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2016 (11) TMI 366

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..... ing in view of the peculiar facts and circumstances of the case , the ground raised by the Revenue in this appeal w.r.t. computation of disallowance u/s 14A of the Act of the expenditure incurred by the assessee in relation to earning of exempt income lacks merit and is hereby dismissed and we confirm the disallowance u/s 14A of the Act to be at ₹ 1 lacs for the assessment year 2007-08 as sustained by learned CIT(A). Addition on account of provision for write off of the dies - whether no actual sale or disposal of dies has taken place during the year of the old dies which has been shown as written off whereas actually the amount written off is in the nature of provision only? - Held that:- It is the say of the assessee that the dies left with the assessee with respect to Chakan Plant cannot be used because of the various restrictions on the assessee due to the non-compete agreement clauses. It is the say of the assessee that now these dies cannot be used by the assessee and also have became obsolete because of the agreement with MFL whereby the assessee agreed not to compete with MFL in persuant to demerger of Chakan Plant in favour of MFL and non compete-agreement with M .....

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..... by learned Commissioner of Income Tax (Appeals)- 5, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2007-08, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 30th December, 2009 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called the Act ). 2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under:- 1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance u/s.14A of the Income-tax Act, 1961 to ₹ 1,00,000/ - as against ₹ 2,93,198/ - made by the AO without appreciating the fact that assessee has made substantial investment during the previous year resulting into earning of exempt income. 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting disallowance of ₹ 1.99,00,801/- made by the A.O on account of provision for write off of the Dies without appreciating the fact that no actual sale or disposal of .....

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..... the dividend income of ₹ 10,19,208/- which had been claimed as exempt by the assessee u/s 10(34) of the Act. The A.O. relied on the decision of Special Bench of ITAT in the case of Daga Capital Management Ltd. (2009) 117 ITD 169(Mumbai)(SB), whereby it was held that Section 14A of the Act is a special provision which deals with disallowance of expenditure incurred by the assessee in relation to income which does not form part of total income. The expenses falling under any head or section which are otherwise deductible as business expenditure or under other respective heads would call for disallowance to the extent to which those expenses have been incurred in relation to earning of income exempt from tax. Thus, the A.O. made the disallowance of expenses relying upon provisions of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 @ 0.5% of the average value of investments of ₹ 5,86,39,500/- held by the assessee, which disallowance worked out to ₹ 2,93,198/- u/r 8D(2)(iii) of Income Tax Rules, 1962 and was disallowed by the AO while computing income of the assessee vide assessment order dated 30-12-2009 passed by the AO u/s. 143(3) of the Act. 5 .....

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..... ear 2007-08 is correct. However, reasonable disallowance of expenditure incurred in relation to earning of exempt income has to be made u/s 14A of the Act. The assessee s investments as on first and last day of the previous year were ₹ 702.99 lacs and ₹ 469.80 lacs respectively and the assessee has earned exempt income by way of dividend of ₹ 10,19,208/-. The assessee has itself made disallowance of ₹ 10,000/- u/s 14A of the Act. No further expenses were claimed to have been incurred but no basis/ details have been given by the assessee to arrive at the disallowance of ₹ 10000/- u/s 14A of the Act. The ld. CIT(A) held Rule 8D of Income Tax Rules, 1962 is not applicable prior to assessment year 2008-09 but that the said method provide basis to arrive at an average expense on proportionate basis related to exempt income even for earlier years, the ld. CIT(A) restricted the disallowance of expenses incurred in relation to earning of exempt income , u/s 14A of the Act to ₹ 1 lac and directed the A.O. to give appeal effect after adjusting the disallowance of ₹ 10,000/- voluntarily disallowed by the assessee u/s 14A of the Act, thus confirming th .....

