Betex India Limited, Surat vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL " D " BENCH, AHMEDABAD (BEFORE SHRI SHAILENDRA Kr. YADAV, J.M. & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. No. 2280/AHD/2011 (Assessment Year: 2008-09)

M/s. Betex India Ltd. 504, V/S The D.C.I.T., Circle-1, Surat Trividh Chambers, Ring Road, Surat

(Appellant) (Respondent)

PAN: AABCB2413L

Appellant by : Smt. Urvashi Sodhan, A.R. Respondent by : Smt. Sonia Kumar, Sr. D.R.

(आदे श)/ORDER

Date of hearing : 22-04-2015 Date of Pronouncement : 15 -05-2015

PER SHRI ANIL CHATURVEDI,A.M.

1. This appeal filed by the Assessee is against the order of CIT(A)-I, Surat dated 28.06.2011 for A.Y. 2008-09.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a company stated to be engaged in the business of Dyeing and

Printing of Synthetic Cloth on Job Work basis. Assessee initially electronically filed its return of income for A.Y. 2008-09 on 30.09.2008 declaring total income at Rs. Nil. Subsequently it filed revised return of income on 17.08.2009 showing total income at Nil and the reason for 2 ITA No 2280/AHD/2011 . A.Y. 2008-09 revising the return of income was stated to be mistake in calculation of depreciation. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order dated 30.06.2010 and the total income was determined at Rs. Nil after making certain disallowances/additions and after adjusting the brought forward unabsorbed depreciation of Rs. 2,18,61,594/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 28.06.2011 dismissed the appeal of the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following grounds;-

(1) ADDITION ON ACCOUNT OF CLOSING WORK- IN -PROCESS:-

On the facts and circumstances of the case as well as law on the subject, the Ld. CIT(A)-I, Surat has erred in upholding the action of the Ld. DCIT, Circle-1, Surat, of making an addition on account of Closing Work-In- Process of Rs. 9,16,858/-, even though the Appellant stated that it is engaged in the business of Dyeing & Printing of Synthetic Cloth on Job Work basis only.

(2) ADDITION U/S 14A OF THE INCOME TAX ACT 1961.

On the facts and circumstances of the case as well as law on the subject, the Ld. CIT(A)-I, Surat has erred in upholding the action of the Ld. DCIT, Circle-1, Surat, of making an addition u/s. 14A of the I.T. Act 1961 of Rs. 5,18,888/-.

4. 1st ground is with respect to addition on account of closing work in progress.

5. During the course of assessment proceedings and on perusing the Balance sheet, A.O noticed that Assessee had not shown closing stock of work in progress. The Assessee was asked to explain the same to which Assessee interalia submitted that Assessee does job work and the raw materials are not owned by the Assessee but belong to the party who gives the work for processing. It was further submitted that the processing cycle was 2 to 3 days and therefore the colors, chemicals and labour used for the grey which are on machines at the year end was very insignificant. It was further 3 ITA No 2280/AHD/2011 . A.Y. 2008-09 submitted that the Assessee was following the same method consistently. The submissions of the Assessee was not found acceptable to the A.O as he was of the view that valuation of closing stock was an important component and unless the correct value of stock at the year end is credited to the trading account, a distorted picture and the trading results will emerge. He thereafter taking into consideration the total cloth processed by the Assessee and on the basis of 26 working days per month, worked out the average of process of cloth per day and after considering the processing cycle to be of 5 days, worked out the closing stock of work in progress and made addition of Rs. 2,47,678/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

7.Decision:

The Assessing Officer has given sound reasons for making this addition. In fact, out of value of closing stock worked out at Rs.9,16,858/-. A.O. has given credit for opening stock of Rs.6,69,180/- Which was added last year as closing WIP. The action of the A.O". last year was upheld by CIT(A). Accordingly, A.O. followed this practice this year also. In fact, A.O. has been very reasonable in giving credit of addition made last year. The appellant has not led any credible argument which would call for interference with A.O.'s Order. In view of the above, action of the A.O. is held correct and addition of Rs.2,47,678/- (Rs.9,16,858-Rs.6,69,180) is upheld.

Thus, this ground of appeal is dismissed.

