The Arvind Ltd, Ahmedabad V. The ACIT.,Circle-1, Ahmedabad

ITA 862/AHD/2012

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7025 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 18-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Earning of tax free income; Cost of acquisition; Wholly owned subsidiary; Bad and doubtful debts; Competent authority; Scheme of amalgamation; Unabsorbed depreciation; Capital expenditure; Rule 8D; Set aside
• Section: 37; 28; 15; 143(3); 14A; 115JB

Judgement Text

आयकर अपीलीय अिधकरण, अहमदाबाद Ɋायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ A’’ BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ITA No. 862/AHD/2012 िनधाŊरण वषŊ/Asstt. Year: 2007-2008 Arvind Ltd.(earlier known as Arvind Mills Ltd.), Naroda Road, Naroda, Ahmedabad. PAN: AABCA2398D Vs. A.C.I.T., Circle-1, Ahmedabad. (Applicant) (Respondent) Assessee by : Shri S.N. Soparkar, Sr. Advocate with Shri Parin Shah, A.R Revenue by : Shri Vijay Kumar Jaiswal, CIT. DR सुनवाई की तारीख/Date of Hearing : 04/05/2022 घोषणा की तारीख/ Date of Pronouncement : 15/07/2022 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax(Appeals)-6, Ahmedabad, dated 06/03/2012 arising in the matter of Assessment Order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2007-2008. ITA no.862/AHD/2012 Asstt. Year 2007-08 2 2. The assessee has raised the following concise grounds of appeal: 1. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in treating Ground No. 1 of the appellant's appeal before him challenging the very validity of the assessment order impugned before him, as being general in nature and, therefore, not requiring adjudication by him. He ought to have appreciated, inter alia, that only a bare reading of that ground showed that it was not general but supported by as many as four specific contentions and that each one of those contentions deserved his careful consideration and adjudication. 2. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding the disallowance of the appellant's claim for deduction of Rs.16,80,74,562 arising on the write off of a part of the inventories which had been transferred to the appellant upon demerger of the Garments Business Division of the appellant's wholly owned subsidiary Arvind Brands Ltd. and accounted in the appellant's books of account at the same value as was appearing in the books of Arvind Brands Ltd. immediately before the demerger. 3. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding the disallowance of the appellant's claim for deduction of loss of Rs.18,57,00,000 arising on the write off of a part of the inventories which had been transferred to the appellant upon amalgamation of the appellant's wholly owned subsidiary Arvind Fashions Ltd. and accounted in the appellant's books of account at the same value as was appearing in the books of Arvind Fashions Ltd. immediately before the amalgamation. 4. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding the disallowance of Rs.5,82,608 out of interest expenditure and of Rs.82,14,500 out of other expenses debited to the appellant's Profit and Loss Account under Rule 8D(2)(ii) and Rule 8d(2)(iii) respectively, read with Section 14A of the Income- tax Act, 1961. 5. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding rejection of the appellant's claim for increasing the quantum of depreciation to be reduced (while computing book profit) in pursuance of clause (iia) of Explanation 1 below sub-section (2) of Section 115JB read with clause (g) of that Explanation, by Rs.25,93,43,434, that being the amount of depreciation corresponding to downward revaluation of assets by which the appellant's Profit and Loss Account had been short debited (for depreciation) and which, therefore, was required to be considered in pursuance of the portion in parenthesis appearing in the said clause (iia) of Explanation 1 below sub-section (2) of Section 115JB and added to the amount of depreciation debited to the appellant's Profit and Loss Account, for arriving at the quantum of depreciation to be reduced in pursuance of the said clause (iia) of Explanation 1 below sub-section (2) of Section 115JB. He ought to have appreciated, inter alia, that when the portion appearing in the parenthesis of the said clause (iia) enjoined exclusion of depreciation on account of revaluation of assets, it being axiomatic that revaluation of assets could be both upward and downward, the exclusion on account of revaluation of assets need not necessarily result only into reduction in the amount of depreciation debited to the Profit and Loss Account and that, in case of downward revaluation of assets, it would have to result into increasing the amount of depreciation actually debited to the Profit and Loss Account. 6. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in dismissing Ground No. 8 of the appellant's appeal before him challenging the learned Assessing Officer's action of adding the amount of Rs.87,97,108 disallowed u/s. ITA no.862/AHD/2012 Asstt. Year 2007-08 3 14A (while computing the appellant's total income under the normal provisions of the Income-tax Act, 1961) while computing the appellant's book profit u/s. 115JB. He ought to have appreciated, inter alia, that it was not open to him to dismiss the appellant's ground summarily and without dealing with the elaborate submissions made by the appellant in support thereof as contained in the Statement of Facts accompanying its appeal before him. 7. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in omitting to consider Grounds No. 9 and 10 of the appellant's appeal before him reading as under: "9. In law and in the facts and circumstances of the appellant's case, the learned Assessing Officer has grossly erred in levying interest amounting to Rs.20,16,408 u/s. 234C. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the appellant's case the ratio of the decision of the Gujarat High Court in Bharat Machinery and Hardware Mart's case (136 ITR 875) and of the decision of the ITAT, Delhi Bench in Haryana Warehousing Corporation v. DCIT [252 ITR (AT.) 34] was attracted and it was not open to him to levy the impugned interest. The appellant challenges the very levy of this interest. 10. In law and in the facts and circumstances of the appellant's case, the learned Assessing Officer has grossly erred in initiating penalty proceedings u/s. 271(1)(c). He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the appellant's case, quite apart from the fact that none of the additions made to the appellant's returned income was at all warranted/justified, it was just not possible even to allege that the appellant was guilty of concealing particulars of its income or furnishing inaccurate particulars thereof." 8. The appellant craves leave to add, amend and/or alter the ground or grounds of appeal either before or at the time of hearing of the appeal. 3. The 1 st issue raised by the assessee is general in nature and therefore we do not find any reason to adjudicate the same. Thus, we dismiss the same being general in nature. 4. The 2 nd issue raised by the assessee is that the Ld. CIT-A erred in confirming the addition of Rs. 16,80,74,562/- made by the AO on account of the inventories written off in the year under consideration. 