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..... ection 14A of the Act to disallow expenditure incurred in relation to earning of exempt income having regard to the accounts of the assesseee as per mandate of Section 14A of the Act. We have observed that the assessee has earned dividend income of ₹ 10,19,208/- which was claimed as exempt income u/s. 10(34) of the Act and the ld. CIT(A) has restricted the disallowance u/s 14A to ₹ 1 lac. In our considered view, the disallowance of ₹ 1 lac u/s 14A of the Act keeping in view factual matrix of the case is quite reasonable. The A.O. has not undertaken any exercise to work out the disallowance having regard to the accounts of the assessee and merely applied Rule 8D of Income Tax Rules, 1962 in a mechanical manner which cannot be applied for the assessment year 2007-08 and earlier years in view of Hon ble Bombay High Court decision in the case of Godrej and Boyce Manufacturing Company Limited(supra) . Keeping in view of the peculiar facts and circumstances of the case , the ground raised by the Revenue in this appeal w.r.t. computation of disallowance u/s 14A of the Act of the expenditure incurred by the assessee in relation to earning of exempt income lacks merit and .....

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..... rsuant to the Scheme of Arrangement between the assessee and M/s Mahindra Forging Ltd.( hereinafter called the MFL )(Earlier known as Mahindra Automotive Steels Private Limited), the Chakan Plant of the assessee was demerged from the assessee company and merged with MFL. Till the year ended 31st March, 2006 , the assessee company was having two plants at Chakan and Chinchwad both located at Maharashtra. The Chakan Plant was producing the forged articles all of which were suitable for four wheelers. The Chinchwad Plant was producing the forged articles all of which were mainly suitable for two wheelers. Since M/s. MFL took over the business of Chakan Plant, M/s MFL requested the assessee not to compete with them in the manufacture of forged articles similar to the ones produced at Chakan Plant and accordingly Non-Compete Agreement was entered into. It was submitted that it was the accounting practice of the assessee company to claim deduction of the dies manufactured and consumed during the year. Similarly obsolete dies were being written off from time to time. Attention was invited to Schedule 21 to the Audited Account wherein accounting policies are given which is reproduced as u .....

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..... realized that the value of the dies carried in the Balance Sheet has diminished , the said reduction in the value of the dies has been written off by debiting to the Profit Loss Account which was allowed to the assessee company in respective years by the Revenue. The A.O. rejected the claim of the assessee. The A.O. held that the amount written off cannot be claimed during the relevant year and it may be allowable only when the actual event of disposing of the dies takes place. The assessee submitted that the conclusion of the A.O. to the effect that the amount written off is in the nature of provision is incorrect and contrary to the method of accounting followed by the assessee and prescribed u/s. 145 of the Act. The write off amount of ₹ 1,99,00,801/- is nothing but the reduction in the value of the inventories of dies carried in the balance sheet of the assessee company from year to year. Secondly , as the assessee company had demerged its Chakan Plant, the dies required and used for the said plant had become obsolete and therefore, the assessee had revalued the said obsolete and unusable dies at the end of the year. It was submitted that the A.O. failed to appreciate .....

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..... and the said dies were not sold during the previous year relevant to the instant assessment year and it is merely a provision for reducing value of dies in the books and to reduce profits. The ld. D.R. relied upon the order of the A.O.. 16. The ld. Counsel for the assessee submitted that pursuant to the Scheme of Arrangement/demerger, Chakan plant of the assessee was demerged and taken over by MFL. The assessee entered into agreement with MFL for demerger of Chakan Plant. In view of agreement with MFL persuant to demerger of Chakan Plant, the assessee cannot produce the same items as per the agreement with MFL so as to compete with MFL which is not allowed in view of terms and condition of agreement . The ld. Counsel submitted that these dies have become obsolete and cannot be used. He drew our attention to page 46 of the paper book whereby the details have been given w.r.t dies for the year from 2001-02 to 2012-13. He submitted that these dies were sold in the assessment year 2012-13 for ₹ 99,93,400/- and the said amount is offered as income of the assessee company for taxation in the assessment year 2012-13. The learned counsel submitted that the matter may be set aside .....