6. Aggrieved by the order of ld. CIT(A), Assessee is now in appeal before us.

7. Before us, at the outset the ld. A.R. submitted that identical issue arose in the case of Assessee in A.Y. 05-06 and when the matter was carried before Hon'ble Tribunal, Hon'ble ITAT after considering the various decisions cited in the order decided the issue in favour of the Assessee. She also placed on record the copy of the aforesaid decision in ITA No. 799/AHD/2009 order dated 22.07.2011. She therefore submitted that since the facts and circumstances of the case in the year under appeal are identical

4 ITA No 2280/AHD/2011 . A.Y. 2008-09 to that of A.Y. 05-06 and since the issue has been decided in earlier year in Assessee's favour, the ground be decided in favour of the Assessee. Ld. D.R. on the other hand supported the order of A.O and ld. CIT(A).

8. We have heard the rival submissions and perused the material on record. We find that an identical issue of valuation of closing stock of work in progress arose in the Assessee's own case in A.Y. 05-06 before the Co-ordinate Bench of Tribunal. The Co-ordinate Bench of Tribunal after relying on the various decisions cited in the order, decided the issue in favour of the Assessee by holding as under:-

5.3 Indisputably, the assessee is doing the job work and the grey cloth lying in the premises or in the machine at the end of accounting year belongs to other parties. The assessee consistently following the method of valuation right since its inception and has been accepted by the Department. The assessee never reflected any opening stock of work in progress nor closing stock thereof. The ITAT in the case of Gagan Silk Mills. P. Ltd.

(supra) allowed a similar claim of the assessee while holding that the A.O was not correct in law in valuing the work in progress in respect of various expenses incurred by the assessee relating to fabric in process of dyeing and printing. In the light of consistent view taken in the aforesaid decisions Bhagwati Syntex P. Ltd. (supra), Vardhaman Fabrics P. Ltd. (supra) and M/s. Bajrang Processors P. Ltd. (supra) on identical facts and circumstances, we have no alternative but to allow the claim of the assessee in the instant case. Therefore, ground no. 1 in the appeal is allowed.

9. Before us, Revenue has not pointed out any distinguishing feature in the case year under appeal and that of A.Y. 05-06 nor has placed on record any contrary binding decision in its support. In view of the aforesaid facts and respectfully following the decision of the Co-ordinate Bench of Tribunal in the case of Assessee for A.Y. 05-06 and for similar reasons, we are of the view that no addition can be made in the present case. We thus allow this ground of Assessee.

10. 2nd ground is with respect to addition u/s. 14A of the Act.

5 ITA No 2280/AHD/2011 . A.Y. 2008-09

11. During the course of assessment proceedings, A.O noticed that Assessee has earned exempt income in the form of dividend income of Rs. 2,96,200/- and long term capital gain on listed securities of Rs. 1,80,792/- but no expenditure in relation to the exempt income was shown by the Assessee. The Assessee was therefore asked to show cause as to why expenditure on earning the exempt income not be disallowed to which Assessee interalia submitted that it has incurred no expenditure for earning exempt income. The submission of the Assessee was not found acceptable to the A.O. He thereafter on the basis of method prescribed under Rule 8D, worked out the disallowance of Rs. 5,18,888/- u/s. 14A.

12. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

13. Before us, ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and further submitted that the investments have been made from interest free funds which are available in the form of Capital and Reserves and no part of interest bearing funds have been utilized for the purpose of making investment which generated exempt income. She further submitted that the interest free funds available in the form of Share capital and Reserves and Surplus were far in excess of the investments and therefore it is to be presumed that the investments have been made out of interest free funds and no disallowance on account of interest was called for. For the aforesaid proposition she also placed reliance on the decision of Hon'ble Gujarat High Court in the case of Torrent Power 363 ITR 474. With respect to the disallowance on account of administrative expenses, she submitted 6 ITA No 2280/AHD/2011 . A.Y. 2008-09 that the disallowance of Rs. 61,497/- as worked out by A.O as per Rule 8D was on a higher side and therefore a reasonable disallowance as considered appropriate be made by the Hon'ble Bench and for which she also placed reliance on the decision by the Co-ordinate Bench in the case of Chudgar Ranchodlal Jethalal ( ITA No. 245/AHD/2013) order dated 27.03.2015. Ld. D.R. on the other hand supported the order of A.O and ld. CIT(A) and further submitted that provisions of Rule 8D are applicable from assessment year 08-09 and therefore the A.O was fully justified in working out the disallowance u/s. 14A. She thus supported the order of A.O and ld. CIT(A).

14. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to disallowance u/s. 14A. It is an undisputed fact that the year under consideration is A.Y. 08-09 and therefore in the light of the ratio laid down by Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom), provisions of Rule 8D, which prescribes the method for determining the expenditure incurred in relation to the income which does not form part of the total income being applicable from A.Y. 08-09 is applicable to the year under consideration. The method for determining the expenditure in relation to exempt income under Rule 8D which is to be disallowed u/s. 14A has three components. The first component of Rule 8D is the amount of expenditure directly relating to income which does not form part of the total income. The second component of Rule 8D basically apportions the amount of expenditure of interest [other than the interest included in clause (i)] incurred during the previous year in the ratio of the average value of investments the income from which does not form part of total income, to the average of total assets.

The third component of Rule 8D is an artificial 7 ITA No 2280/AHD/2011 . A.Y. 2008-09 figure of one half percent of the average value of the investments as appearing in the Balance sheets on the first and last day of previous year. The aggregate of the aforesaid 3 components would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed u/s. 14A of the Act. In the present case, A.O has worked out the aggregate disallowance by following the formula prescribed under Rule 8D at Rs. 5,18,888/- which comprises of first component namely expenditure directly related to exempt income at Rs. Nil, indirect interest expenses on the basis of second component of Rule 8D at Rs. 4,57,391/- and the third component (on the basis of ½% of average investments) at Rs. 61,497/-. As far as first component of rule 8D with respect to direct expenditure is concerned, there is no dispute between the parties about the amount of Rs. Nil considered by A.O. As far as second component of disallowance on account of interest of Rs. 4,57,391/- is concerned, it is Assessee's submission that its interest free funds in the form of Share Capital and Reserves are in excess of investments and applying the ratio of the decision of Torrent Power (supra) and other decisions, no disallowance on account of interest is called for.

On perusing the audited Balance sheet as at 31.03.2008 placed on record, we find that the interest free funds in the form of Share Capital and Reserves and Surplus are to the extent of Rs. 3.90 crores as against the investments of Rs. 1.59 crores meaning thereby that the interest free funds are far in excess of the investments. The aforesaid facts have not been disputed by the Revenue. On the issue of disallowance on account of interest expenditure as per Rule 8D, we find that the Hon'ble Gujarat High Court in the case of Torrent Power (supra) has held when the assessee had sufficient funds for making the investments and it had not used borrowed funds for such purpose, A.O was 8 ITA No 2280/AHD/2011 . A.Y. 2008-09 not justified in disallowing interest expenses for earning exempt income. Considering the facts of the present case with respect to second component of Rule 8D and in the light of the aforesaid decision of Hon'ble Gujarat High Court, we are of the view that in the present case no disallowance on account of interest can be made. With respect to the disallowance on account of administrative expenses i.e. third component is concerned, we find that the same has been worked out at Rs. 61,497/- on the basis of the average value of investments.

Before us, ld. A.R. has relied on the decision in the case of Chudgdar Ranchodlal Jethalal (supra). We however find that the ratio of the aforesaid decision would not be fully applicable to the facts of the present case because in that case, the disallowance u/s. 14A made by applying the formula prescribed under Rule 8D was much higher than dividend income earned by the Assessee and therefore the Tribunal after relying on the decision in the case of Joint Investment Pvt. Ltd. vs. CIT cited therein and on the basis of the alternate submission of the ld. A.R. to make a reasonable disallowance u/s. 14A made the disallowance of Rs. 5,000/-. In the present case, of the total disallowance u/s. 14A of Rs. 5,18,888/- that has been worked out by the A.O and from which after deleting the addition on account of interest of Rs. 4,57,391/-(being second component of Rule 8D) as held by us hereinabove, the addition on account of third component of Rule 8D remains at Rs. 61,497/- and thus the total revised total disallowance u/s. 14A as worked out, is not higher than the exempt income earned by the Assessee.

Further, before us no details of the total investments made, the period since the investments are held by the Assessee, the number of transactions in those investments etc has been placed on record to support its contention of non incurring of administrative expenses. Further Assessee has also not placed any material on record to support its contention of non 9 ITA No 2280/AHD/2011 . A.Y. 2008-09 incurring of administrative expenses for earning of exempt income. In view of the aforesaid and considering the totality of the facts, we are of the view that no interference on account of disallowance of administrative expenses (being the third component of Rule 8D) which has been worked out at Rs. 61,497/- by the A.O is called for. In the result this ground of Assessee is partly allowed.

15. In the result, the appeal of the Assessee is partly allowed.

Order pronounced in Open Court on 15 - 05 - 2015.

Sd/- Sd/- (SHAILENDRA Kr. YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad