNAL IN THA T CASE THAT THE ASSESSEE HAD GENERATED ITS OWN FUNDS AND INTEREST FREE FUNDS IS IN THE COURSE OF THE YEAR COMMENCING FROM1.4.1999 OUT OF WHICH INVESTMENT WAS MADE. THE HONBLE HIGH COURT HAS CONFIRMED THE CONCURRENT FINDINGS RECORDED BY THE CIT(A) AND THE ITAT AS NOT BEING PERVERSE. IN THE PRESENT CASE, THE ASS ESSEE ITA 3793 & 3151/MUM/2009 PAGE 4 OF 9 HAD NOT MADE ANY ATTEMPT TO ESTABLISH GENERATION OF ITS OWN FUNDS IN THE YEAR UNDER APPEAL TO WARRANT A PRESUMPTION THAT THESE WERE INVESTED IN THE COMPANI ES IN THE PURCHASE OF SHARES. TAKING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE INTO CONSIDERATION, W E ARE OF THE VIEW THAT THE DECISION OF THE CIT(A) DOES NO T WARRANT ANY INTERFERENCE. THE GROUNDS OF APPEAL RA ISED BY THE REVENUE AS WELL AS THE GROUNDS OF APPEAL RAI SED BY THE ASSESSEE IN THIS REGARD FOR BOTH THE ASSESSM ENT YEARS ARE ACCORDINGLY DISMISSED. 5. FOLLOWING THE ABOVEMENTIONED ORDER, WE UPHOLD TH E ORDER OF THE CIT(APPEALS) AND REJECT THE GROUNDS OF APPEA L RAISED BY THE ASSESSEE AS WELL AS THE REVENUE. 6. GROUND NO.3 RELATES TO DISALLOWANCE OF INTEREST OF ` .9 LAKHS. AT THE TIME OF HEARING BOTH THE PARTIES AGR EED THAT THIS GROUND IS ALSO COVERED BY THE TRIBUNAL ORDER (SUPRA ), THE RELEVANT PARAGRAPH IS EXTRACTED HEREUNDER: 17. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO T HE RIVAL CONTENTIONS. IN OUR CONSIDERED VIEW, THE ADDITION @ 10% OF THE OUTSTANDING LOAN OF ` .90 LAKHS IS NOT JUSTIFIED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. THE ASSESSEE HAD FILED A SUIT FOR RECOVERY OF THE AMOUN T FROM THE RESPECTIVE COMPANIES. IT IS IN THIS BACKGROUND THAT THE DECISION HAS BEEN TAKEN BY THE COMPANY NOT TO PROVIDE ANY INTEREST IN RESPECT OF LOAN ADVANCED TO THE TWO COMPANIES. IT IS WELL SETTLED PRINCIPLE OF LAW THAT WHERE THE INTEREST HAS ACCRUED TO THE ASSESSEE AND THE SAME IS REFLECTED IN THE BOOKS OF ACCOUNT, SUCH INT EREST IS LIABLE TO TAX EVEN WHEN THE SAME IS WAIVED IN SUBSE QUENT ASSESSMENT YEARS. HOWEVER, IN THE PRESENT CASE, TH E ASSESSEE HAS NOT PROVIDED FOR ANY INTEREST IN THE B OOKS OF ACCOUNT FROM THE DEFAULT COMPANIES. THE ASSESSEE H AS ALSO FILED SUIT FOR RECOVERY OF THE PRINCIPAL AMOUN TS AS WELL AS THE DISPUTED INTEREST. IN THE LIGHT OF FIL ING OF CIVIL SUIT FOR RECOVERY OF THE PRINCIPAL AMOUNTS, THE ASS ESSEE WAS JUSTIFIED IN DECIDING NOT TO PROVIDE INTEREST I N THE BOOKS OF ACCOUNT ON THE LOANS ADVANCED TO THE TWO COMPANIES. THE CIT(A) IN OUR VIEW, WAS JUSTIFIED I N DELETING THE ADDITION ON THE GROUND THAT WHEN THE RECOVERY OF EVEN PRINCIPAL AMOUNT IS DOUBTFUL, THE ITA 3793 & 3151/MUM/2009 PAGE 5 OF 9 ASSESSEE WOULD BE JUSTIFIED IN NOT PROVIDING THE IN TEREST IN THE BOOKS OF ACCOUNT ON ACCRUAL BASIS. FINDING NO MERIT IN THIS GROUND OF APPEAL, THE SAME IS ACCORDI NGLY DISMISSED. 7. FOLLOWING THE ABOVEMENTIONED ORDER OF THE TRIBUN AL, WE ALLOW THIS GROUND OF APPEAL RAISED BY THE ASSESSEE. 