5. The facts of the case are that the assessee is a Limited Company and engaged in the business of Textile, Branded Garment Business, Telecommunication, and IT Services. In the year under consideration, the Hon’ble Gujarat High Court vide order dated 24-11-2006 sanctioned a composite scheme of arrangement in the nature of demerger/ transfer of Garments Business Division of Arvind Brands Limited and amalgamation of Arvind Fashion Limited with the assessee company with effect ITA no.862/AHD/2012 Asstt. Year 2007-08 4 from 01-04-2006. The assessee, therefore, was the resulting company of M/s Arvind Brands Limited and amalgamated company of M/s Arvind Fashions Ltd. 5.1 The assessee in the year under consideration has claimed the loss of Rs. 16,80,74,562/- on account of Inventories written off which was adjusted against the securities premium account in pursuance to the scheme approved by the Hon’ble Gujarat High Court. 5.2 The assessee during the assessment proceedings had claimed that the loss of Rs. 16,80,74,562/- was accruing on account of write off of Inventories due to change in the method of accounting policies for valuing the inventories adopted by the assessee which were different from the demerged company namely M/s Arvind Brands Limited. 5.3 The aforesaid loss was not debited by the assessee in the profit and loss account but the same was adjusted against the share premium account. However, it was claimed in the computation of income for the year under consideration. The assessee regarding this submitted that the accounting entries recorded in the books of account are not decisive of the claim for which it was entitled under the provisions of law. Any expense is allowable or not is decided within the parameters specified under the provisions of section 28 to 44DB of the Income Tax Act. 5.4 The assessee, therefore, claims that the impugned loss of Rs. 16,80,74,562/- on account of write off inventories is an allowable trading loss irrespective of fact that the said loss was debited in the profit and loss account or not. 6. The AO on the other hand, perused the order of the Hon’ble Gujarat High Court and made certain observations as detailed under: 2.7 On examination of the relevant clauses of the scheme, reproduced above, it is clear that: ITA no.862/AHD/2012 Asstt. Year 2007-08 5 (i) The assets and liabilities of the demerged-company (ABL) have been transferred to the assessee-company on at their respective books values net of revaluation. (ii) The difference between the assets and liabilities transferred to Resulting Company would be debited/credited to the Capital Restructuring account. (iii) The Resulting Company shall, upon the arrangement becoming effective, record the assets and liabilities of the Garment Business Division of Demerged Company vested in it pursuant to this Scheme, at the respective book values. (iv) The net amount in the Business Acquisition on De-Merged Account will be transferred to "Goodwill on acquisition of business' or "Capital Reserve". (v) The write off of inventory consequent to restructuring business operations and harmonization of accounting policies of De-merged Undertaking/ Transferor Company will be charged to the share premium account of the assessee- company. 6.1 The AO in view of the above was of the opinion that any loss arising on transfer of business to the assessee in the scheme of demerger should have been adjusted against the Goodwill/Capital Reserve Account. The AO also noted that the loss to the assessee on account of write off of Inventories had not been arising after the transfer of stock but, the said loss was existing in the books of the demerged company at the time of giving effect to the order of Hon’ble High Court as discussed above. 6.2 The AO further speculated that if the contention of the assessee is admitted that the loss on account of write off Inventory was resulting after the transfer of stock/ inventories on account of demerger, the impugned loss still would be charged against the capital account as per clause 22.2(iv) as provided in the scheme approved by the Hon’ble High Court. 6.3 The AO has also found that the assessee in its books of account has rightly charged the loss against the capital account and therefore, the claim of the impugned loss on account of write off Inventory as revenue, in the return of income, was not justifiable. ITA no.862/AHD/2012 Asstt. Year 2007-08 6 6.4 The AO was, further of the opinion that the accounting treatment given by the assessee in its books of account with respect to the inventory write-off was not in the normal course of business but it was done in pursuance to the scheme approved by the Hon’ble High Court. Thus, the AO, treating the sum of Rs. 16,80,74,559/- as capital expenditure/ loss, disallowed u/s 37 of the Act and added to the total income of the assessee. 7. Aggrieved assessee carried the matter before the Ld. CIT-A and submitted that the AO instead of checking the genuineness of the claim, disallowed the same on irrelevant grounds. As such, the AO has not raised any objection on genuineness of the writing -off inventory against the share premium account. 7.1 The assessee also submits that the closing stocks were taken on book value in the scheme of demerger in its books of account as detailed under: 7.2 Out of the aforesaid value of stock, it had curtailed the stock to the extent of Rs. 16,80,74,559/- only. However, the Ld. CIT-A upheld the addition of AO by observing that loss due to scale-down in the inventory was not in the nature of revenue rather it was a capital expenditure. The view taken by the Ld. CIT-A was based on following observations: i- The loss on account of overvaluation of the assets of demerged company was the loss of demerged company and not the loss of resulting company i.e. assessee. ii- If any loss is arising due to amalgamation/demerger but the same has been covered-up in the consideration price/share exchange ratio. Particulars Amount(Rs.) Rawmaterial 11,24,49,295/- Stores 2,27,79,662/- Work-in-progress 2,03,73,324/- Finished Goods 51,80,02,103/- Total 67,36,04,389/- ITA no.862/AHD/2012 Asstt. Year 2007-08 7 iii- The loss on account of scale-down in the value of the inventory was existing before the date of de-merger. iv- The loss on account of write-off of inventory/fall in value of assets belongs to the demerged company and adjusted in the scheme of amalgamation against the share premium account as approved by the Hon’ble High Court. 8. Being aggrieved by the order of the Ld. CIT-A, the assessee is in appeal before us. 9. The ld. AR before us filing a paper book running from pages 1 to 231 and contended that all the assets and liabilities were acquired by the assessee in the scheme of demerger at the book value. There was no doubt raised by the authorities below with respect to the amount written off for the inventories acquired the scheme of demerger. All the conditions specified under the provisions of section 2(19AA) of the Act were duly complied. The learned AR reiterated the arguments raised before the authorities below. 10. On the contrary, the ld. DR before us contended that there was the direction of the Hon’ble Gujarat High Court to adjust the loss against the share premium account. Thus the question of claiming the deduction in the statement of income by writing off the inventories does not arise. According to the learned DR, the loss claimed by the assessee is a notional loss. The same cannot be allowed the computation of income. The learned DR vehemently supported the order of the authorities below. 