TMI Blog2013 (1) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the purchases and sales of goods and inventories, as it has a direct bearing on valuation of stock. Thus, that the matter needs to be restored back to the file of the Assessing Officer to carry out necessary valuation on account of MODVAT credit on purchases and inventories in accordance with the provisions contained in section 145A. The assessee will provide necessary details and working to the Assessing Officer to this effect, who will verify the same - the corresponding adjustment in the opening stock should also be made in view of the principles laid down in case of Mahalaxmi Glass Works P. Ltd. (2009 (4) TMI 182 - BOMBAY HIGH COURT)- partly in favour of assessee for statistical purposes. Disallowance of interest and expenses u/s 14A r.w.r. 8D - assessee contested that no disallowance u/s 14A where no income is earned by the assessee - Held that:- Commissioner (Appeals) that Rule 8D is applicable in this year, cannot be sustained in view of the judgmentin the case of Godrej Boyce (2010 (8) TMI 77 - BOMBAY HIGH COURT), wherein it has been held that Rule 8D cannot be applied retrospectively i.e., prior to assessment year 2008-09 - unable to accept this contention of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) of section 36 that the decision for treating debt as bad or irrecoverable should be taken in the previous year itself. If the books of account are not closed and completed, it is permissible to make adjustments before being finally adopted - there is also a categorical finding by the Tribunal in assessment year 2000–01 that interest income has always been treated as business receipts by the AO, thus, once the interest income has been offered on accrual basis, which has been debited in the Profit & Loss account as business income and the same has been written off as irrecoverable in the accounts in this year, the same has to be allowed as bad debt fairly settled in the case of TRF Ltd [2010 (2) TMI 211 - SUPREME COURT] - in favour of assessee. Disallowance of Inter Corporate Deposit (ICD) along with the interest written–off - Held that:- Assessee had shown interest on ICDs on accrual basis in the Profit & Loss account in the earlier years. Also the amount received under one time settlement with the companies, the assessee has adjusted the same against the principal amount first. The interest portion has mostly been written–off. Insofar as the Commissioner (Appeals)’s finding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act") for assessment year 2001-02. 3. In ground no.1, the assessee has challenged disallowance of club expenses of sums amounting to Rs. 96,997. The Assessing Officer, in the assessment order, has observed that the club expenditure of Rs. 96,997, consist of subscription fee of Rs. 51,940, and entertainment charges of Rs. 45,057. Before the Assessing Officer, it was contended that the entire expenditure have been incurred for the purpose of business only. However, the Assessing Officer has disallowed the same on the ground that in the assessment year 1999-2000, the Commissioner (Appeals) has confirmed the said disallowance, as was made by the Assessing Officer. Accordingly, he disallowed the entire amount of Rs. 96,997. 4. Before the Commissioner (Appeals), it was explained that the said expenditure comprised of corporate membership of Bombay Gymkhana Club and Khar Gymkhana Cub, taken specifically for the directors mainly with an intention to promote business and to establish business relationship in commercial interest of the business. Voucher-wise details of expenditure incurred were also filed. In support of the allowability of Club expenditure, the assessee relied upon the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer, reliance was placed on the judgment of Jurisdictional High Court in the case of Indo Nippon Chemicals Ltd., 245 ITR 385. The Assessing Officer did not accept the assessee s contentions and held that in the said decision, section 145A was not considered as the same was brought in the statute w.e.f. assessment year 1999-00. Thus, following the decision given by the Commissioner (Appeals) in the assessment year 2000-01, he added the entire amount of unutilized MODVAT credit of Rs. 9,49,30,534, to the assessee s total income. 