TMI Blog2004 (10) TMI 278X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of components for which export has been made. 31,79,98,407 4. Excise duty paid and (CVD) paid on purchase of Components to be adjusted against excise duty Payable on finished products i.e. balance of RG 23-A Part-II. 69,93,00,428 5. Custom duty (CVD) paid to be adjusted against Excise duty payable on finished products 8,39,13,307 6. Custom duty paid in advance on goods in Transit/ under inspection 22,08,48,421 7. Custom duty included in closing inventory with vendors (imported tools) 50,28,051 8. Custom duty included in closing stock 69,12,41,610 9. Central Sales tax paid under protest 4,12,112 10. Excise duty paid under protest 41,26,902 11. Sales tax recoverable 3,08,79,171 Total 231,18,96,076 The Assessing Officer noted that such claim was rejected in the preceding assessment year. He further expressed his view that such claim could not be allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for this amount is to be set off against credit accrued and will not effect income computation." 5. Regarding deduction of Rs. 31,79,98,407 on account of custom duty paid on import of components for which export was made, the CIT(A) held as under: "The appellant has claimed an amount of Rs. 31,79,98,407 on account of custom duty paid on import of components for which export has been made. In respect of the above amounts the appellant was entitled to receive duty draw back on accrual basis as sales entitling duty draw back had already been completed and vehicles exported. The Assessing Officer will allow this amount of Rs. 317998407 as deduction for custom duty paid as cost of purchases but will simultaneously add the duty draw back on accrual basis at Rs. 317998407 as business income. This will effect computation of deduction under section 80HHC in view of definition of 'profits of the business' as given in clause (baa) of the Explanation to section 80HHC." 6. Regarding claim of Rs. 22,46,88,464 on account of custom duty paid on import of components for export purposes but export had not been made, CIT(A) held as under: "The appellant has claimed an amount of Rs. 22,46, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y against the other amount of Rs. 33,87,074 the appellant has a right for credit which has already accrued on sale. Therefore, deduction for this amount is to be set off against credit accrued and will not effect income computation." 10. Regarding two items of Rs. 4,12,112 and Rs. 41,26,902 on account of central sales tax and excise duty, the same were allowed by her since actual payments were made in pursuance of additional liabilities created by the concerned authorities. Aggrieved by the order of CIT(A), the assessee has preferred this appeal on such issue. 11. The learned counsel for the assessee, Mr. C.S. Aggarwal, has vehemently assailed the order of CIT(A) by raising various submissions. At the outset, he informed the bench about the method of accounting adopted by the assessee in respect of the disputed amounts. According to him, the assessee had adopted two methods of accounting, i.e. 'gross method' and 'net method'. According to 'gross method', the duty paid by assessee is included in the cost of purchase and, therefore Profit and Loss account stands debited with the purchase price and the duty paid and the proportionate duty is correspondingly included in the closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to deduction under section 43-B in the year in which there is purchase of raw material (input) since payment of excise duty at the time of purchase amounts to actual payment when assessee becomes entitled to modvat credit under the excise laws. It is irrelevant when such modvat credit is utilized against the duty payable on finished goods. Reliance was placed on the decision of Tribunal in the case of Honda Siel Power Products Ltd. (iii) That new section 145A introduced w.e.f.1-4-1999does not affect the claim of assessee under section 43-B. According to him, section 145A has overriding effect on the provisions of section 145 but does not override the other provisions of the Act. Therefore, in case of conflict, the provisions of section 43-B would prevail. Hence, the earlier judgments of Gujarat High Court in the case of Lakhanpal National Ltd. and of Calcutta High Court in the case of Berger Paints (I) Ltd. (No. 1) would still hold the field. Therefore, assessee would still be entitled to deduction under section 43-B where gross method is adopted by the assessee. Reliance was also placed on the decisions of the Tribunal in the case of Sona Steering System Ltd., Indian Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-B to buttress his argument that liability must precede the payment. Reliance was also placed on the provisions of Explanation 2 in support of above contention. (ii) The liability to pay excise duty accrues on the date of manufacture and not before. The expression 'any sum payable' in section 43-B has been defined in Explanation 2 which defines the same as a sum for which the assessee has incurred liability. Therefore, till the event of manufacture, there is no liability to pay excise duty. Hence, any sum paid in advance would not fall within the ambit of section 43-B. (iii) Any payment in PLA register is in the nature of amount set part to meet a future liability which may or may not arise. Hence, such payment cannot be said to be an expenditure since not irretrievably lost. (iv) Similarly, liability to pay custom duty arises only when goods are brought within the country for the purpose of use, enjoyment, consumption, sale or distribution so that they are incorporated and mixed up with the mass of the products of the country. Prior to such event, no liability is incurred. Reliance was placed on Delhi High Court judgment in the case of Trilochan Singh v. Union of India 1981 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 145A. Reliance was also placed on judgment of Calcutta High Court in the case of CIT v. Berger Paints (I) Ltd. (No. 2) [2002] 254 ITR 503. He also relied on the judgment of Supreme Court in the case of Mahendra Mills Ltd. v. P.B. Desai, AAC [1975] 99 ITR 135 where it was held that figures of closing stock of an assessment year would automatically became the opening stock of succeeding year. Hence, section 145A and judgment of Privy Council cannot be applied to opening stock. (viii) Section 145A would be applicable to adjust the purchase value of closing stock. Therefore, Modvat credit plus sales-tax paid on purchases would have to be adjusted in accordance with section 145A. Hence, no separate deduction under section 43-B would be allowed since such payments stand allowed once these are taken to Profit Loss A/c. In the rejoinder, the learned counsel for the assessee has submitted as under: 1. Deduction under section 43B is allowable in the year of payment irrespective of the fact whether goods are manufactured or not or the fact of incurring liabilities. The claim of assessee is fully allowable in view of recent Supreme Court judgment in the case of Berger Pain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary to the plain provisions of section 43-B. The decision of Special Bench of Tribunal in the case of KCP Ltd. v. ITO [1991] 38 ITD 15 (Hyd.) was also distinguished. Lastly, it was pleaded that if advance payment is held to be disallowable, then such payment should be allowed in the year in which the same is adjusted against liability to pay excise or taxes. Consequently, the advance payment made in the preceding year may be allowed in this year as such payment was finally adjusted against the liability. 