2011 (8) TMI 1147 - AT - Income Tax

Deductions only on Actual Payments u/s 43B - AO disallowed the amount of excise duty paid on purchased inputs on the ground that the same did not amount to payment of duty - HELD THAT - Following the view in the case of DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 4 (1). VERSUS GLAXO SMITHKLINE CONSUMER HEALTHCARE LIMITED. 2007 (7) TMI 334 - ITAT CHANDIGARH , where it was held that the unutilized MODVAT credit is not an allowable deduction since such credit does not amount to payment of duty, the claim of the assessee is declined.- Decision against Assessee. Expenditure incurred for Earning Exempt Income - Deduction u/s 14A - The department applied the provisions of Rule 8D to determine the disallowance - HELD THAT - Since the matter is already before the Delhi High Court in the case of INCOME-TAX OFFICER, WARD 6 (2) (2), MUMBAI VERSUS DAGA CAPITAL MANAGEMENT (P.) LTD. 2008 (10) TMI 383 - ITAT MUMBAI , involving the same identical issue, we think it fit to restore the matter back to the file of the AO with the direction to decide the issue afresh in the light of the binding decision of the Jurisdictional High Court - Matter restored back. Disallowance comprising of PLA balances of R D Cess on vehicles - Deduction u/s 43B - As per AO, PLA balances are advance payments made towards goods which are yet to be manufactured or cleared from the factory, thus disallowed. HELD THAT - We may point out that the decision of the ITAT Special Bench of Chandigarh in the case of DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 4 (1). VERSUS GLAXO SMITHKLINE CONSUMER HEALTHCARE LIMITED. 2007 (7) TMI 334 - ITAT CHANDIGARH , is directly on the issue of balances in PLA and is allowable deduction u/s 43B of the Act and, therefore, in the light of these, we decline to interfere - Decision in favour of Assessee. Customs duty on import of components for Export Purposes - The AO disallowed the claim holding that the same is revenue neutral since this amount should be reflected in the closing stock and purchase as provided in section 145, thus not allowable deduction - HELD THAT - In our view, this issue is concluded in favour of the assessee by the decision of the Hon ble Supreme Court in the case of BERGER PAINTS INDIA LTD. VERSUS COMMISSIONER OF INCOME-TAX 2004 (2) TMI 4 - SUPREME COURT , wherein it was observed by the Hon ble Supreme court that by merely debiting the duties to the P L account as part of the value of the closing stock, it could not be said that the same have been allowed as deduction and would be separately allowable u/s 43B - Decision in favour of Assessee. Customs duty on Inventory held in Closing Stock - As per AO, the assessee has already debited the said sum to the Profit Loss account and correspondingly included in closing stock and the assessee is not entitled for any further deduction - HELD THAT - CIT (A) accepted the contentions of assessee that although the amount stood debited to the Profit and loss account and was included in the closing stock, the said amount would still be separately deductible under section 43B in the light of the decision of Hon ble Supreme Court in the case of BERGER PAINTS INDIA LTD. VERSUS COMMISSIONER OF INCOME-TAX 2004 (2) TMI 4 - SUPREME COURT . We confirm the decision of CIT(A) - Decision in favour of Assessee. Excise duty paid under protest - The AO disallowed the claim on the ground that the assessee was contesting these liabilities and there was no finality regarding the liability -HELD THAT - CIT(A) accepted the claim of assessee that these payments were statutory dues in the year under consideration as declared by the excise department. The liability has crystallized and paid in the same year. If the company gets relief from the Excise Authorities, the refunds received will be accrued as income and the same are offered for taxation - Decision in favour of Assessee. Excess Consumption of Raw material - Tolerance Limit - AO made an addition on the basis of excess consumption -HELD THAT - CIT(A) after going through this historical perspective on the issue, finds the alleged consumption of raw material is 0.06% only whereas CESTAT has accepted such tolerance limit at 0.24% in assessee's own case. CIT(A) decision, thus, upheld - Decision in favour of Assessee. Disallowance u/s 35DDA - Amortization of expenditure incurred under Voluntary Retirement Scheme - Assessee claimed deduction for VRS payments which was disallowed by AO on basis of his stand in earlier asseement year -HELD THAT - we follow our own earlier order according to which payments made by the assessee are clearly covered u/s 35DDA, the same payments cannot be considered and allowed u/s 37(1). Expenditure incurred for Business Purposes - Assessee claimed expenditure on club membership fee was for employees and directors. CIT(A) allowed said expenditure - HELD THAT - ld. CIT(A) following its own case, confirmed that expenditure was incurred for business purposes and warranted by business necessities and exigencies. We therefore, confirm the decision of CIT - Decision in favour of Assessee. Sales Tax Subsidy - Wrongly included in Return of Income - Sales Tax subsidy recieved was included in the return of income by the assessee. Also, such income was considered as capital receipt - HELD THAT - The CIT(A) was right in having come to the conclusion that when the assessee signed a letter before the AO during the course of assessment proceedings wherein it was claimed that the disputed receipt be excluded from the total income, was required to be adjudicated by the AO. Merely because the assessee wrongly included the income in the return of income, it cannot by itself tax that income in that year, even though legally such income did not pertain to that year - Decision in favour of Assessee. Sales Tax Subsidy u/s 25A of The Haryana General Sales Tax Act, 1973 - Capital Receipt or Revenue Receipt? - HELD THAT - Applying the test laid down in the COMMISSIONER OF INCOME TAX, MADRAS VERSUS PONNI SUGARS CHEMICALS LTD. 2008 (9) TMI 14 - SUPREME COURT , CIT(A), correctly came to the conclusion that the subsidy receipt in question are part of capital receipt given by the Haryana State Government for the purpose of meeting the objectives of Industrial Policy 1999 i.e. to attract new investment and to ensure growth of existing industries -Decision in favour of Assessee.