10. Before the Commissioner (Appeals), the assessee submitted that it has been following exclusive method of valuation of closing stock as prescribed by the ICAI in the guidance note on accounting of MODVAT. It has been consistently following this method in which valuation of stock is made at net method i.e., after excluding the MODVAT credit available from the gross purchase price. It was also submitted that the Hon'ble Supreme Court in case of CIT v/s Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 (SC), has confirmed this method of valuation. Even otherwise, it was submitted that even if the closing stock is adjusted by MODVAT credit, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f goods and inventories, adjustment on account of tax, duty, cess or fee actually paid or incurred by the assessee has to be made. Excise duty component in the form of MODVAT in the raw materials has to be included while valuing the purchases and sales of goods and inventories, as it has a direct bearing on valuation of stock. Thus, we are of the considered opinion that the matter needs to be restored back to the file of the Assessing Officer to carry out necessary valuation on account of MODVAT credit on purchases and inventories in accordance with the provisions contained in section 145A. The assessee will provide necessary details and working to the Assessing Officer to this effect, who will verify the same. We also agree with the alternative submissions made by the learned Counsel for the assessee that the corresponding adjustment in the opening stock should also be made in view of the principles laid down by the Jurisdictional High Court in case of Mahalaxmi Glass Works P. Ltd. (supra). Consequently, we set aside the impugned order passed by the Commissioner (Appeals) and direct the Assessing Officer to also make corresponding adjustment in the opening stock in view of the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are not invested in the shares. Further, the assessee was also asked to furnish the details on the Average Rate of Borrowings (ARB) by the assessee. 14.36% Is the Average Rate of Borrowings as supplied by the assessee without prejudice to its original contention. Applying the ARB of 14.36%, the interest relatable to the amount of Rs.41.60 crores is worked out and the same works out to Rs.5,97,30,7071-. Further, the assessee s request for set off of interest Income of Rs.80 lakhs and from the investment company with the interest expenses on Rs.41,59,52,000/- has not been allowed as the provisions of section 14A do not allow such set off. Accordingly, Rs.5,97,30,707/- is the interest not relatable to the business of the assessee. The same Is disallowed under the provisions of section 14A of the Income Tax Act. The addtion on this account is Rs.5,97,30,707. 16. Before the Commissioner (Appeals), it was contended by the assessee that the investments in shares to the various companies were made for the strategic business purposes and, therefore, the same was for the purpose of business of the assessee and hence, section 14A, cannot be invoked. Further, it was argued that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance under section 14A of the Act, even as per the formula of the Assessing Officer will hardly come to Rs. 3,00,000 and odd. To substantiate his claim, he has given statement showing working of cost of investment and has relied upon the following decisions:- Delite Enterprises P. Ltd. v/s ITO, 22 SOT 245; CIT v/s Delite Enterprises, ITA no.110 of 2009, Bombay High Court; Avshesh Mercantile P. Ltd. v/s DCIT, ITA no.5779/M/2006) Siva Ind. Holdings Ltd. v/s ACIT, 2011 TII 67 ITAT Mad.; CIT v/s Winsome Textile Ind. Ltd., 319 ITR 204 (P H); and Shree Shyamkamal Finance Leasing Co. P. Ltd., v/s ITO, 21 SOT 42 (SMC). 19. On the other hand, the learned Departmental Representative submitted that the assessee has shown dividend income in its account and no expenditure has been attributable towards earning of this income and, therefore, disallowance has to be made. He finally relied upon the findings and reasoning given by the Commissioner (Appeals). 20. We have heard the rival contentions of the parties, perused the orders of the authorities below and considered the case laws cited by the learned Counsel for the assessee. Insofar as the findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal. 21. On perusal of the statement filed by the learned Counsel for the assessee, we find that the assessee has made investment of Rs. 590.67 crores as on 31st March 2001, in the shares. The assessee s own funds as per the balance sheet are in the form of share capital of Rs. 42.80 crores and reserve and surplus of Rs. 394.50 crores which aggregates to Rs. 437.30 crores, out of which Rs. 60.36 crores have been incurred for miscellaneous expenses and balance amount of Rs. 379.94 crores were duly available for making the investment. The learned Counsel for the assessee had submitted that accumulated depreciation of Rs. 235.58 crores should also be considered as available funds as depreciation is a notional charge to the profit. However, we are unable to accept this contention that funds in the form of accumulated deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e outset, the learned Counsel for the assessee submitted that the Tribunal, vide order dated 25th June 2010, for the assessment year 2000-01, in assessee s own case, has given a direction to allow these expenditure in the assessment year 2000-01. 