11. We have heard the rival contentions of both the parties and perused the materials available on record. A demerger can be regarded as a business strategy where one company transfers one or more of its business undertakings to another company. In other words, it can be considered as a type of corporate restructuring ITA no.862/AHD/2012 Asstt. Year 2007-08 8 in which a business is broken into components, either to operate on its own, to be sold or to be liquidated. 11.1 There are many reasons for a company to undergo the demerger process. Companies often have to downsize their operations in certain circumstances such as when a division of the company is under-performing or simply because it no longer fits into the company’s plans or to give effect to rationalization or specialization in the manufacturing process. There is an increasing realization among companies that demerger may allow them to strengthen their core competence and realize the true value of their business. ‘De-merger’ is often used to describe division or separation of different under-takings of a business, functioning hitherto under a common corporate umbrella. A scheme of de-merger is in effect a corporate partition of a company into two undertakings, thereby retaining one undertaking with it and by transferring the other undertaking to the resulting company. It is a scheme of business reorganization and rearrangement. 11.2 In the process of demerger, the scheme of arrangement is the most vital document, as by this document the company binds all related stakeholders to the demerger of the company. It would deal with the details of the transfer of employees, payment to creditors, transfer of debt, assets, liabilities etc. it can be proposed by the directors or the liquidator of the company. The scheme of arrangement has to be accepted by the shareholders, employees, creditors, and stakeholders. This scheme of arrangement has to be filed in the court which has to be sanctioned by three-fourths of members/creditors. The court will pass an order after hearing the objections. The court will then pass an order approving the demerger. 11.3 Under the provisions of Income Tax Act, the scheme of de-merger as provided under the companies Act has been identified, which allows lot of benefits to the various parties involved therein which are enumerated below: ITA no.862/AHD/2012 Asstt. Year 2007-08 9 i. Accumulated losses and unabsorbed depreciation can be carried forward from the de-merged company to the resulting company. ii. Neither the companies nor the shareholders are subject to capital gains tax. iii. Expenses incurred wholly for the purpose of de-merger are allowed as a deduction in five annual instalments being 20 per cent in each year. 11.4 The above benefits, however, will not apply should there be another de- merger of the resulting company within a period of ten years from the date of de- merge. However, the benefits as provided above are subject to the provisions of the Income Tax Act. Demerger is defined under Section 2(19AA) of the Income-Tax Act, 1961 in relation to companies transferring its one or more undertaking to any resulting company in pursuant to the scheme of arrangement under sections 391- 394 of the companies Act 1956 by a demerged company in a manner by which:  All the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger  All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger  The property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account of demerged company immediately before the demerger.  The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company ITA no.862/AHD/2012 Asstt. Year 2007-08 10  The shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company  The transfer of the undertaking is on a going concern basis.  The demerger is in accordance with the conditions, if any, notified under the provision of section 72A(5) of Income-Tax Act, 1961, by the central government in this behalf. 11.5 Now, from the above provisions specified under the income tax Act, it is transpired that certain tax benefits have been extended to different parties involved in the scheme of demerger in order to make the entire scheme as tax neutral subject to the conditions as specified therein. 11.6 The scheme of the demerger is prepared, processed and approved by the competent authority in the manner provided under the companies Act which have been elaborated in the preceding paragraph. As a corollary, once the scheme has been approved of the demerger in the manner provided under the companies Act, the benefits specified under the provisions of the income tax Act, has to be followed, while framing the scheme of the demerger under the companies Act, there is no need to make any reference of the provisions of the income tax Act. It is for the reason that once the scheme of demerger has been approved in the manner provided under the companies Act, the provisions of the income tax Act will automatically be followed in determining the income of the resulting and demerged company along with the parties involved therein which have been elaborated in the preceding paragraph. Thus we are of the view that in the scheme of the demerger approved by the Hon’ble High Court/competent authority is independent to the ITA no.862/AHD/2012 Asstt. Year 2007-08 11 provisions of the income tax Act. In other words, the income of the parties involved have to be determined in the manner as provided under the provisions of Income Tax Act irrespective of the conditions as specified under the scheme of the demerger which was approved by the competent authority until and unless the competent authority makes reference to any of the provisions of the Income Tax Act therein. 11.7 Now coming to the facts of the case, we note that scheme for the demerger was prepared by the parties involved with the object to carry out the restructuring of share capital of the assessee and Arvind Brands Limited. On perusal of the above objects specified under the scheme in pursuance to the provisions of section 391 to 394 of the companies Act, we note that there is nothing mentioned or provided anything in relation to the provisions of the Income Tax Act. Accordingly, the Hon’ble Gujarat High Court in the scheme of demerger has provided to make the adjustment with respect to write off of certain items against the share premium account. The relevant observations of the Hon’ble Gujarat High Court reads under: 22-2 The Share Premium Account which stands at Rs. 928.73 crores as on 31 st March 2006, will be partly utilized: (i) To set off balance of Rs.71.16 Crores lying in lease equalization account on foreclosure of Lease Agreements, (ii) To set off the balance of Amalgamation Goodwill Account, if any, (iii) To set off outstanding investments and loans and receivables not exceeding Rs-40 Crores from its foreign subsidiaries and (iv) To make provision for an amount not exceeding Rs.75 Crores for various claims of taxes and duties that may arise against the company for past liabilities, for all costs, expenses, losses and write off consequent to restructuring business operations and harmonization of accounting policies of De-merged Undertaking/Transferor Company and Transferee Company as may be considered proper and necessary by the Company or for any other purposes that the Board may deem fit and proper. 11.8 The above direction was provided by the Hon’ble Gujarat High Court in pursuance to the scheme proposed by the parties involved therein. The impugned scheme proposed by the parties was subsequently approved by the Hon’ble Gujarat High Court as discussed above. 