5. That decision of Tribunal in the case of Amforge Industries is not more good law on account of subsequent judgment of Supreme Court in the case of Berger Paints India Ltd. and judgment of Allahabad High Court in the case of C.L. Gupta. The contention of the learned counsel for revenue, that judgment of Allahabad High Court is distinguishable on the ground that Explanation 2 was not considered, was disputed by submitting that Explanation 2 was quoted in the judgment and therefore, such contention of revenue should not be accepted. Even otherwise, such plea cannot be allowed to raise in view of Supreme Court judgment in the case of Ambika Prasad Mishra v. State of UP [1980] 3 SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot allowable unless liability to pay has accrued. On the other hand, Hon'bleAllahabadHigh Court has held that such payment should be allowed in the year of payment irrespective of the year in which liability to pay arises. There is no judgment of jurisdictional High Court or ofApex Courton this issue though it is claimed by the learned counsel for assessee that this issue stands covered by Supreme Court judgment in the case of Berger Paints India Ltd. 15. Before expressing any opinion on construction of section 43-B, it would be appropriate, at this stage, to find out whether judgment of Supreme Court in the case of Berger Paints India Ltd., clinches the issue before us. We have gone through the said judgment very carefully. In our humble opinion, that judgment does not support the case of assessee in as much as the duties paid by the assessee in that case were not advance payments. The Hon'ble Supreme Court has not expressed any opinion on the correctness of the judgment of Calcutta High Court against which the revenue was in appeal. What has been held by theApex Courtis that having accepted the judgments of Gujarat High Court in the case of Lakhanpal National Ltd. of Bombay Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., in the previous year relating thereto), suppose they actually pay excise duty of Rs. 100. Suppose also, that on the last day of the previous year, there is a closing stock of goods manufactured but not until then sold. According to the assessee's model, this closing stock of goods also caused some excise liability of the assessee, resulting in some payment of excise duty, which is also contained in the said aggregate excise duty paid, i.e. in the said sum of Rs. 100. Let us suppose that this part of excise duty paid, relatable to the closing stock only, is Rs. 10." The facts stated above clearly shows that excise duty included in the stock related to manufactured stock. Therefore, it was also a case where liability to pay excise duty had already been incurred and consequently, could not be termed as advance payments. 18. Similarly, in the case of Bharat Petroleum Corpn. Ltd. the assessee claimed deduction of Rs. 12,62,47,225 under the head 'Excise Custom Duty Paid' relating to closing stock as on31-3-1985. In the case of Chemicals Plastics India Ltd., the facts as noted by the court were as under: "The assessment year is 1984-85. The assessee is engaged in the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a) any sum payable by the assessee by way of tax, duty, cess or fee by what ever name called, under any law for the time being in force, or (b) to (f) ** (Not relevant) ** ** shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him; Provided ** ** ** Provided further ** ** ** Explanation (1).- ** ** ** Explanation (2).- For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law." The perusal of above provisions clearly shows that before allowing any deduction under section 43-B on the basis of actual payment, the following conditions must be satisfied: 1. That deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng taxes/duties paid on stock in trade is allowable under the residuary section 37. Section 37 refers to any expenditure, not being in the nature of capital expenditure or personal expenses of assessee, which is laid out or expanded wholly and exclusively for the purpose of business. It means that deduction must relate to an expenditure which is neither capital in nature nor in the nature of personal expenses. The scope of the word 'expenditure' appearing in section 10(2)(xv) of 1922 Act corresponding to section 37 of 1961 Act was examined by the Hon'ble Supreme Court in the case of Indian Molasses Co. Ltd. v. CIT [1959] 37 ITR 66. TheApex Courtdefined the meaning of the word 'expenditure' as under: "'Spending' in the sense of 'paying out or away' of money is the primary meaning of 'expenditure'. 'Expenditure' is what is paid out or away and is something which is gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure." In view of the above ruling, the advance payment of duty cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment in the case of Lakhanpal National Ltd. The issue relating to advance tax of duty was never before the Tribunal. Hence, that case is quite distinguishable on facts. 25. Special Bench decision in the case of Indian Communication Network (P.) Ltd. has already been commented upon by us while dealing with judgment of Calcutta High Court in the case of Berger Paints (India) Ltd. For the similar reasons, the Special Bench decision in the case of Food Specialities Ltd. is held to be distinguishable. 