25. In view of the fact that in the assessment year 2000-01, these prior period expenses have been directed to be allowed, hence, the same cannot be allowed in this year. Thus, disallowance made in this year cannot be allowed. Consequently, grounds No.6, 7 and 8, are treated as allowed. 26. In the result, assessee s appeal is partly allowed for statistical purposes. We now take up assessee s appeal in ITA no.7109/Mum./2010, for assessment year 2002 03. This appeal is barred by limitation by 30 days. In petition for condonation of delay, the assessee has given detailed reasons supported by an affidavit. In view of the reasons given in the said petition, we condone the delay of 30 days. Accordingly, appeal is being decided on merits. 27. Ground no.1, relates to disallowance of club expenditure of Rs. 1,49,332. 28. At the outset, both the parties agreed before us that this is similar to the issue decided by us in assessee s appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same. Thus, he reached to the conclusion that the stand taken by the assessee is contradictory as when the assessee is not treating the principal amount as bad debt, then how the interest can be written off as irrecoverable. Accordingly, he disallowed the claim. In his conclusion, he has also given a remark that in the assessment year 2000 01, proceedings under section 263, have been concluded by the learned Commissioner of Income Tax, whereby it was held that the assessee has actually not shown any income relatable to the claim of the assessee in any of the previous year. 35. Before the learned Commissioner (Appeals), it was submitted by the assessee that it has invested in Optionally Convertible Debentures (OCDs) in the financial year 1994 95 of the following companies. a) Karnivasini Investment Finance P. Ltd. b) Kauandaliya Investments Finance P. Ltd. c) Morta Finlease Inv. P. Ltd. d) Atirupa Investments P. Ltd. e) Zafonic Finlease Inv. P. Ltd. f) Ottoman Finlease Inv. P. Ltd. 36. These OCDs carry interest @ 16% per annum and were redeemable at the end of seven years from the date of allotment with an option to convert the OCD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business activity or even incidental to its business activity. Therefore, the real nature of interest income earned in the earlier years is income from other sources and not business income . Merely because interest was wrongly taxes as business income , in the earlier years, claim cannot be allowed under section 36(1)(vii) of the Act. In view of these facts, the claim for deduction under section 36(1)(vii) is not allowed. This ground of appeal is not allowed. 38. The learned Counsel for the assessee, first of all, submitted that insofar as the observations of the Assessing Officer regarding 263 proceedings under Section 263 in A.Y. 2000 01 are concerned, the said order has been quashed by the Tribunal vide order dated 24th March 2008, passed in ITA no.3969/Mum./2005, wherein the Tribunal found that the Assessing Officer has treated the interest income received on advance as business receipts. He drew our attention to Paras 7 and 8 of the said order. With regard to the learned Commissioner (Appeals) s observations that bad debt can be written off only during the year and not after 31st March, the learned Counsel for the assessee submitted that this issue has been considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed in the Profit Loss account of the earlier years. Such an interest income has also been accepted as business income of the assessee. The assessee has written off this amount of interest in the account as irrecoverable as per the decision taken by the board of directors in resolution in May 2002. The first issue is, whether the decision to write-off the amount after the close of the financial year can be done and treated to be written off in the accounts of the assessee for the previous year. From the perusal of the decision in the case of U.P. Rajkiya Nirman Nigam (supra), as relied upon by the learned Counsel for the assessee, we find that this issue has been discussed and analyzed in the following manner:- 8. The conditions required for allowing the claim is that, firstly, any debt, or part thereof, is written off as irrecoverable and secondly, they should be written off in the accounts of the assessee for the previous year. So far as the first part of ci. (vii) of s. 36(1) is concerned, there is no dispute that the debt has become bad and it was written off. The dispute relates to the interpretation of the words used subsequently. When we go through the subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the resolution approving and accepting the recommendation relating to the treatment of certain items must relate back to the