11.9 In the light of the above stated facts, now we have to evaluate the provisions of the Income Tax Act with respect to the write-off of the inventory by the assessee ITA no.862/AHD/2012 Asstt. Year 2007-08 12 against the share premium account. The assessee indeed has complied the scheme of demerger as approved by the Hon’ble Gujarat High Court by adjusting the write- off of the inventories against the share premium account but the assessee while preparing the income tax return has claimed the deduction for the same in the computation of income. Thus the controversy arises whether the assessee can claim the deduction for the write-off of inventories in the computation of income while preparing the income tax return. In this regard, we note that the genuineness of the loss claimed by the assessee by writing-off of the inventories in the computation of income has nowhere been doubted by the authorities below. What has been doubted is that the Hon’ble Gujarat High Court in the scheme of demerger has approved write-off of such loss with respect to the inventories against the share premium account of the assessee. However, to our understanding that direction of the approval of the Hon’ble Gujarat High Court has to be seen in the light of the scheme of demerger in pursuance to the provisions of section 391 to 394 of the companies Act. That the scheme of demerger does not in any way interfere with the provisions of the Income Tax Act until and unless something is provided under the scheme of demerger. None of the authority below has pointed out that there was any provisions with respect to the write-off of inventories which needs to be effected in relation to the determination of the total income of the assessee. But the authorities below have made the disallowance of the claim of the assessee merely on the reasoning that the Hon’ble Gujarat High Court has directed to set-off such write-off of inventories against the share premium account without realizing that such direction was given in relation to the provisions of the companies Act and therefore, such direction cannot have any bearing to the determination of the total income of the assessee in pursuance to the provisions of the Income Tax Act. At the time of hearing, the Ld. DR has also not brought anything on record pointing out that the direction given by the Hon’ble Gujarat High Court has to be applied while determining the income of the assessee under the provisions of the Income Tax Act. ITA no.862/AHD/2012 Asstt. Year 2007-08 13 11.10 One more aspect that needs to be seen is this that the assessee admittedly has not accounted for such loss in the profit and loss account. Thus the question arises whether the assessee can claim the deduction under the provisions of the income tax Act of the item which was not shown in the profit and loss account. This issue has already been settled in numerous judgment wherein it was held that the income has to be determined in accordance to the provisions of the Income Tax Act irrespective of the fact whether the accounting treatment was given by the assessee while determining the total income. In this regard we draw support and guidance from the judgment of Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. Vs. CIT reported in 82 ITR 363. The relevant extract of the judgment is reproduce hereunder; “Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might taken of its right nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the amount of sales tax which it was liable under the law to pay during the relevant accounting year. The liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed. The appeal was consequently allowed and the judgment of the High Court was set aside.” 11.11 Moving further, had there not been any demerger of M/s Arvinds Brands Ltd, the company could have made the adjustments for the impugned losses in the inventories which would have been allowed under the provisions of section 37 of the Act. Therefore, merely the inventories has been shifted to the assessee in the scheme of demerger, the assessee being or resulting company cannot be denied the benefit of the deduction provided under the provisions of law. 11.12 Going forward, the adjustment in the inventory is tax neutral exercise, in the sense that the closing inventory becomes the opening inventory in the next year. In other words, the assessee by way of claiming the loss on account of impairment in the value of the closing inventory will declare less profit by that amount but at the same time this value of the closing inventory will have to be carried forward in the next year leading to the tax neutral impact. In simple words it is only the shifting ITA no.862/AHD/2012 Asstt. Year 2007-08 14 of profits or loss from one A.Y. to another A.Y. and therefore based on this the assessee cannot be denied the loss claimed by it in the year under consideration. 11.13 Before parting, it is equally significant and important to note that the assessee will not claim higher value of the opening stock in the next year without setting off the loss on account of impairment in the value of the inventories in the year under consideration. In view of the above and after considering the facts in totality we are of the view that the deduction claimed by the assessee should have been allowed. Hence, we set aside the finding of the ld. CIT-A and direct the AO to delete the addition made by him. Thus, the ground of appeal of the assessee is allowed. 12. The 3 rd issue raised by the assessee is that the Ld. CIT-A erred in upholding the addition of Rs. 18,57,00,000/- on account of write-off of the Inventory transferred by AFL in the scheme of amalgamation approved by the Hon’ble High Court. 13. The assessee company in the year under consideration has acquired its sister concern namely, M/s Arvind Fashion Limited (i.e. amalgamating company) a 100% subsidiary of it in accordance with the scheme approved by the Hon’ble Gujarat High Court vide order dated 24-11-2006. The scheme of the amalgamation was effective from 01-04-2006. Before approval of the scheme, M/s Arvind Fashion Limited had entered into a slump sale agreement with VF Arvind Brands Private Limited effected on 01-09-2006. 13.1 Therefore, the business of AFL was transferred to VF Arvind Brands Private Limited on a going concern basis for a lump sum consideration of Rs. 181.65 Crores where assessee had made the profit amounting to Rs. 100.12 Crores. The assessee had shown the profit as extraordinary profit in its books of account whereas at the time of filing the return of income, it had reduced the sum of Rs. 144.79 Crores ITA no.862/AHD/2012 Asstt. Year 2007-08 15 comprising profit on sale of business of Rs. 100.12 Crores and expenditure of Rs. 44.67 Crores respectively from business income. 13.2 The details of expenditures amounting to Rs. 44.67 Crores which were reduced in addition to the profit on sale of AFL under slum sale are as under: Mature- of exns Amount in Crores Advertisement exps 10.25 Goods in transit written off 2.03 value loss in FG inventory 3.14 FG written off ( shrinkage etc) 10.00 W1P written off 0.90 Value loss in Fabrics inventory 2.50 Gratuity payment 0.56 Disallowed in the return Provision for doubtful debt 2.29 Disallowed in the return Provision for future clams from VF 13.00 Disallowed in the return 44.67 13.3 Out of the above expenditures, a sum of Rs. 15.85 Crores relating to gratuity payment, provision for doubtful debts, and provisions for future claims of VF were added back to the income. 