8. GROUND NO.4 RELATES TO MODVAT CREDIT OF ` .43,34,812/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSEE WAS ASKED AS TO WHY THE ABOVE AMOUNT SHOULD NOT BE ADDE D TO CLOSING STOCK UNDER THE PROVISIONS OF SEC.145A OF T HE ACT. IN RESPONSE TO THE QUERY RAISED BY THE AO, THE ASSESSE E SUBMITTED THAT MODVAT SHOULD NOT BE ADDED TO THE CLOSING ST OCK. HOWEVER, THE AO ADDED THE SAME TO THE CLOSING STOCK IN VIEW OF THE PROVISIONS OF SEC.145A OF THE IT ACT. ON APPEA L, THE CIT(APPEALS) UPHELD THE ORDER OF THE AO. THE ASSES SEE IS IN FURTHER APPEAL BEFORE US. 9. LEARNED COUNSEL FOR ASSESSEE SUBMITTED THAT THE MODVAT CREDIT SHOULD NOT BE INCLUDED IN THE CLOSING STOCK WHEN THE ASSESSEE IS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTIN G. ON THE OTHER HAND, LEARNED DEPARTMENTAL REPRESENTATIVE SUP PORTED THE ORDERS OF THE LOWER AUTHORITIES. 10. WE HAVE HEARD BOTH SIDES AND PERUSED THE RECORD S. THE ISSUE IS WHETHER MODVAT CREDIT SHOULD BE ADDED TO T HE CLOSING ITA 3793 & 3151/MUM/2009 PAGE 6 OF 9 STOCK OR NOT. AFTER INSERTION OF SEC.145A FROM 199 9-2000, IT IS NO MORE OPEN TO VALUE THE INVENTORY UNDER EXCLUSIVE METHOD. AS PER SEC.145A, AT THE MATERIAL TIME, PURCHASE, SALES AND INVENTORY, BOTH OPENING AND CLOSING STOCK HAVE TO B E ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY OR CESS OR FEE ETC. SINCE THE ASSESSEE HAS FAILED TO MAKE VALUATION IN TERMS OF S EC.145A OF THE I.T. ACT, 1961 AND NO SUCH DETAILS WERE FURNISHED B EFORE THE AO DESPITE HIS REQUEST. IT WOULD BE JUST AND FAIR, IF THE IMPUGNED ORDER IN THIS ISSUE IS REMITTED BACK TO THE AO. WE SET ASIDE THE ORDER PASSED BY CIT(A) AND DIRECT THE AO TO CALCULA TE THE AMOUNT OF TAX AFFECT, THE VALUATION OF PURCHASES, S ALES AND OPENING AND CLOSING STOCK. ORDERED ACCORDINGLY. 11. THIS GROUND OF APPEAL RAISED BY THE ASSESSEE AL LOWED FOR STATISTICAL PURPOSES. 12. GROUND NO.5 RELATES TO LEVY OF INTEREST U/S 234 B OF THE IT ACT. LEARNED COUNSEL FOR ASSESSEE SUBMITTED THAT THE AO AND THE CIT(APPEALS) HAVE WRONGLY HELD THAT 234B IS CON SEQUENTIAL. HE SUBMITTED THAT INTEREST CAN BE LEVIED ON THE AMO UNT OF TAX PAYABLE AND THE ASSESSEE CANNOT ANTICIPATE AND PAY THE TAX. 13. WE HAVE HEARD BOTH SIDES AND WE ARE OF THE CONS IDERED OPINION THAT SEC.234B IS CONSEQUENTIAL IN NATURE. THE AUTHORITIES BELOW AS RIGHTLY CONSIDERED THE ISSUE AND NO INTERF ERENCE IS CALLED FOR. HENCE, THIS GROUND OF APPEAL RAISED BY ASSESSE E IS DISMISSED. ITA 3793 & 3151/MUM/2009 PAGE 7 OF 9 ITA NO.3793/MUM/2009(REVENUES APPEAL): 14. THE ONLY GROUNDS REMAIN TO BE CONSIDERED ARE GR OUND NO.2 AND 3. GROUND NO.2 RELATES TO EMPLOYEES CONTRIBUTI ON TO PF. BOTH THE PARTIES AGREED THAT THE PAYMENT TO PF WAS MADE WITHIN THE GRACE PERIOD. THIS GROUND OF APPEAL IS DISMISSE D. 15. GROUND NO.3 RELATES TO DEPRECIATION @ 25% ON EL ECTRICAL FITTINGS. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS, THE AO OBSERVED THAT ON VERIFICATION OF THE DEPRECIATION C HART IN ANNEXURE 2 TO FORM 3CD, IT HAS BEEN NOTICED THAT TH E ASSESSEE HAS CLAIMED DEPRECIATION AT 25% ON ELECTRICAL FITTI NGS. THE OPENING WDV OF ELECTRICAL FITTINGS WAS ` .34,9,405/-, THE ADDITIONS ON THE ELECTRICAL FITTINGS DURING THE YEAR UNDER CO NSIDERATION IS ` .1,74,269/- AND THE CLOSING WDV WAS ` .36,03,674/-. AS PER THE PROVISIONS OF THE IT ACT READ WITH IT RULES, THE EL ECTRICAL FITTINGS COME UNDER THE BLOCK OF FURNITURE AND FIXTURES ON W HICH THE DEPRECIATION IS ALLOWABLE @ 15% AND THE AO ACCORDIN GLY ALLOWED DEPRECIATION @ 15%. ON BEING AGGRIEVED ASSESSEE C ARRIED MATTER BEFORE THE CIT(A) AND SUBMITTED THAT THE ELE CTRICAL FITTINGS ARE PART OF THE PLANT AND MACHINERY. HENCE IT HAS TO BE TREATED AS PLANT AND MACHINERY AND DEPRECIATION IS ALLOWABL E @ 25% . THE LD CIT(A) BASING ON THE SUBMISSIONS OF THE ASSE SSEE AS ALLOWED DEPRECIATION @ 25%. ON BEING AGGRIEVED RE VENUE HAS RAISED IS GROUND OF APPEAL BEFORE THE TRIBUNAL. THE LD DR HAS SUBMITTED THAT THE DEPRECIATION FIND ON ELECTRICAL FITTINGS COMES UNDER THE BLOCK OF FURNITURE AND FIXTURE ON WHICH T HE DEPRECIATION ITA 3793 & 3151/MUM/2009 PAGE 8 OF 9 IS ALLOWABLE @15% ONLY. THE CIT(A) WITHOUT CONSIDE RING THE I.T. RULE 1962, ALLOWED THE DEPRECIATION AS CLAIMED BY T HE ASSESSEE. HE SUPPORTED THE ORDER PASSED BY THE AO AND SUBMITT ED AO ORDER MAY BE RESTORED. ON THE OTHER HAND, THE LD C OUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ELECTRICAL FITTINGS ARE PART OF PLANT AND MACHINERY @25% DEPRECIATION IS ALLOWABLE. 16. WE HAVE HEARD THE BOTH THE SIDE PERUSED THE REC ORDS, GONE TO THE AUTHORITIES BELOW. NO MATERIAL WAS FILE D BEFORE US TO SHOW THAT THE ELECTRICAL FITTINGS ARE CONNECTED WIT H PLANT AND MACHINERY. AS PER THE I.T. RULE 1962, APPLICABLE TO AY 2003-04 TO 2005-06 (RULE 5) AND AS PER NOTE, THE DEPRECIATI ON ALLOWABLE FOR FURNITURE AND THE FITTINGS WHICH INCLUDES ELECT RICAL FITTINGS AT 15%. THE ELECTRICAL FITTINGS WHICH INCLUDES ELECT RICAL WIRINGS, SWITCHES, SOCKETS, OTHER FITTINGS AND FANS ETC. IN VIEW OF THE ABOVE RULE POSITION WE SET ASIDE THE ORDER PASSED B Y THE CIT(A) AND UPHOLD THE ORDER OF THE AO. THIS GROUND OF APP EAL RAISED BY THE REVENUE IS ALLOWED. BOTH THE APPEALS ARE PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH OCTOBER, 2010. SD/- SD/- (R. S. SYAL) (V. DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI : DATED : 20TH OCTOBER, 2010 EKS* ITA 3793 & 3151/MUM/2009 PAGE 9 OF 9 COPY TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. CIT- CONCERNED 4. CIT(A)- CONCERNED 5. DEPARTMENTAL REPRESENTATIVE C BENCH BY ORDER ASST REGISTRAR, ITAT, MUMBAI DATE INITIALS DRAFT DICTATED ON SR.PS DRAFT PLACED BEFORE AUTHOR SR.PS DRAFT PROPOSED & PLACED BEFORE SECOND MEMBER JM/AM DRAFT DISCUSSED & APPROVED BY SECOND MEMBER JM/AM APPROVED DRAFT COMES TO SR.PS SR.PS KEPT FOR PRONOUNCEMENT ON SR.PS FILE SENT TO BENCH CLERK SR.PS DATE ON WHICH FILE GOES TO THE HEAD CLERK DATE OF DISPATCH OF ORDER.