date upto which the accounts are finalised and such determination or approval must be treated as being effective from that date. By being retrospective effect, the nature and character of the entries have not been changed. From the proposition laid down by the aforesaid decisions, we hold that even the board resolution was passed in May 2002, with regard to the approval of writing off the amount as irrecoverable in the accounts, it will relate back to that previous year in which it is being treated as irrecoverable and written off in the accounts of the assessee. There is no such condition in the said clause i.e., clause (vii) of sub section (1) of section 36 that the decision for treating debt as bad or irrecoverable should be taken in the previous year itself. If the books of account are not closed and completed, it is permissible to make adjustments before being finally adopted. Thus, we do not find any merit in such a conclusion drawn by the learned Commissioner (Appeals). 42. Now, coming to the issue that whether such a deduction on account of writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground no.7 8 are thus allowed for statistical purposes. 47. Ground no.9, relates to disallowance of Inter Corporate Deposit (ICD) along with the interest written off for sums amounting to Rs. 2,51,33,956. 48. The assessee has debited an amount of Rs. 2,51,33,956 to the Profit Loss account on account of amount in respect of ICDs written off. The same was added back while computing the taxable income as it was doubtful about the claim. The assessee has given ICDs in the F.Y. 1994 95 to the various companies, the details of which are given in Para 12.2 of the learned Commissioner (Appeals) s order. From the F.Y. 1994 95 to 2000 01, interest of Rs. 2,30,02,576, was accrued to the assessee which was shown in the Profit Loss account as income, the details of which was given before the learned Commissioner (Appeals). It was claimed before the learned Commissioner (Appeals) that these parties were not in a position to pay the amount due to financial crunch and in one time settlement proposal and protracted negotiation, settlement was reached where the parties paid part of the principal amount as full and final settlement. Whatever amount was left was written-off in the books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record. It is an admitted fact that the assessee had shown interest on ICDs on accrual basis in the Profit Loss account in the earlier years. It is also an admitted fact that the amount received under one time settlement with the companies, the assessee has adjusted the same against the principal amount first. The interest portion has mostly been written off. Insofar as the learned Commissioner (Appeals) s finding that the amount received should have been first adjusted against the accrued interest and then towards principal, cannot be upheld as there is no such law which permits that adjustment should be first made against the interest and not towards the principal amount unless the parties have agreed to otherwise. The department cannot thrust upon the assessee that the amount received or recovery should be first adjusted against the accrued interest. It is the decision and mutual understanding of the parties as to how the adjustments should be made. Thus, the findings of the learned Commissioner (Appeals) on this issue are rejected. 53. Now coming to the issue that such a writing-off cannot be allowed as the investment in the ICDs was not part of the business activity. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner (Appeals), it was submitted that it had capitalised interest expenditure in its books of account to comply with the requirement of the AS-16, issued by the ICAI. However, the accounting entries made in the books of account are not conclusive for the treatment of tax. It was further submitted that provisions of proviso to section 36(1)(iii) will not be applicable as the said proviso came into force w.e.f. A.Y. 2004 05. Finally, reliance was placed on the judgment of Hon'ble Supreme Court in the case of Core Health Care, 298 ITR 194 (SC). The learned Commissioner (Appeals) accepted the assessee s contentions and allowed the assessee s ground after observing and hold as under: "2.4 I have considered the submissions of the appellant. As per provisions of sec.36(1)(iii) of the Income Tax Act, any interest paid on borrowed capital is to be allowed as deduction if the borrowed capital is used for the purpose of business. According to the Assessing Officer, if the borrowed capital is used for the purpose of acquiring capital assets, then interest upto the date, on which the asset acquired is put to use, is to be capitalized. This issue has come before the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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