Transformers & Rectifiers (India) ... vs Department Of Income Tax

आयकर अपील सं./I.T.A. No.952/Ahd/2011 ( Ǔनधा[रण वष[ / Assessment Year : 2007-08) ACIT बनाम/ M/s.Transformers & Rectifiers Circle-8 Vs. (India) Ltd. Ahmedabad Sur.No.344-350, Opp.PWD Stores Sarkhe- Bavla Highway Village Changodar, Tal.Sanand Dist.Ahmedabad-382 213 èथायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AACCT 8243 P (अपीलाथȸ /Appellant) .. (Ĥ×यथȸ / Respondent)

अपीलाथȸ ओर से / Appellant by : Shri T.P.Krishna Kumar,CIT-DR Ĥ×यथȸ कȧ ओर से/Respondent by : Shri Sanjay Majmudar, AR

ु वाई कȧ तारȣख / सन Date of Hearing 18/12/2014 घोषणा कȧ तारȣख /Date of Pronounce ment 23/01/2015

आदे श / O R D E R

PER SHRI KUL BHARAT, JUDICIAL MEMBER :

This appeal by the Revenue is directed against the order of the Ld.Commissioner of Income Tax(Appeals)-XIV, Ahmedabad ('CIT(A)' ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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in short) dated 24/01/2011 pertaining to Assessment Year (AY) 2007-08. The Revenue has raised the following grounds of appeal:-

[1] The Ld.CIT(A)-XIV, Ahmedabad erred in law and on facts in deleting the disallowance of Rs.1,81,50,813/- made by the Assessing Officer on account of loss due to flood which occurred in the month of August, 2006.

[2] The Ld.CIT(A) has erred and on facts in restricting the disallowance of Rs.8,53,917/- made by the Assessing Officer to the extent of Rs.42,423/- u/s.14A of the Act.

[3] The Ld.CIT(A) has erred and on facts in deleting the disallowance of Rs.5,08,11,590/- made by the Assessing Officer on account of late delivery charges debited by the assessee.

[4] The Ld.CIT(A) has erred and on facts in deleting the disallowance of expenditure of Rs.30,73,341/- covered u/s.40A(2)(a) of the Act.

[5] On the facts and in the circumstances of the case, the ld.Commissioner of Income-tax(A)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer.

[6] It is therefore, prayed that the order of the ld.Commissioner of Income-tax(a)-XIV, Ahmedabad may be set-aside and that of the Assessing Officer be restored.

2. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as "the Act") was framed vide order dated 31/12/2009, thereby the Assessing Officer (AO in short) disallowed the loss claimed on account of flood amounting to Rs.1,81,50,813/-, disallowance u/s.14A of the Act amounting to ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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Rs.8,53,917/- and disallowance of expenses relatable to increase in share capital amounting to Rs.7,33,000/-. Apart from this, AO made disallowance of expenses related to land/transfer of property of Rs.26,000/-, disallowance of inward clearing expenses paid towards capital assets of Rs.51,764/-, disallowance of late delivery charges of Rs.5,08,11,590/-, disallowance of expenditure covered u/s.40A(2)(a) of Rs.30,73,341/-, disallowance u/s.40a(ia) of Rs.30,736/- and disallowance of depreciation wrongly claimed of Rs.58,835/-. Against this, the assessee filed an appeal before the ld.CIT(A), who after considering the submissions of the assessee partly allowed the appeal. While allowing the appeal, the ld.CIT(A) deleted the disallowance of Rs.1,81,50,813/- made by the AO on account of loss due to flood. The ld.CIT(A) restricted the disallowance made by the AO reduced from Rs.8,53,917/- to Rs.42,423/- by invoking the provisions of section 14A of the Act. The ld.CIT(A) deleted the disallowance of late delivery charges amounting to Rs.5,08,11,590/- and also deleted the disallowance of expenditure of Rs.30,70,341/- covered u/s.40A(2)(a) of the Act. Against this, the Revenue is in appeal before us.