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..... law. We order accordingly. 18. The next ground i.e. ground no. 3 raised by Revenue is with respect to the deletion by the learned CIT(A) of disallowance of debit balance of creditors written off to the tune of ₹ 69,55,477/- made by AO without appreciating that the assessee failed to prove that the advances were given for the purpose of business and efforts were made for collection of the amounts advanced to the sundry creditors. The last effective ground i.e. ground No. 4 raised by the Revenue is with respect to the deletion by the learned CIT(A) of addition of sundry balances written off of ₹ 1,10,00,000/- made by the AO without appreciating the fact that assessee has not been able to explain the nature of such receivable amount and the same shall be treated as the amount paid by the assessee for internal settlement in respect of valuation of various balance sheet items in the scheme of demerger.Both the grounds are taken together. 19. The A.O. observed that the assessee company has written off debit balances of ₹ 69,55,477/-. The assessee was asked to substantiate the allowability of such write off with necessary evidences. In reply, the assessee submitted .....

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..... ments to them. This amount has been netted off against credit balance written back of ₹ 22.22 lacs. The amount of ₹ 43.05 lacs is pertaining to one of assessee s closed plant i. e., Faridabad. These amounts are written off as there may be no corresponding invoices received after the advance paid by the assessee. The assessee also filed statement giving party-wise details of debit balances in creditors accounts which amounts are written off in the year ended 31st March, 2007. It was submitted that these debit balances in the creditors account were carried forward prior to the accounting year ending on 31st March, 2003 and are reflected in the trial balance of the assessee for all the earlier years. The copies of trial balances reflecting the debit balances in the creditors account which are written off in the year under consideration which were reflected in the assessment years 2002-03 to 2006-07 were submitted. Similarly it was submitted that these advances were given as advance for supply of goods or services in the course of business but the said amount was not claimed as business expenditure in the respective years as the goods were not supplied or partly supplied or .....

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..... lowed by learned CIT(A) vide appellate order dated 20-03-2014 passed by learned CIT(A). 22. With respect to the disallowance of sundry balances written of ₹ 110 lacs, it was submitted by the assessee before the learned CIT(A) that the A.O. disallowed the amount on the ground that the assessee company could not explain the nature of such receivable amounts. The assessee submitted that the assessee had three plants; plant at Faridabad, plant at Chinchwad, Maharashtra and plant at Chakan, Maharashtra. In the year 2005, the assessee company demerged its Chakan Plant with MFL to sell the same to Mahindra Automotive Steels Private Limited(Now known as MFL) . To this effect, application was filed by the assessee with the Hon ble Bombay High Court along with the Scheme of Demerger for the Chakan Plant with effect from 1st April, 2005 , which scheme of demerger was approved by the Hon ble Bombay High Court on 27th March, 2006. During the course of the business, the assessee company had advanced various amounts from time to time to its Chakan Plant and accordingly in the books of the Chakan Plant for the year ended 31st March, 2006, the amounts were outstanding due and payable to th .....

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..... adjustment as the valuation of MFL differs from that of valuation of sundry debtors and advances and the said amount cannot be claimed as sundry balance written off whereas the same has been paid by the assessee for internal settlement in respect of valuation of various balance sheet items in the scheme of demerger and hence it was requested by the AO to confirm the addition as made in assessment order. The learned CIT(A) deleted the disallowance by holding that the sundry debtors and inventories were appearing in books of Chakan Plant which was demerged by the assessee and sold to MFL . The MFL has found that inventories and book debts are not good to the tune of ₹ 1.78 crores which was stated by MFL in its letter dated 13-10-2006 and ultimately the amount was settled for ₹ 1.10 crores and the balance debtors and inventories were taken over by MFL and this amount of ₹ 110 lacs was written off by the assessee. Thus, the ld. CIT(A) accepted the contentions of the assessee and the disallowance of ₹ 110 lacs was deleted by learned CIT(A) vide appellate order dated 20-03-2014. 23. Aggrieved by the appellate order dated 20-03-2014 passed by the ld. CIT(A), .....

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