26. The only decision of the Tribunal which remain to be considered is the unreported decision in the case of Raj Sandeep Ltd. We have obtained the copy of the said decision from our record. The issue has been discussed in paras 17 to 21.Para17 refers to the facts in very brief. It only states that assessee had claimed deduction of Rs. 1,68,582 on account of excise duty paid in advance. Assessing Officer disallowed the claim on advance payment was deductible under section 43B. In para 18, it is stated that CIT(A) confirmed the order of Assessing Officer but reduced the addition to Rs. 61,992 as sum of Rs. 1,06,390 had already been confirmed in preceding year. Para 19 contains the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application to the Commissioner for withdrawing an amount from such account-current, the Commissioner may, for reasons to be recorded in writing, permit such assessee to withdraw the amount in accordance with such procedure as the Commissioner may specify in this behalf," In view of the above sub-rule, it could not be contended by the counsel for assessee that amount paid under sub-rule (1) of Rule 173G had gone for ever and non refundable in any case. Had this rule been brought to the notice of the Tribunal, the decision might have been different. Even according to general law, advance payment is always akin to loan/advance and can be appropriated against some liability. In the absence of such liability, the amount so advanced is liable to be refunded. There may be so many circumstances where assessee may not be in a position to manufacture. For example, for the reasons beyond control, the assessee may close down its manufacturing unit. In such cases, the advance payment has to be refunded. Besides, there may be fire or theft in the factory. The input may be destroyed due to natural calamities. In all such situations, the assessee may not be able to manufacture any goods for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is year. We are in complete agreement with such contention since such adjustment amounts to actual payment. Even the learned counsel for revenue has no objection to such contention provided such deduction was not allowed in the preceding year since double deduction of the same amount cannot be allowed. Considering the same, the order of CIT(A) is modified and the matter is remitted to the file of Assessing Officer who shall allow the alternate claim of assessee after verification if such deduction was not allowed in the preceding year. Since it has been held that advance payment did not represent the payment of excise duty, the question of including the same in the closing stock does not arise. Therefore, finding of CIT(A) to that effect is vacated. 30. The above finding of ours would apply mutates mutandis with reference to the sum of Rs. 8,41,460 and Rs. 6,76,075 representing PLA balances of R D cess on vehicles and excise duty on spare parts respectively. 31. At this stage, let us also deal with the deduction of Rs. 69,30,00,248 under section 43-B which represents modvat credit of excise duty which remained un-utilized by the end of the year under consideration. After givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43-B considering the same as actual payment. 33. The claim of the assessee, thus, is based on the footing that un-utilized modvat credit is nothing but advance payment of excise duty by the assessee and, therefore, should be allowed as deduction under section 43-B on the basis of actual payment. We have already adjudicated this issue at length in the earlier part of the order against the assessee by holding that advance payment of excise duty without incurring the liability in respect of such payment is not allowable as deduction under section 43-B. For the similar reasons, this claim of the assessee is also rejected. 34. Even otherwise, we are of the view that un-utilized modvat credit is not even payment of excise duty by way of any liability to pay such duty much less the advance payment. The liability to pay excise duty under the excise laws accrues only on the event of the manufacture of goods and not earlier as held by the Hon'ble Supreme Court in the case of Union of India v. Delhi Cloth General Mills Ltd. AIR 1963 SC 791. As per the scheme of excise law discussed earlier, the assessee becomes entitled to set off the amount of modvat credit against the liability to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B under the head 'Sales-tax recoverable a/c'. This amount is also in the nature of modvat credit under excise law. The relevant facts are that assessee pays certain amount of sales-tax on the purchase of raw materials and computers which are required to be used in the manufacture of cars. Though, the sales-tax paid is part of cost of raw material, the assessee debits the purchases net of sales-tax and the amount of sales-tax is debited to separate account 'Sales-tax Recoverable a/c'. Under the provisions of Haryana General Sales Tax Act, 1973, the assessee is entitled to set off such sales-tax against the liability of assessee on the sales of finished goods i.e. cars. Whenever the goods are sold, the tax on such sales is credited to the aforesaid account. The balance amount is shown in Balance-sheet on asset side. Again, the claim of assessee is based on the ground that amount of sales-tax debited to Sales-tax Recoverable A/c was actual payment of tax in advance. We have already rejected such contention in respect of modvat credit. For the similar reason, this claim of assessee is rejected. 38. However, we find merit in alternate contention that amount of Rs. 3,84,55,412 represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on imports forms part of cost of purchase and resultantly such element also forms part of closing stock. The Hon'ble Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 has held that closing stock, shown to the credit side of trading account, has the effect of cancelling the purchases to that extent debited to such trading account. Therefore, it cannot be said that deduction on account of purchases, to the extent included in the closing stock, stands allowed. Applying the same principle, it cannot be said that the custom duty paid and debited to profit and loss account stands allowed to the extent included in the closing stock. 40. This view of ours is also fortified by the decision of Tribunal in the case of Sona Steering System Ltd. where on similar facts such claim was allowed. In that case, the assessee was debiting the purchases in trading account inclusive of custom duty and showing the closing stock inclusive of such duty. Such method of accounting was in consonance with the method now prescribed in section 145 A. The assessee had claimed deduction under section 43-B equal to the amount of custom duty included in the closing stock but such claim was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance amount of Rs. 1,86,74,072 it is seen that CIT(A) has disallowed the same on the ground that it could not be considered as an expenditure as such duty pertained to goods in transit which are not routed through P L account. There is no reference to any material on the basis of which it could be said that goods were in transit. It is also not clear as to what the CIT(A) meant with the words 'in transit'. The counsel for assessee submitted that such goods were in transit from port to the place of assessee's business while ld. Counsel for revenue stated that goods had not reached the custom barrier and, therefore, payment of duty was only in the nature of advance payment which was not deductible under section 43B in as much as no liability to pay custom duty had accrued. According to him, the liability