13.4 With respect to the advertisement expenses of Rs. 10.25 Crores the assessee submitted that the said expenditure was incurred for and on behalf of the amalgamating company i.e. AFL to promote its brand “Lee and Wrangler”. The advertisement expenses was incurred during the period 01-04-2006 to 31-08-2006 ITA no.862/AHD/2012 Asstt. Year 2007-08 16 but M/s AFL was amalgamated with the assessee company effective from 01-04- 2006 and accordingly all the expenses and income during the period 01-04-2006 to 31-08-2006 were vested to the assessee company. 13.5 For the remaining/ balance of Rs. 18.57 Crores, the assessee submitted that on identification and verification of stock transferred by AFL by virtue of amalgamation scheme, it was found that the stock valued at Rs. 18.57 Crores did not had any realizable value. Therefore, the same was written off in the profit and loss account of the assessee. 13.6 The assessee also submitted that the accounting policies to value the stocks/inventory of both the companies i.e. assessee company and AFL amalgamating company were different and to align the method for the valuation of stocks, the values of the stocks got affected by the sum of Rs. 18.57 Crores in downward direction. 13.7 The assessee, thus was of the view that the write-off stock valued at Rs. 18.57 Crores being revenue in nature is an allowable claim as per the provisions of the Income Tax Act. Therefore, the claim of the expense for writing off impugned inventory in its return of income is an allowable deduction under the Act. 13.8 The assessee was also of the view that the tax on profit on sale of business AFL was offered to tax, therefore, the expenditures relating to AFL should also be allowed. 13.9 The assessee also submitted that the AO has allowed the expenditure of Rs. 10.25 Crores incurred with respect to the promotion of brand of AFL during the period 01-04-2006 to 31-08-2006 by observing that the said expenditure was an allowable expenditure. But, the AO with respect to the expenditures of Rs. 18.57 Crores on account of write-off inventory observed as under: ITA no.862/AHD/2012 Asstt. Year 2007-08 17 a- The assessee has followed the purchase method of accounting as defined in Accounting Standard-14 issued by ICAI to account for the effect of amalgamation in the books of accounts. b- Since, the assessee has followed the purchase method, therefore, the consideration paid over and above the fair value of the assets and liabilities should be recorded in the books of the transferee company as “amalgamation goodwill”. c- The write-off of inventory should be adjusted to the amalgamation goodwill account instead of debiting the profit and loss account. d- In purchase method, there is no need to align the accounting policies of two different companies. e- The loss on account of write off inventories are not coming after transfer of the stock but the impugned loss was existing at the time of giving effect to the order of Hon’ble High Court. 13.10 The AO, thus, in view of the above disallowed the sum of Rs. 18,57,00,000/- claimed by the assessee on account of write-off of inventory and added to the total income. 14. Aggrieved assessee preferred an appeal to the Ld. CIT-A and submitted that the claim of write off of inventories were made after considering the financial statements and with due diligence. The assessee also furnished the copy of letter working out the value to be written off for the inventories which was prepared by the supervisor K R Veerappan addressing to Finance director Shri Jayesh Shah. 14.1 The assessee further submits that out of inventories written-off were actually sold in the immediately succeeding assessment year. The relevant details submitted by the assessee before the ld. CIT-A reads as under: (i) From out of inventory Arvind Brands Ltd. Rs.26.96lacs (ii0 From out of inventory of Arvind Fashions Ltd Rs.14.20 lacs ITA no.862/AHD/2012 Asstt. Year 2007-08 18 14.2 The assessee after placing its reliance on various judicial pronouncements contended that the accounting entries recorded in the books do not determine the allowability or not whereas the loss of write off of inventory is a trading loss which has to allowed under the provisions of section 37 of the Income Tax Act. 14.3 The assessee also submits that the closing stock of the inventory was taken on at book value as recorded by AFL before amalgamation in its books of account. The details of the same stand as under: Particulars Amount(Rs.) Raw Material 5,46,28,451/- Stores 3,04,48,691.- Raw Material 98,61,929/- Work-in-progress 3,21,26,026/- Finished goods 27,88,12,154/- Total 40,58,77,252/- 14.4 Out of aforesaid value of stock, it had curtailed the stocks amounting to Rs. 18,57,00,000/- only. 14.5 The assessee has also taken additional plea that write off of inventories was arising out of inventories transferred by amalgamating company AFL and the unsold inventories were transferred to VFABPL by virtue of slump sale. 14.6 As such the cost of acquisition was worked out after reducing write-off of inventories to determine the capital gain under slum sale and therefore, if the same are not allowed to assessee, then the corresponding increase in the cost of acquisition by said write-off amount should be allowed. 15. However, the Ld. CIT-A disregarded the contention of the assessee by observing that the write off of inventories due to amalgamation is not revenue in nature but allowed the alternative claim of the assessee by observing that cost of ITA no.862/AHD/2012 Asstt. Year 2007-08 19 inventories will alternatively increase in consequence to not allowing the expenditure on account of write off inventories. 15.1 The Ld. CIT-A, therefore, directed the AO to re-compute the capital gain on transfer of business of AFL under slum sale. 16. Being aggrieved by the order of the Ld. CIT-A, the assessee is in appeal before us. 17. The Ld. AR before us contended that the impugned loss was very much eligible for deduction while determining the total income of the assessee. According to the learned AR, the profit arose to the assessee as a result of amalgamation and slum sale has been offered to tax and therefore any loss arising in consequence thereto, the same should be allowed as deduction. The learned AR before us reiterated the contentions made before the authorities below. 18. On the other hand the Ld. DR before us vehemently supported the order of the authorities below. 19. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the identical issue was raised by the assessee in the scheme of demerger in ground No. 2 as discussed above, which we have allowed in favour of the assessee vide paragraph number 11 of this order. At the time of hearing, the Ld. AR and the DR also agreed that whatever will be the findings with respect to ground No. 2 as discussed above will also be applied to the ground of appeal on hand. Accordingly, we set aside the finding of the Ld. CIT-A and direct the AO to allow the deduction claimed by the assessee on account of writing-off the inventories as discussed above. Hence the ground of appeal of the assessee is allowed. ITA no.862/AHD/2012 Asstt. Year 2007-08 20 20. The 4 th issue raised by the assessee is that the Ld. CIT-A erred in confirming the disallowance for the sum of Rs. 87,97,108/- comprising interest of Rs. 5,82,608/- and other expenses of Rs. 82,14,500/- made by the AO under rule 8D(2)(ii) and rule 8D(2)(iii) respectively r.w.s. 14A of the Act. 21. The assessee in the year under consideration has earned exempted income by way of dividend and sale of shares of M/s Atul Ltd. amounting to Rs. 35,32,939/- and Rs. 6,84,59,035/- respectively. The assessee has not shown any expense against such exempted income. Therefore the AO invoked the provisions of rule 8D of Income Tax Rules and made the disallowance of Rs. 5,82,608/- and Rs. 82,14,500/- representing the interests and administrative expenses which were added to the total income of the assessee. 