3. First ground related to the deletion of disallowance of Rs.1,81,50,813/- made by the AO on account of loss due to flood. The CIT-DR Shri T.P.Krishnakumar vehemently argued that the ld.CIT(A) was not justified in deleting the disallowance. He submitted that the AO ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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has given a finding that the assessee itself was not sure about the exact quantum of loss suffered. He further submitted that the loss was not ascertained by the surveyor of the Insurance Company. The ld.CIT-DR submitted that the assessee initially claimed loss of Rs.6,89,04,655/- and, later on, revised their final claim to Rs.5,12,40,158/- as against the assessee's claim of Rs.5,82,21,109/- as claimed in the return. He submitted that the AO has given finding that the salvage value after tendering process was of Rs.1,67,12,388/- as against the claim of the assessee on the estimate basis of Rs.1,84,68,000/- in the return of income for the year under consideration. It was also pointed out by the AO that claim of the assessee included the amount of Rs.33,97,704/- related to the extensive repair works taken for damaged capital assets after the flood. He submitted that under these facts, the AO was justified in holding that the action of the assessee for making the claim is pre-mature action and taken in haste by the assessee to reduce the taxable profit for the year under consideration. Thus, an amount of Rs.1,81,50,813/- is disallowed by the AO and added back to the income of the assessee. On the contrary, ld.counsel for the assessee supported the order of ld.CIT(A) and submitted that there is no dispute with regard to fact that the assessee suffered loss on account of flood during the year under consideration, he submitted that the assessee made claim in accordance with prescribed accounting standards. He reiterated the submissions as were made before the ld.CIT(A). He submitted that the AO was not justified in rejecting ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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the claim merely on the basis that the claim being pre-mature. He submitted that the surveyors assessed the claim on the basis of their own methodology, but the assessee has suffered losses and in view of the fact that the volume of damages occurred and loss suffered and the exact quantification of loss could not be made. Therefore, there were some modifications in the claim made before the Insurance Company by the assessee. He submitted that this should not be the ground for throwing out the assessee. He further submitted that wherever the additional insurance claim reasoned by the assessee-company was offered for taxation.

4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. In the instant case, allowability of loss caused is not in dispute, however in the year in which such loss can be allowed is in dispute. The AO's objection is that the claim of the assessee is pre-mature as the liability what the loss is not yet ascertained as the surveyors ascertained the exact quantum of loss. However, the contention of the assessee is that it has been following mercantile system of accounting and has claimed as per the prescribed accounting standards. It is also the submission of the assessee that as and when the claim is settled by the insurance company which would offer the same as income of that year. The assessee has placed reliance on the judgement of the Hon'ble Supreme Court rendered ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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in the case of Bharat Earth Movers vs. CIT reported at 245 ITR 428 (SC), wherein the Hon'ble Apex Court has held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. We find that the ld.CIT(A) has observed that the assessee followed the principle and signed in the notified accounting standards. Therefore, the assessee claimed loss due to flood, on mercantile basis in the year in which the said loss (liability) had arisen. We also find that the AO has disallowed the claim on the basis that the extent of damages due to flood was not ascertainable in the assessment year under consideration. It is not in dispute that loss has occurred during the year under consideration, however the dispute is that the loss and quantification thereof are not ascertainable in the year under consideration. We do not agree with this reasoning of AO in rejecting the claim in view of the principle laid down by the Hon'ble Apex Court in the case of Bharat Earth Movers vs. CIT reported at 245 ITR 428 (SC). Thus, this ground of Revenue's appeal is rejected.

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5. Ground No.2 is against in restricting the disallowance of Rs.8,53,917/- made by the AO to the extent of Rs.42,423/- u/s.14A of the Act by the ld.CIT(A). The ld.CIT-DR submitted that the ld.CIT(A) grossly erred in restricting the disallowance. He further supported the order of the AO.