to pay such duty accrues only when goods cross the custom barrier. In the absence of any material on record, it is not possible for us to record a finding whether goods were in transit between port and assessee's place of business as contended by assessee or whether goods had not crossed the custom barrier as contended by learned counsel for revenue. Further, the legal posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bill of entry for home consumption is filed." Similar observations have also been made by Hon'ble Delhi High Court in the case of Trilochan Singh in para 8 as under: "Thus it is clear that the import is not merely the bringing into but comprises something more. It is with the intention of incorporating and mixing of the goods imported with the mass of the property already beyond the customs barrier in the local area." In view of the above judgments, liability to pay custom duty is incurred only when the goods reach the custom barrier and bill for home consumption is filed. However, in the present case, neither the necessary evidence is on record nor such aspect was considered by the lower authorities. Hence, we set aside the order of CIT(A) on this issue and restore the matter to the file of Assessing Officer for fresh adjudication after verifying the necessary facts and after giving reasonable opportunity to assessee to place necessary materials. If the Assessing Officer finds, the assessee had incurred the liability to pay such duty in the year under consideration, he shall allow the claim of assessee. 45. Now coming to the addition of Rs. 31,79,98,407 in respect of dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch such income accrues to the assessee. 47. Thus, the contention of the assessee that income is taxable in the year of receipt cannot be upheld. Prior to the amendment effective from1-4-1997, section 145 as originally enacted permitted the assessee to compute business income in accordance with any method of accounting regularly employed by assessee. It permitted even the hybrid system of accounting meaning thereby that assessee could adopt one method of accounting for one part of income while other method of accounting for other part of income under the same head of income. So upto assessment year 1996-97, the assessee could offer the duty drawback income on cash basis even though income from business of manufacturing car was offered on mercantile basis. But w.e.f. assessment year 1997-98, such hybrid system of accounting is not permitted and the assessee has to choose either cash or mercantile system of accounting. Having chosen mercantile system of accounting, the assessee is now not permitted to compute income of duty draw back on cash system of accounting. Therefore, it has to be computed on accrual basis only. 48. However, that is not the end of the matter. The question st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee until the claim was accepted by the authorities. 50. In view of the above discussion, it is held that no amount of duty drawback can be said to accrue to the assessee until such claim is accepted by the concerned authorities. Therefore, conclusion of CIT(A) that duty drawback accrued to the assessee immediately on the event of export made by assessee cannot be upheld. However, there is no evidence on record to verify this factual aspect whether the claim of assessee was accepted by the concerned authorities. Therefore, the order of CIT(A) is set aside on this aspect of the issue and the matter is restored to the file of Assessing Officer for verification as to when the claim of assessee was accepted. If the Assessing Officer finds that claim of assessee was not accepted in the year under consideration, then no addition shall be made by him. However, if it is found that claim of assessee was accepted in the year under consideration, then to that extent, the addition would be retained. However, in the later situation, the addition would have to be deleted in the year in which it has been offered for taxation if such claim of deduction is made before the appropriate author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard. During the year under consideration, the assessee could export only 17,920 cars as against 21500 cars. As such, there was a shortfall which resulted in liabilities to pay custom duty in terms of the said order/bond. As per terms of the bond, the assessee was required to pay such amount within 30 days from the end of financial year. In view of such liability, assessee paid the sum of Rs. 2,99,12,931 on28-4-1999. The assessee had claimed depreciation in respect of this amount since value of the capital goods was enhanced by the said amount. The Assessing Officer disallowed the claim of assessee by observing "By adding this amount to the plant and machinery, the assessee has altered the actual cost of assets which is not permissible under the provisions of Income-tax Act". On appeal, the CIT(A) upheld the disallowance on different ground by observing "that liability for payment of custom duty on shortfall in export obligation only arises when the appellant agrees to pay the custom duty which the appellant did in this case on28-4-1999". According to CIT(A), the liability did not incur in the year under consideration and, therefore, no depreciation could be allowed in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plea of CIT(A). The depreciation is allowable with reference to actual cost. The actual payment has nothing to do with the determination of actual cost particularly when mercantile method of account is adopted by the assessee. As soon as the liability is incurred to pay, it becomes the cost of assets. The claim of assessee cannot be denied merely because the payment is not made. It is also not the case of revenue that component of custom duty does not form part of actual cost of assets. The only argument of ld. Counsel for revenue is that liability being contractual did not crystallize in the year under consideration. We are unable to agree with such contention. As soon as the capital goods were imported, the statutory liability to pay custom duty was incurred. However, as per the scheme of Custom Act, exemption from payment of such duty could be allowed if certain quantity of export was made by assessee. In the present case, such exemption was allowed to assessee subject to the condition that assessee would export 11000 cars in financial year 1995-96 and 21500 cars for each of the next six years. In case of failure to export such cars, the assessee was liable to pay proportionate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 56. The matter was carried in appeal before the CIT(A) before whom it was submitted (i) the company had sufficient interest free funds for making such investment and there was no direct nexus between the earning of tax free income and expenditure incurred; (ii) the use of term 'in relation to' under