22. Aggrieved assessee preferred an appeal to the Ld. CIT-A who has confirmed the order of the AO by observing as under: 5.3 I have considered the facts of the case assessment order and appellant'’s submission. It is not in dispute that appellant earned exempt income in the form of dividend on investment of more than Rs.16,429/- lakhs. It is also not in dispute that appellant borrowed funds on which interest to the extent of RS 132.31 lakhs were paid. Apart from this substantial administrative expenses were incurred, part of which may relate to investment resulting in exempt income. Considering these facts it is clear that there are expenses in the form of interest and other administrative expenses relatable to earning of exempt income which are to be disallowed under section 1A A. Therefore disallowance under section 14 A is necessary. Coming to the method of computing disallowance under section 14 A, assessing officer disallowed expenses relatable to exempt income as per rule 8D. Up to 2007-08 the method to arrive at disallowable expense was estimation. Thereafter rule 8 D was framed which gives formula for disallowance of expenses relating to exempt income. For interest, proportionate expense is disallowable whereas for other expenses .5% of investment value is disallowable. Considering the fact that appellant claimed huge administrative and other expenses, the disallowance of administrative expenses made by the assessing 1 officer rupees 8214500 is quite reasonable and therefore the same is confirmed. regards interest, appellant submitted that it was having interest free funds and profit therefore no interest is relatable to investment resulting in exempt income. However it is seen that appellant borrowed substantially which was used for business purpose as well as investment. Since Common funds are maintained and appellant could not identify the immediate source of investment. In view of this, the decisions relied upon by the appellant are not applicable. Since admittedly investment was not part of business head, no income from such investment is taxable. Considering the fact that expenses relating to exempt income ere to be estimated end rule CD gives basis for computing such disallowance, therefore the disallowance of interest under section 14 A made by the assessing officer as per rule 3 D is confirmed. ITA no.862/AHD/2012 Asstt. Year 2007-08 21 23. Being aggrieved by the order of the Ld. CIT-A, the assessee is in appeal before us. 24. The Ld. AR before us contended that the own fund of the assessee exceeds the amount of investment and therefore a presumption can be drawn that no borrowed fund has been utilized by the assessee against such investments. Accordingly, the question of making the disallowance with respect to interest expense does not arise. The Ld. AR further contended that there cannot be disallowance under the provisions of rule 8D of Income Tax Rules as the same is not applicable for the year under consideration. 25. On the contrary, the Ld. DR vehemently supported the order of the authorities below. 26. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the own fund of the assessee exceeds the amount of investments. As per the submission of the assessee, the own fund as on 31 st March, 2007 stands at Rs. 1387.03 Crores whereas the investment stands at Rs. 48.05 Crores. Thus it can be held that the own fund exceeds the amount of investments. The Hon’ble Gujarat High Court in the case of Pr. CIT v. Patel Alloy Steel Co. (P.) Ltd. [2019] 103 taxmann.com 431 held that when the assessee was already having enough surplus funds, the disallowance of interest under Section 14A of the Act read with Rule8D was not warranted. 26.1 Moving further with respect to the disallowance of administrative expenses under rule 8D, we note that Rule 8D of the Income Tax Rules was notified by the Government on 25-3-2008. The controversy arises whether the Rule 8D was applicable retrospectively or prospectively? It was claimed on behalf of the Department that Rule being a procedural provision was retrospective and, accordingly, would apply to earlier assessment years as well. This controversy, however, has now been settled vide decisions of the Hon'ble High Court of Mumbai ITA no.862/AHD/2012 Asstt. Year 2007-08 22 in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203 and of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. v. CIT [2011] 203 Taxman 364/15 taxmann.com 390. Accordingly, now the admitted position is that up to A.Y. 2007-08 the disallowance has to be made only on the basis of sub- section (1) of section 14A of the Income-tax Act, which provides for disallowance of an expenditure incurred in relation to exempt income and, accordingly, disallowance has to be determined keeping in view the direct nexus between the exempt income and the expenditure incurred. Disallowance is to be calculated on a reasonable basis. The prescribed method in Rule 8D has no application in respect of the A.Y. up-to 2007-08. The provisions of sub-sections (2) and (3) of section 14A and the Rule 8D of Income Tax Rules have to be considered for the purpose of determining the disallowance in respect of A.Y. 2008-09 onwards. 26.2 Now the controversy arises, how to determine the expenses which needs to be disallowed against the exempted income in the absence of rule 8D of Income Tax Rule. In this regard we note that Hon’ble Kolkata High Court in the case of CIT Vs. R.R. Sen & Brothers Pvt. Ltd. in G.A. No. 3019 of 2012, ITAT No. 243 of 2012 has held as under: “The court:- The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under the income tax. The Tribunal has computed expenditure at 1 per cent of such dividend income which, according to them, is the thumb rule applied consistently. We find no reason to interfere.” 26.3 Admittedly, there was no applicability of Rule 8D in the instant case as it came in force w.e.f. 24.03.2008. But the disallowance was very much warranted as per the provisions of section 14A of the Act. Taking a consistent view and after drawing support on the decision of Hon'ble High Court in the above cited case i.e. R.R. Sen & Brothers Pvt. Ltd.(supra), we direct the AO to restrict the disallowance to 1% of the exempt income. Thus, the ground raised by assessee is partly allowed. 