Issues Involved:
1. Disallowance of custom duty paid on import of components for export purposes.
2. Disallowance of excise duty on purchased inputs included in RG 23A.
3. Disallowance of expenditure incurred for earning exempt income.
4. Disallowance of PLA balances of R&D Cess and Excise duty.
5. Customs duty on import of components for export purposes not exported by year-end.
6. Customs duty paid adjusted against excise duty payable on finished products and goods in transit.
7. Customs duty on inventory held in closing stock.
8. Excise duty paid under protest.
9. Withdrawal of add back of duties and statutory liabilities.
10. Deduction u/s 43B of RG23A balance.
11. Addition for excess consumption of raw materials and components.
12. Disallowance u/s 35DDA for VRS payments.
13. Disallowance of club membership fee.
14. Classification of sales tax subsidy as capital receipt.

Detailed Analysis:

1. Disallowance of Custom Duty Paid on Import of Components for Export Purposes:
The Assessing Officer (AO) disallowed the claim of Rs. 23,67,21,074 under Section 43B of the Income Tax Act, 1961, stating that the duty drawback accrues on an accrual basis. The assessee argued that the duty drawback claim does not accrue until accepted by the Duty Drawback Directorate. The Tribunal, relying on previous ITAT orders for AY 1999-00 and 2001-02, allowed the assessee's appeal, stating that the issue is covered in favor of the assessee.

2. Disallowance of Excise Duty on Purchased Inputs Included in RG 23A:
The AO disallowed Rs. 71,63,89,449, stating that RG 23A is a MODVAT balance register and does not represent expenditure. The Tribunal, following the Special Bench decision in DCIT vs Glaxo Smithkline Consumer Health Care Ltd., declined the assessee's claim, confirming the CIT(A)'s order.

3. Disallowance of Expenditure Incurred for Earning Exempt Income:
The AO applied Rule 8D to determine disallowance. The Tribunal restored the issue to the AO to work out the disallowance u/s 14A in light of the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd. The matter was directed to be decided afresh by the AO.

4. Disallowance of PLA Balances of R&D Cess and Excise Duty:
The AO disallowed Rs. 25,73,919, considering PLA balances as advance payments. The CIT(A) followed the ITAT orders for AY 1999-00, 2000-01, and 2001-02, allowing the assessee's claim. The Tribunal affirmed the CIT(A)'s order.

5. Customs Duty on Import of Components for Export Purposes Not Exported by Year-End:
The AO disallowed the claim, considering it revenue neutral. The Tribunal, relying on the Supreme Court decision in Berger Paints and ITAT orders for AY 1999-00 and 2000-01, affirmed the CIT(A)'s order in favor of the assessee.

6. Customs Duty Paid Adjusted Against Excise Duty Payable on Finished Products and Goods in Transit:
The AO disallowed Rs. 11,24,51,254 and Rs. 6,06,69,407, stating that duty paid is not tax deductible. The Tribunal, following ITAT orders for AY 1999-00 and 2000-01, confirmed the CIT(A)'s order allowing the assessee's claim.

7. Customs Duty on Inventory Held in Closing Stock:
The AO disallowed Rs. 23,68,09,186, stating that the amount is already debited to the Profit & Loss account. The Tribunal, following the Supreme Court decision in Berger Paints and ITAT orders for AY 1999-00 and 2000-01, affirmed the CIT(A)'s order.

8. Excise Duty Paid Under Protest:
The AO disallowed Rs. 32,29,311, stating that the liability is not final. The Tribunal, following ITAT orders for AY 1999-00, 2000-01, and 2001-02, affirmed the CIT(A)'s order allowing the assessee's claim.

9. Withdrawal of Add Back of Duties and Statutory Liabilities:
The assessee claimed withdrawal of Rs. 58,32,85,322 offered in the return of income. The CIT(A) directed the AO to verify and allow the claim if the deduction was not allowed in earlier years. The Tribunal affirmed the CIT(A)'s order.

10. Deduction u/s 43B of RG23A Balance:
The assessee claimed Rs. 47,31,50,000 as deduction u/s 43B. The CIT(A) accepted the claim, directing the AO to withdraw relief if the deduction was allowed in earlier years. The Tribunal affirmed the CIT(A)'s order.

11. Addition for Excess Consumption of Raw Materials and Components:
The AO added Rs. 4,65,02,993 based on a show cause notice from excise authorities. The CIT(A) deleted the addition, stating it was within tolerable limits. The Tribunal affirmed the CIT(A)'s order.

12. Disallowance u/s 35DDA for VRS Payments:
The AO disallowed Rs. 38,63,64,348 for VRS payments. The CIT(A) allowed the claim, following ITAT orders for AY 2004-05. The Tribunal affirmed the CIT(A)'s order.

13. Disallowance of Club Membership Fee:
The AO disallowed Rs. 15,95,844 for club membership fees. The CIT(A) allowed the claim, following ITAT orders for AY 2001-02. The Tribunal affirmed the CIT(A)'s order.

14. Classification of Sales Tax Subsidy as Capital Receipt:
The AO did not adjudicate the claim of Rs. 16,04,07,733 as capital receipt. The CIT(A) held that the subsidy is a capital receipt, following the Supreme Court decision in CIT vs Ponni Sugars and Chemicals Ltd. The Tribunal affirmed the CIT(A)'s order.

Conclusion:
The appeal of the assessee is partly allowed, and the appeal of the revenue is allowed.

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