section 14A requires a direct nexus in view of Supreme Court judgment in the case of Madhav Rao Jiva Ji Rao Scindia v. Union of India [1971] 1 SCC 85 and Navin Chemicals Mfg. Trading Co. Ltd. v. Collector of Customs [1993] 4 SCC 320; (iii) that the investment in shares actually amounted to Rs. 193,80,27,000 because a sum of Rs. 24 crores was on account of investment made in debentures of Maruti countrywide Automobiles Finance Ltd. interest on which is taxable; (iv) that the Assessing Officer calculated interest at the rate of 18 per cent for the full year while interest if any to be disallowed should have been computed on day-to-day product method with respect to cost of funds to the company. The CIT(A) distinguished the judgments of Supreme Court relied on by assessee and held that direct and approximate relationship is not necessary. However, as per CIT(A), an effort was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the year of Rs. 2143.35 crores and at the close of the year Rs. 2622.37 crores and, therefore, the net own funds of the company were far in excess of the investments made by the appellant company of Rs. 217 crores to earn the tax free income. Further, the assessee had net profit of Rs. 975 crores which alone far exceeded the investment in shares. Hence, no inference could be drawn that investment in shares was out of borrowed funds. Reliance was also placed on Calcutta High Court judgment in the case of Indian Explosives Ltd. v. CIT [1984] 147 ITR 392 as well as Madras High Court judgment in the case of CIT v. Hotel Savera [1999] 239 ITR 795; (vii) that merely the fact that on the date of investment, the bank account had borrowed funds, it could not be said that borrowed money had been used for making investment in shares; (viii) that provisions of section 14A could not be applied to the year under consideration since it was inserted by Finance Act, 2001 w.e.f. 11-5-2001; (ix) Alternatively, it was also pleaded that the learned CIT(A) has failed to appreciate that interest has been computed on day-to-day product method by adopting the period equivalent to number of days from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o made to Rule 7 of Income-tax Rules, 1962. 59. Rival submissions of the parties have been considered carefully in the light of case law referred to and the material placed before us. The first aspect of the issue relates to the scope of section 14A. Prior to insertion of section 14A, the legal position regarding allowability of expenditure was like this: "Where an assessee is carrying on one indivisible business and a part of income is either excluded or is exempt under any provision of the Income-tax law, it is not permissible to disallow the proportionate part of the expenditure attributable to such exempted or excluded income". Reference can be made to the judgments of Supreme Court - CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajas than State Warehousing Corpn.'s case. However, where different activities do not constitute one and the same business and income from some activity is not taxable, the composite business expenditure has to be apportioned to each one of the activities. Reference can be made to judgment of Supreme Court in the case of Waterfall Estates Ltd. v. CIT [1996] 219 ITR 563, Perhaps, the legislature never intended to allow the deduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that interest paid by assessee on borrowed funds related to acquisition of shares yielding tax free income. 61. Another aspect of the matter relates to the meaning of the words 'in relation to' used by the legislature in section 14A. In our humble opinion, the meaning of any expression or words should be construed in the light of the context and the purpose intended to be achieved by the legislature. The purpose of the legislature is to disallow the expenditure which has been incurred by the assessee for earning tax free income. Therefore, the words 'in relation to' would include any expenditure which is proved to have nexus directly or indirectly with the utilization of funds for earning tax free income. However, as already stated, the burden is heavy on the revenue to prove the same. 62. In the light of the above legal position, let us examine the facts of the case. We have examined the material placed before us. The Assessing Officer had disallowed the interest without reference to any material. However, CIT(A) has observed that an effort was made to link the availability of funds on the date of each investment yielding tax free income. It was further observed that sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. This issue has been disallowed by Assessing Officer in para 5.9 of his order. It is observed that above claim was made on accrual basis while upto assessment year 1993-94 it was being claimed on the basis of actual expenditure. This change had not been accepted in part by his predecessor. It was also observed that CIT(A) had allowed the change but the said order was not accepted and appeal is pending before the Tribunal. Accordingly, he did not accept the claim of assessee on accrual basis. Since the assessee did not file the details of actual expenditure, the entire claim was disallowed. 64. On appeal, it was contended before CIT(A) that as per technical evaluation and based on past experience, the assessee was scientifically able to estimate the warranty claims. Reliance was placed on Supreme Court judgment in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 as well as judgment of Privy Council in the case of IRC v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697. Alternatively, it was claimed that expenditure of Rs. 10,73,21,503 be allowed on actual basis. The CIT(A), considering various judgments of Supreme Court and High Courts, held that liability b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------- The CIT(A) allowed the deduction in respect of expenses incurred for upgradation of software and for maintenance of software. 68. Regarding the balance amount of Rs. 13,99,91,022, it was seen that this amount was spent on acquisition of the following software: Rs. 1. ERP Application Software 91,36,496 2. Enterprise management Application software 38,67,322 3. Application Software for creation and management Parts 8,25,000 4. Director Multimedia Software 48,000 5. Software for Civil Engineering 45,000 6. Software for sales incentive monitoring 30,600 7. Software for designing tiles for captive consumption 13,650 8. Software for keeping records of development 12,954 spare in production division 9. Software for Bills of Entry processing 12,000 ----------- 1,39,91,022 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d byInstituteofChartered Accountantseffective from1-4-2003. He also relied on the following decision for the proposition that expenditure on software was revenue expenditure: (1) Bank of Punjab Ltd. v. Dy. CIT [2002] 122 Taxman 235 (Chd.) (Mag.) (2) Media Video Ltd. v. Joint CIT [2002] 122 Taxman 28 (Chd.) (Mag.) (3) Business Information Processing Services v. Asstt. CIT [1999] 106 Taxman 116 (Jp.) (Mag.) (4) Gurudev Engineers (P.) Ltd. v. ITO [1990] 34 ITD 297 (Mad.) (5) ITC Classic Finance Ltd. v. Dy. CIT [2000] 112 Taxman 155 (Cal.) (Mag.) (6) CIT v. K Co. [2003] 181 CTR (Delhi) 378 (7) Dy. CIT v. TCIL Bellsouth Ltd. [2003] 130 Taxman 37 (Delhi) (Mag.) Proceeding further, it was also submitted that expenditure in respect of ERP application software be allowed as a business since it was not found to be feasible to implement in the instant year. 71. On the other hand, the learned counsel for revenue has reiterated the reasonings given by the CIT(A) and also relied on the judgment of Rajasthan High Court in the case of CIT v. Arawali Constructions Co. (P.) Ltd. [2003] 259 ITR 30 for the proposition that expenditure on acquisition of software is capital expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure on purchase of software is a capital expenditure. There is no contrary judgment on this aspect of issue. Hence, it has to be held that software is an asset. Admittedly, the assessee is not in the business of software. Hence, we are further of the view that software was a capital asset as far as the present assessee is concerned. The Income-tax Rules, 1962 as amended w.e.f.1-4-2003rather helps the revenue and not the assessee in as much as it provides for depreciation on software at the rate of 60 per cent. By providing higher depreciation, it cannot be said that prior to1-4-2003, it was revenue expenditure. It was always a capital asset. Prior to1-4-2003, the assessee was entitled to normal rate of depreciation which was enhanced to 60 per cent by the amendment considering the rapid wear and tear. The judgment of Supreme Court in the case of Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 also supports the view taken by us in as much as their Lordships held that know how is part of plant and machinery and assessee is entitled to depreciation thereon. Before concluding this issue, we would like to refer to one more judgment of Supreme Court in the case of Arvind M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36,496 in respect of ERP Application Software. We are in agreement with the reasoning given by the CIT(A). The expenditure was admittedly not incurred in the year under consideration. It has been merely written off in this year as it was not found feasible. Even assuming, for the sake of argument, that expenditure was of revenue character, it could be allowed only in the earlier years where actual payments were made. Hence, question of allowing as business loss in this year does not arise. Business loss can be allowed only with regard to trading asset which is not the case before us. We have already held that expenditure related to capital asset. Hence, loss, if any, was capital loss and could not be allowed as deduction. 76. In view of the above discussion, it is held that disallowance was rightly made by Assessing Officer and sustained by CIT(A). The order of CIT(A) is, therefore, upheld on this issue. 77. The next issue relates to the disallowance of Rs. 32,41,870 in respect of litigation expenses. It was found by CIT(A) that expenditure was made in connection with CBI cases against its employees - Pramod Kumar Minocha and Ambuj Jain. Hence, following Supreme Court judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected with criminal activity of employees i.e. misappropriation of funds of assessee company. Such criminal activity was an offence for which one of the two employees was convicted and sentenced to imprisonment for 5 years. It was also submitted that criminal proceedings were not against company and, therefore, it could not be said that expenses was incurred for protecting the goodwill and image of the company. Hence, it was submitted that expenses was disallowable in view of Supreme Court judgment relied on by CIT(A). 81. Rival submissions of the parties have been considered carefully in the light of material placed before us and the case law referred to. The disallowance has been made by the Assessing Officer and sustained by the CIT(A) on the footing that expenditure in respect of litigation in the criminal proceedings is not allowable in view of the Supreme Court judgment in the case of H. Hirjee. In our opinion, the said judgment was delivered on the facts of that case and that judgment is not an authority for the proposition that litigation expenses in connection with the criminal proceedings are per se disallowable. This position has been clarified by the Hon'ble Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y approved by the various resolutions. In our opinion, if the employees had acted in good faith then it is the duty of the employer to defend them against any proceedings initiated against such employees otherwise the goodwill and image of the company would be spoiled in the commercial world and no person in future would join such company. Further, there may be unrest among the employees if the employer does not defend the case of employees who had acted in good faith on behalf of the employer. It is not the case of misappropriation of funds by the employees. It is a case where the transactions were effected between the assessee company and UCO Bank through a broker Harshad Mehta. In fact, the company had appreciated the work of Pramod Kumar by giving him promotion. As far as Ambuj Jain is concerned, he has gone on training and, therefore, had no involvement in such transactions. In fact, he was acquitted on this ground. Considering the facts of the case, we are of the view that the company had incurred the expenditure to safeguard its goodwill and image by defending its employees and, therefore, such expenditure can be said to have been incurred for the purpose of business. Conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------- 85. Both the parties have been heard on this issue. The interest on others represents interest on tooling advance to vendors, interest received from dealers for late payment, interest on advances to employees and interest on investment in its joint venture, namely, M/s. Sona Koyo Steering Systems Ltd. and M/s. J.J. Impex (Delhi) Ltd. The learned counsel for revenue has fairly agreed that such interest should have been assessed as business income. Accordingly, the order of CIT(A) to that extent is set aside and the Assessing Officer is directed to treat such interest as business income. 