27. The 5 th issue raised by the assessee is that the Ld. CIT-A erred in upholding the rejection of claim of Rs. 25,93,43,434/- made by it representing additional ITA no.862/AHD/2012 Asstt. Year 2007-08 23 depreciation amount on devaluation of assets reduced in pursuance to the clause (iia) of explanation 1 below sub-section (2) of section 115JB of the Act. 28. The assessee in its financial statement prepared as on 31 st March, 2007 under the companies Act has revalued its certain fixed assets in downward direction. Accordingly the assessee claimed less amount of depreciation in its statement of profit and loss account. However, the assessee while calculating the book profit under the provisions of section 115JB of the Act has made upward and downward adjustments in the manner provided under explanation 1 to section 115JB of the Act. The relevant adjustments can be explained as under: Profit as shown in the statement of profit and loss : XXXXXX Addition under clause (g) of the explanation 1 : XXXXXX Subtraction under clause (iia) of the explanation 1 : XXXXXX 28.1 The assessee while subtracting the amount of depreciation has calculated the same after ignoring the valuation of assets which was made in the downward direction. As such, the assessee has reduced the higher amount of depreciation while computing the book profit under the provisions of section 115JB of the Act. 28.2 The assessee during the assessment proceedings further submitted that there were more assets which were revalued in the downward direction but it has omitted to claim the higher depreciation in the manner as discussed above while calculating the book profit. The summary of the adjustments made by the assessee while calculating the book profit is tabulated as under: Depreciation debited to profit and loss account (calculated on revalued cost) [A] Effect of revaluation (Downward Revaluation [B] (depreciation charges less due to revaluation) Amount of Depreciation after excluding the effect of revaluation [A-B] Rs.146,98,55,916 Rs.25,93,43,434 Rs.172,91,99,349 ITA no.862/AHD/2012 Asstt. Year 2007-08 24 28.3 In view of the above, the assessee during the assessment proceedings prayed to the AO that it is entitled for reducing the amount of depreciation under clause (iia) of explanation 1 to section 115JB of the Act for an additional amount of Rs. 25,93,43,434.00 which was calculated after taking into consideration the effect of revaluation of assets which was done in downward direction. 28.4 However, the AO was not satisfied with the contention of the assessee on the reasoning that the amount of depreciation under clause (iia) of explanation 1 to section 115JB of the Act has to be calculated after excluding the amount of revaluation of assets. Thus, claim of the assessee representing the amount of depreciation on the revalued figure was disallowed while calculating the profit under section 115JB of the Act. 29. Aggrieved assessee preferred an appeal to the Ld. CIT-A, who has confirmed the order of the AO by observing as under: Appellant revalued certain assets downward. As a result of this, book depreciation on these assets was lower than the depreciation without revaluation. Since adjustment relating to depreciation on revaluation of asset is to be excluded from the book profit as per the provisions of section 15 JB, appellant claimed that such exclusion can result b increasing the book profit also. Appellant submitted that revaluation of asset can be upward or downward and In both the situation, the effect of revaluation on book depreciation is to be nullified. However, assessing officer clearly discussed that issue depreciation on account of revaluation can only be excluded. The same cannot be included on account of revaluation of assets. Since the language of the section only intends excluding the excess appreciation claimed in the books of account of revaluation of assets, the same cannot be used for increasing the depreciation more than what is claimed in the books. Appellant also submitted that in the computation of income, incorrect figures of depreciation adjustments were taken which should be corrected. To this, I agree with the, appellant that if a mistake is there in adopting any figure ii computation, the same can be corrected in assessment. However fro the detailed analysis made by the assessing officer it is clear that appellant is not entitled to increase the book depreciation by including depreciation on revaluation of asset. Since provisions of this section does not provide for removing the effect of revaluation, the effect o depreciation on account of revaluation of asset is only to be excluded. If the book depreciation is less on account of downward revaluation of \ assets, the depreciation on such revaluation cannot be added to the \ book profit. Appellant was asked to give any judicial decision which 1 supports its claim however appellant could not find any such case law. In absence of any authority supporting appellant's claim, the literal interpretation of the section has to be made and as per that appellant cannot add depreciation on downward revalued assets. This ground of the appellant is accordingly dismissed. ITA no.862/AHD/2012 Asstt. Year 2007-08 25 30. Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before us. 31. The Ld. AR before us contended that there is no prohibition for claiming the depreciation on the value of the assets after ignoring the amount of assets revalued in the downward direction. The learned AR before us reiterated the contentions made before the authorities below. 32. On the other hand the Ld. DR before us submitted that there is no ambiguity under the provisions of law to ignore the depreciation attributable to the revalued figures of the assets. Therefore, there is no need to interpret the provisions of law. Thus, the provision as mentioned under section 115 JB of the Act should be applied in the manner as given therein in full force. The learned DR vehemently supported the order of the authorities below. 33. We have heard the rival contentions of both the parties and perused the materials available on record. Section115JB of the Income-tax Act, 1961 provides for levy of Minimum Alternate Tax (MAT) in case of what are popularly referred to as Zero tax companies. The tax liability under the provisions of MAT has to be determined based on the book profit which shall be deemed as total income. The provisions of MAT comes into play where income shown by the assessee under normal provisions of the Act is lesser than the book profit. Every assessee, being a company, has to, for the purpose of section115JB, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. 33.1 To calculate the Book profit, the net profit as per the profit and loss account prepared under the Companies Act, for levy of MAT, needs to be adjusted as per Explanation-I to section115JB of the Income-tax Act. This Explanation provides that the net profit as shown in profit and loss account prepared as per the Schedule- ITA no.862/AHD/2012 Asstt. Year 2007-08 26 VI of the Companies Act in accordance with the requirements of Parts II and III of the Schedule has to be adjusted by the increases and the decreases as given in the Explanation. The items of adjustments for working out the book profit are numerous but the relevant adjustments which are in dispute are detailed as under. i. The net profit shown by the assessee in the statement of profit and loss for the relevant year has to be increased by the amount of depreciation as provided under clause (g) of explanation 1 to section 115JB of the Act. ii. Likewise, the net profit shown by the assessee in the statement of profit and loss account for the relevant year has to be decreased by the amount of depreciation debited to the statement of profit and loss excluding the depreciation on account of revaluation of assets as provided under clause (iia) of explanation 1 to section 115JB of the Act. 33.2 In other words the depreciation debited to profit and loss account shall be added back. However, depreciation not being depreciation which arises because of revaluation of assets shall be deducted. The cumulative impact of the addition and deduction is that book profit will be increased by depreciation (pertaining to revaluation of assets). 