5.1. On the contrary, the ld.counsel for the assessee supported the order of the ld.CIT(A) and reiterated the submissions made before him.

6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the AO observed in the assessment order that the assessee has incurred interest of Rs.5,25,15,064/- and the year end investment stands Rs.1,79,69,000/-. The assessee-company is in receipt of exempt income. The AO applying the Rule 8D made disallowance in respect of the interest expenditure amounting to Rs.8,11,495/- and towards administrative expenses amounting to Rs.42,423/-. The ld.counsel for the assessee submitted that the AO was not justified in applying the Rule8D when it has been held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg.Co.Ltd. vs. Dy.CIT & Anr. reported at (2010) 328 ITR 81(Bom) would be applicable w.e.f. AY 2008-09. So far as the applicability of Rule8D is concerned, the issue is no more res integra. Since now it is settled that the Rule 8D would be applicable w.e.f. AY 2008-09, therefore we do not find any infirmity in the order of ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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the ld.CIT(A) giving the finding that Rule8D would apply from AY 2008-09. In respect of the interest expenditure, the contention of the assessee before the ld.CIT(A) was that the total investment made by the assessee-company in shares of M/s.Transpares Limited and M/s.Transweld Engineering Works Pvt.Ltd. was Rs.169.81 lacs. It was contented that the total consideration payable has been paid/discharged by issue of shares of Transformers and Rectifiers (India) Ltd. for consideration other than cash amounting to Rs.1,30,60,000/- and amount payable to Mr.Kantilal Mamtora was Rs.36,37,500/- which was outstanding and payable (as on 31.03.2007) to Mr.Kantilal Mamtora. It was contented that a small amount of Rs.2.84 lacs has been paid by way of cash consideration and bulk of the payment has been made by issue of fresh shares of the company for consideration other than cash. By implication there is absolutely no involvement of any borrowed funds for the purpose of making investment and thus there is no direct or indirect involvement of any expenditure which has been incurred to earn the exempt dividend income. We find that the ld.CIT(A) has given a finding that the assessee has been able to establish this fact from its account that no portion of interest bearing-funds were utilized by the applicant in making the aforesaid investments and, therefore, the applicant has not really incurred any direct expenditure for earning the exempt income. This finding of ld.CIT(A) has not been controverted by the Revenue by placing any material contrary. Therefore, we no reason to interfere with ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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the order of the ld.CIT(A) on this issue, same is hereby upheld. In respect of disallowance to 0.5% of value of investments amounting to Rs.42,423/-, the ld.CIT-DR submitted that the order of the ld.CIT(A) is justified on this ground. We find that the assessee has not challenged the finding of the ld.CIT(A) by filing a cross-objection, therefore this finding of ld.CIT(A) is not interfered. Thus, this ground Revenue's appeal is partly allowed.

7. Ground No.3 is against the deletion of disallowance of Rs.5,08,11,590/- made by the AO on account of late delivery charges debited by the assessee. The ld.CIT-DR submitted that the ld.CIT(A) was not justified in deleting the disallowance. He submitted that the AO has given a clear finding that many of the cases the invoices pertain to the AYs 2004-05, 2005-06, 2006-07 and 2007-08. He submitted that the AO has also given a finding that the assessee has not produced any evidence in support of its claim that the liabilities crystallized in the year under consideration. He submitted that under these facts, the ld.CIT(A) was not justified in deleting the disallowance.

7.1. On the contrary, the ld.counsel for the assessee submitted that the AO failed to appreciate the fact that liability of late delivery charges has crystallized only during the financial year in question and, therefore, the amount debited to P&L account are pertaining to the current financial year. The ld.counsel for the assessee submitted that before the ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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ld.CIT(A) all the objections raised by the AO were duly replied and the ld.CIT(A) was, after considering the submissions, rightly allowed the claim. He submitted that in the business of the assessee, this kind of the charges are paid.

8. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the AO disallowed the issue by observing as under:-

"a) Many of the cases the invoices pertains to assessment year 2004-05, 2005-06, 2006-07 and even 2007-08.

b) Contractual and actual delivery dates were also of those respective assessment years.

c) In cases of delays, the assessee was fully aware of the consequences as per Purchase Order (PO).

d) In few cases where the assessee is shown to have attached letters, such letters a5re from other parties and not from the contractual parties. The locus standi of such persons in the entire process is unknown.

e) No confirmations from the contractual parties were available for the alleged sums of late deliver4y charges retained by them.

f) No evidence was produced to show that such late delivery charges have been crystallized during the year.

8.1. However, the ld.CIT(A) deleted the addition by observing as under:-

"I find considerable merit in the submissions made by the AR. It is evident that Late Delivery charges are intrinsic part of the appellant's business and requires to be paid contractually by the appellant to its customers as per tender conditions, for the delay in ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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delivery of transformers beyond the contract delivery date. On the basis of the evidences adduced by the appellant, it is evident that the LD Charges can be regarded as having been crystallized during the year under review, based on the final position conveyed by the marketing department of the appellant, after trying to negotiate with its customers. This is also supported by way of confirmations from third party agents (intermediaries) through whom such orders were procured. Further, it appears that in spite of the shorter time available during the Assessing Proceedings, the Appellant has tried to submit maximum possible data, and evident that the A.O. has not taken a proper cognizance of the information made available by the Appellant. Hence the addition of Rs.5,08,11,590 made by the AO on this ground is deleted."

8.2 We find that the ld.CIT(A) has given a finding that the liabilities pertaining to the late delivery charges crystallized during the year under consideration based on the final position conveyed by the marketing department of the appellant and the evidence adduced by the appellant- company. Admittedly, in this case, no remand report was sought for from the AO by the ld.CIT(A) before deleting the disallowance on the basis of evidence adduced by the assessee-company. The AO has categorically given a finding that no evidence was produced to prove that such late delivery charges have been crystallized during the year under consideration. We find that the ld.CIT(A) has also not given any finding as to what were the terms of agreement between the assessee and the customers. After considering the totality of the facts and submissions made by the parties, we cannot approve the finding of the ld.CIT(A), therefore the order of the ld.CIT(A) on this issue is set aside and the issue ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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is restored back to the file of ld.CIT(A) for decision afresh since the order passed by the ld.CIT(A) is not a speaking order as the ld.CIT(A) has not given any finding as to what were the evidences which were before him for arriving at the conclusion that the assessee has paid late delivery charges in terms of the contractual terms and the liability crystallized during the year under consideration. In the absence of such finding, we cannot confirm the finding of the ld.CIT(A). Thus, this ground of Revenue's appeal is allowed for statistical purposes.

9. Ground No.4 is against the deletion of disallowance of expenditure of Rs.30,73,341/- covered u/s.40A(2)(a) of the Act. The ld.CIT-DR submitted that the ld.CIT(A) was not justified in deleting the disallowance. He submitted that the assessee could not explain as to how the proprietary-concern of the Chairman of the assessee-company purchased unfinished goods from such concern. He submitted that the entire transactions are designed to benefit to the proprietary-concern.

9.1. On the contrary, the ld.counsel for the assessee submitted that the AO has not pointed out as to how the payments made to the Chairman's concern are not reasonable. He submitted that the AO should have given a finding by comparing the payments made to the other concerns and to the concern of the Chairman before invoking the section 40A(2)(a) of the Act. He submitted that even the AO has not given any finding to the far ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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market value of the articles purchased from the Chairman's concern. He further submitted that such disallowance cannot be made on the basis of whims and fancies of the AO.

10. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) in para 9.2.1 of his order has decided this issue by observing as under:-

"9.2.1 I have carefully considered the basis of making the above addition on account of purchases made from the proprietorship firm M/s.Transformers and Rectifiers (India) u/s.40A(2)(b) of the Act by the AO, and the submissions/arguments put forth by the Learned AR/appellant.

The fact that the running business of the said proprietorship concern has been taken over w.e.f. 01.08.2006 at the Book Values of the assets and liabilities of the concern is not disputed. Again, as explained by the AR only for the valuation purposes, the value have been considered as per the Audited Balance Sheet of the concern as at 31.03.2006; Further, the share valuation of the acquirer appellant company, whose shares have been issued to the vendor (proprietor of the transferor firm) has also been carried out based on Balance Sheet as at 31.03.2006. I do not find anything objectionable to this, it being a commercial matter between the parties. There is also reasonable merit in the submissions by the AR, establishing that in general, the Margins of Transformers Industry Players have improved during fiscal year 2004-05 and also fiscal year 2005-06. Thus, the GP Margin of the firm for FY 04-05 was 18.71% and also during the period from April-July, 2006 it was 18.80%. On a matching basis the GP Margins earned by the appellant company have also shown increasing trend, as they improved from 15.69% in FY 2003-04 to 18.95% in FY 2005-06.

Further, the GP Margin earned by the firm in case of third party sales (unrelated parties) in the period from April-July 2006 is 18.65% - i.e. ITA No.952 /Ahd/2011 ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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within comparable range vis-à-vis the overall GP Margin earned by the firm in the same period. By inference, it can be concluded that for related party sales also, the firm would have earned similar margin.

The appellant has also explained by way of written submissions to the AO the commercial expediency for which it was incumbent on part of the firm to transfer large position of the semi-finished goods to the appellant company prior to the takeover date.

In view of the above, the addition of Rs.30,73,341/- made by the AO u/s.40(A)(2)(b) is deleted."

10.1. The above finding on fact is not controverted by the Revenue by placing any material contrary. Therefore, we do not find any infirmity in the order of the ld.CIT(A), same is upheld. Thus, ground raised by the Revenue is rejected.

11. Ground Nos.5 & 6 are general in nature require no independent adjudication.

12. In the result, the appeal of the Revenue is partly allowed for statistical purposes.

Order pronounced in the Court on Friday,, the 23rd day of January, 2015 at Ahmedabad.

Sd/- Sd/- (एन.एस.सैनी) (कुल भारत) लेखा सदèय ÛयाǓयक सदèय ( N.S. SAINI ) ( KUL BHARAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Ahmedabad; Dated 23 / 01 /2015 टȣ.सी.नायर, व.Ǔन.स./T.C. NAIR, Sr. PS ITA No.952 /Ahd/2011

ACIT vs. M/s.Transformers & Rectifiers (India) Ltd.

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आदे श कȧ ĤǓतͧलͪप अĒेͪषत/Copy of the Order forwarded to :

1. अपीलाथȸ / The Appellant

2. Ĥ×यथȸ / The Respondent.

3. संबंͬधत आयकर आयुÈत / Concerned CIT

4. आयकर आयुÈत(अपील) / The CIT(A)-XIV, Ahmedabad

5. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय अͬधकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड[ फाईल / Guard file.

आदे शानुसार/ BY ORDER,

स×याͪपत ĤǓत //True Copy//

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलȣय अͬधकरण, अहमदाबाद / ITAT, Ahmedabad

1. Date of dictation .. 1&20.1.15 (dictation-pad 30-pages attached at the end of this File)

2. Date on which the typed draft is placed before the Dictating Member .. 9/15/20.1.15

3. Other Member...

4. Date on which the approved draft comes to the Sr.P.S./P.S.................

5. Date on which the fair order is placed before the Dictating Member for pronouncement......

6. Date on which the fair order comes back to the Sr.P.S./P.S.......23.1.15

7. Date on which the file goes to the Bench Clerk.....................23.1.15

8. Date on which the file goes to the Head Clerk..........................................

9. The date on which the file goes to the Assistant Registrar for signature on the order..........................

10. Date of Despatch of the Order..................