86. Regarding miscellaneous income, it is stated that it represents cash discount received against timely payment in respect of raw materials, royalty from joint ventures, royalty on trade marks, sales of sales promotion materials, shortage recovered from dealers, income from job work, rent from land, late fee on library books, documentation charges. The learned counsel for revenue could not seriously argue in respect of such income and simply relied on the order of CIT(A). In our opinion, such income, except ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideIndia. As far as consumption of raw material is concerned, the same was taken by the assessee in its profit and loss account on the basis of balancing method, i.e., opening stock plus purchases minus closing stock. 90. An enquiry was made by the Central Excise authorities in the case of the assessee in order to find out whether the assessee had rightly claimed the Modvat credit in various years Such enquiry revealed that the closing stock as on 28-2-1999 was more in the Statutory Register RG-23 A Part I by Rs. 1754.83 crores as compared to the stock inventory prepared physically by the assessee on such date. An exercise was made by the assessee to reconcile this huge difference. On such reconciliation, it was found that there were various errors, which were committed by the assessee including posting errors. Ultimately, the unexplained difference remained at Rs. 643.34 crores which the assessee could not explain. Accordingly, a show-cause notice was issued by the Central Excise Authorities to the assessee to explain as to why difference of Rs. 108.39 crores be not recovered in respect of such difference. This show-cause notice contained all the lapses on the part of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. However, the CIT(A) upheld the addition made by the Assessing Officer by observing as under: "5.2 I have considered the arguments of the appellant as also the contentions raised in the assessment order which have been elaborated and supplemented by the counsel for the Assessing Officer. I am of the view that the importance of RG-23A Register cannot be underplayed. The appellant's maintenance of stock records of purchases of raw material and components without recording the issue of raw material and components is not a reliable basis for working out the consumption. It is also to be noted that in the computerized stock record, inputs on receipt basis and issues on the basis of bill of material prevalent on that day are recorded and the balance of inputs after both the entries carried over to the next day but the previous days entries are not saved and accordingly this record is not open to verification. It is also not clear as to how bill of material system makes entries for work in progress. Therefore, the nature and character of RG-23A Register has been appropriately highlighted in the arguments of the counsel of the department. The register is expected to be day to day recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interacting with the excise authorities. Wherever the company was able to provide proper explanation with the support of the documents, the excise authorities gave credit for consumption and finally in its application before the Settlement Commission in para 42, the company admitted a total duty liability of Rs. 108,39,25,925.09 towards the unreconciled discrepancy between RG-23A part I stock and the physical stock. In the issue to be settled before the Settlement Commission the company had itself listed 'liability of the applicant towards the credit taken by them on the use of the inputs not satisfactorily accounted/explained'. Therefore, the stand of the company that the consumption can be explained with reference to certain theoretical models is not acceptable. Theoretical models cannot explain the discrepancies identified with reference to RG-23A which was the statutorily maintained consumption records of the appellant. And these remained unexplained even during the income-tax proceedings and the fact that the appellant agreed to pay excise liability of more than 108 crore proves the charge of overstating of consumption. RG-23 register maintained by the assessee in the course o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I also find merit in the stand of the department that the Assessing Officer was not bound by the figure of profits shown in the accounts and the failure of the ITO to make an explicit statement that from the method of accounting employed by the assessee profits made could not be properly deduced is not of much significance as the order clearly suggests such a finding because the account version of the assessee has been rejected and correct profits of the business computed by disallowing consumption of Rs. 643.34 crores. Provisions of section 145(3) still provide the authority for rejection of account version of the appellant. Acceptance of accounts in earlier years is not of any significance as principles of res judicata are not applicable to income-tax proceedings as held by Supreme Court in the cases reported in 52 ITR 335, 67 ITR 106 and 84 ITR 273. The acceptance of closing stock does not mean that consumption cannot be questioned. 5.7 In view of the factual and legal position discussed in preceding paragraphs, I confirm the addition of Rs. 643,34,23,524 made by the Assessing Officer." Aggrieved by the same, the assessee is in appeal before the Tribunal. 93. The learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Paper Book C-3. In view of the same, it was pleaded that CIT(A) should not have rejected the authenticity of the financial records of the assessee. To support his submissions, he relied on the following decisions: 1. ITO v. Oswal Emporium [1989] 30 ITD 241 (Delhi) (TM) 2. Pandit Bros. v. CIT [1954] 26 ITR 159 (Punjab) 3. M. Durai Raj v. CIT [1972] 83 ITR 484 (Ker.) 4. Jhandu Mal Tara Chand Rice Mills v. CIT [1969] 73 ITR 192 (Punj. Har.) 5. CIT v. Padamchand Ram Gopal [1970] 76 ITR 719 (SC) 6. Axia Engg.Co.v. ITO 56 ITD 335 (Chd.) (sic) 7. Ganesh Foundry v. ITO [2000] 67 TTJ (Jd.) 434 8. 67 TTJ 722 (Jd.) (sic) 9. Orissa Ceramic Industries Ltd. v. CIT [1977] 107 ITR 345 (Ori.) 10. St. Teresa's Oil Mills v. State ofKerala[l970] 76 ITR 365 (Ker.) 11. R.B. Bansilal Abirchand Spg. Wvg. Mills Ltd. v. CIT [1970] 75 ITR 260 (Bom.) 12. Siddheswari Cotton Mills (P.) Ltd. v. CIT [1979] 117 ITR 953 (Cal.). 