33.3 The entire controversy before us revolves with respect to the depreciation on the amount of revaluation of assets. Both the clauses (g) and (iia) of explanation 1 to section 115JB of the Act were brought under the statute by the Finance Act, 2006 effective from 1 st April, 2007. Prior to this amendment, the assessee were revaluing their assets in upward direction and consequently for claiming higher amount of depreciation which eventually reducing the net profit of the assessee under the Companies Act and Book Profit for the purpose of the MAT. The companies on one hand by revaluing the assets in upward direction were strengthening their financial statements but on the other hand they were able to show less amount of book profit for the purpose of the MAT under section 115JB of the Act. ITA no.862/AHD/2012 Asstt. Year 2007-08 27 33.4 Thus the lawmakers to curb this practice, have introduced the respective clauses (g) and (iia) of explanation 1 to section 115JB of the Act as discussed above. The memorandum of explaining such amendment is extracted below: “Under the normal provisions of the Income-tax Act, claim of higher depreciation on account of revaluation of assets is not allowed. However, companies do resort to revaluation of assets to claim such higher depreciation. With a view to plug the leakage of revenue on account of claim of higher depreciation through revaluation of assets by certain companies, it is proposed to insert a new clause (g) in the aforesaid Explanation so as to provide that the book profit shall be increased by the amount of depreciation debited to the profit and loss account and to also insert a new clause (iia) in the said Explanation so as to provide that the amount of depreciation claimed in the profit and loss account, excluding the claim of depreciation on account of revaluation of assets, shall be reduced from the book profit. With a view to avoid double taxation on this account, it is also proposed to insert a new clause (iib) in the said Explanation so as to provide that the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in the proposed new clause (iia), shall be reduced from the book profit.” 33.5 From the above, there remains no ambiguity to the fact that the sole purpose of amending the provisions of section 115JB of the Act as discussed above was to avoid the misuse of the provisions by the companies in the manner as discussed above. 33.6 Be that as it may be, coming to the facts of the case on hand, we note that the assessee has certainly revalued its assets but in downward direction meaning thereby the assessee was not at all trying to misuse the provisions of section 115JB of the Act in the given facts and circumstances. In other words, the assessee by revaluing the assessee in downward direction was showing higher amount of profit under the companies Act which will eventually result higher amount of book profit under the provisions of section 115JB of the Act than the amount of profit which should have been shown as book profit. Admittedly, as per the provisions of clause (iia) of explanation 1 to section 115JB of the Act the amount of revaluation of assets has to be excluded. But the purpose for which this provision was brought under the statute was meant to exclude the valuation of the assessee which was made in the ITA no.862/AHD/2012 Asstt. Year 2007-08 28 upward direction. However, in the case on hand, we note that the valuation was made by the assessee in the downward direction which was not the intention of the lawmakers. Accordingly, we are of the view that the assessee is entitled for the deduction of the higher amount depreciation after taking into consideration of the amount of revalued assets made in downward direction. 33.7 At this juncture, we find pertinent note that the assessee while calculating the amount of book profit has not considered the revaluation amount which was made in the downward direction with respect to certain assets. It is the trite law that the income/profit of the assessee has to be calculated as per the provisions of law despite the fact that the assessee by mistake or knowingly or unknowingly failed to claim certain claims for which it was entitled. In other words, the assessee cannot be denied the benefits which were available to it merely on the reasoning that the assessee failed to claim the same in the income tax return. In view of the above and after considering the facts in totality, we set aside the finding of the learned CIT-A and direct the AO allow the higher amount of depreciation on the revalued assets made in the downward direction. Hence the ground of appeal of the assessee is allowed. 34. The last ground of appeal raised by the assessee is that the Ld. CIT-A erred in confirming the addition made by the AO for Rs. 87,97,108/- while calculating the profit under the provisions of section 115JB of the Act. 35. The AO while calculating the book profit has added the sum of Rs. 87,97,108/- computed under normal provisions of the Income Tax Act while calculating the book profit in pursuance to the clause (f) to explanation 1 under section 115JB of the Act. 36. Aggrieved assessee preferred an appeal to the Ld. CIT-A who also confirmed the order of the AO. ITA no.862/AHD/2012 Asstt. Year 2007-08 29 37. Being aggrieved by the order of the Ld. CIT-A, the assessee is in appeal before us. 38. The Ld. AR before us contended that the amount disallowed while calculating the income under the normal provisions of the Income Tax Act cannot be taken into consideration while calculating the book profit in the manner provided under section 115JB of the Act. 39. On the other hand the Ld. DR vehemently supported the order of the authorities below. 40. We have heard the rival contentions of both the parties and perused the materials available on record. The AO in the instant case has made the disallowance u/s 14A r.w.r. 8D of the Income Tax Rules for Rs. Rs. 87,97,108/- while determining the income under normal computation of income. Further, the AO while determining the income under Minimum Alternate Tax (MAT) as per the provisions of section 115JB of the Act, has added the disallowance made under the normal computation of Income under section 14A r.w.r. 8D of Income Tax Rule for Rs. Rs. 87,97,108/- in pursuance to the clause (f) of explanation 1 to section 115JB of the Act. 40.1 However, we note that in the recent judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below: “In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962.” 40.2 The ratio laid down by the Hon’ble Tribunal is squarely applicable to the facts of the case on hand. Thus it can be concluded that the disallowance made under ITA no.862/AHD/2012 Asstt. Year 2007-08 30 section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act. 40.3 However, it is also clear that the disallowance needs to be made with respect to the exempted income in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance regarding the exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- “We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.” 40.4 Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra). 40.5 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore in the given facts & circumstances, we feel that ad- hoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact ITA no.862/AHD/2012 Asstt. Year 2007-08 31 on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed. 41. In the result, the appeal of the assessee is partly allowed. Order pronounced in the Court on 15/07/2022 at Ahmedabad. Sd/- Sd/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 15/07/2022 Manish