95. Thirdly, it was submitted by him that the CIT(A) was not justified in giving precedence to RG-23A register over the financial record of the assessee. It was argued by him that the purpose of this register is very limited i.e., to ascertain the fact whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... breach of not properly maintaining RG-23A in the manner required and, therefore benefit of deduction under the Income-tax Act could not be lost on that account. Therefore, the charge under the excise law could not be equated with the excessive consumption as alleged by the Assessing Officer. Proceeding further, it was submitted that there was no admission on the part of the assessee regarding the consumption as stated by the lower authorities. According to him, the reason for making application before the Settlement Commission was to buy peace. It was also submitted that further reconciliation was not only infeasible on account of time and cost involved but also was difficult due to the absence of the basic documents pertaining to the preceding years also. In addition, it was submitted that assuming that the books of account were incomplete then the lower authorities should have acted reasonably and determined the income of the assessee after estimating the true figure of consumption of material in the relevant financial year. 99. Seventhly, it was submitted that entire shortage did not pertain to the year under consideration as is evident from the statement of variation between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors' report to the effect that closing stock balances were not made available to them and, therefore, it was not possible to make any comparison with the physical stock at the end of the year. 103. Proceeding further, it was submitted that assessee had never been able to reconcile the balance difference of Rs. 643 crores either before excise authorities or before Income-tax authorities or even before the Tribunal. If computerized records are maintained then it should have come forward with the reconciliation regarding the balance difference. The only explanation given by the assessee is that such difference is because of computer error, non positing of diversions by way of pilferages, rejections and transfer to spare division. Such explanation is general one. Whatever assessee could explain was accepted by the excise authorities. No further reconciliation was made before the Income-tax authorities. Hence, question of accepting the assessee's contention does not arise. 104. In the absence of plausible reconciliation, it was submitted, the assessee cannot take shelter behind the arithmetical formula for explaining the requisite consumption. The onus is on the assessee which it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of accounting and process of manufacture to point out that consumption shown in books of account was correct. (vii) The fact that reconciliation of Rs. 1100 crores approximately pertained only to 600 items out of 12000 components is evident from the summary chart appearing at page 4503 of Paper Book 'L'. (viii) That maintenance of stock register is not the sine qua non for determination of profits. Mere non maintenance of the same cannot be the basis for rejection of books of account. Reliance is placed on following decisions: 1. Pandit Bros.' case 2. M. Durai Raj's case 3. Axia Engg.Co.'s case 4. Ganesh Foundry's case 5. 67 TTJ 722. 6. State ofOrissav. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC) (ix) That the method of derivation of consumption adopted by assessee is in accordance with the practice in Industry. Reliance was placed on some annual accounts of leading companies. (x) Reliance was placed on judgment of Supreme Court in the case of Charandas Haridas v. CIT [1960] 39 ITR 202 for the proposition that for the determination of profits under Income-tax Act, regard should be had to provisions of Income-tax Act and not the provisions of other laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee as held by the Hon'ble Supreme Court in the case of S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579. Their Lordships observed as under: "That in cases such as the instant case, the keeping of a stock register was of great importance because that was a means of verifying the assessee's accounts by having a 'quantitative tally'. If, after taking into account all the materials including the want of a stock register, it was found that from the method of accounting the correct profits of the business were not deductible, the operation of the proviso to section 13 of the Income-tax Act would be attracted. The Income-tax Officer, even if he accepted the assessee's method of accounting, was not bound by the figure of profits shown in the accounts. It was for the Income-tax authorities to consider the material placed before them and, if in any case, after taking into account the absence of a stock register coupled with other materials, they were of the opinion that the correct profits and gains could not be deduced, then they would be justified in applying the proviso of section 13." From the above observations, it is clear that trading results can be rejected in the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Now the crucial question is whether derivated figures of consumption of raw material i.e. opening stock plus purchases minus closing stock can be considered as correct formula for determining the true and correct profits of the business. In our opinion, the answer is in negative. Firstly, this formula can be applied only where there is no dispute to the correctness of the closing stock. In the absence of stock register, the authenticity of closing stock is always unverifiable unless the stock is physically verified. However, in the present case, the stock was physically verified by assessee as on28-2-1999and closing stock was then prepared after making adjustment of entries in the month of March. Even the Assessing Officer has accepted closing stock. Hence, this difficulty would not arise in the present case. So we will proceed on the footing that closing stock shown by the assessee is correct. Still, in our opinion, the derivated figure need not be correct. Such figures can never be a substitute of actual consumption which can only be arrived at by maintaining day to day consumption record (stock register). We would explain the incorrectness of the derivated figures by following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has not been able to give any explanation for the difference of Rs. 643 crores and odd. 116. Coming to the decision of the Excise Tribunal referred to by the learned counsel, we are of the view that the same is distinguishable on the facts of the case. In that case it was found as a fact that there was not only shortage of Rs. 27.67 crores but also excess of Rs. 17 crores. Considering the errors on both sides, the Tribunal was of the view that error was only 0.24 per cent, which was within tolerance limits. However, in the present case, there is no admission of excess variation and shortage is very huge of Rs. 643 crores which is not within the tolerance limits. Hence, that judgment cannot be applied to the present case. 117. In view of the above discussion, we are of the view that neither the entire addition can be upheld nor deleted in the absence of any reliable evidence. Now the question which arises for our consideration is how to compute the profits. Section 145(3) provides that Assessing Officer may proceed to assess in the manner provided in section 144. Section 144 provides the assessment on best judgment basis. No doubt, such assessment cannot be arbitrary a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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