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TMI Blog2013 (2) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. Share capital and share application money can well be said to be available as own funds with the assessee and it cannot be said that since it was utilized in the assets, it lost its character of own funds – Delete the addition – In favour of assessee Addition on account of excess amortization - assessee has purchased video rights / other copy rights - 100% cost of such rights, if any part of such right is sold during the year, are claimed as revenue expenditure as per accounting method consistently adopted – A.O. argued that assessee has not valued the pendancy of rights as its closing stock, therefore, the cost to the extent it could be allowed should be restricted to the sale receipts on partial sale of total bundle of rights – A.O. after reducing the revenue received by the assessee against those rights has added the balance amount to the income of the assessee – Held that:- Without properly valuing the opening as well as closing stock of the assessee, the AO could not adopt such course of action. As decided in case of Rajendra Prasad Moody (1978 (10) TMI 133 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ld. CIT(A) had failed to appreciate the decision of the jurisdictional Bombay High Court in the case of Reliance Utilities and Power Ltd. which is squarely applicable in the case of the Appellant Company. 3. The Appellant craves leave to add to, amend alter or vary the aforesaid grounds and/or adduce further evidence before at the time of hearing. Revenue s Grounds for A.Y 2005-06: 1) On the facts and in the circumstances in the case and in law, the Ld. CIT(A) erred in partly allowing the claim of assessee on interest expenditure without appreciating the fact that the assessee company had utilized major portion of] its interest bearing borrowings for non-business purposes. 2) On the facts and in the circumstances in the case and in law, the Ld. CIT(A) erred in allowing the claim of assessee on amount of excess amortization on rights purchased ignoring the fact that the method of accounting followed by the assessee has no relevance to the issue under consideration. 3) The appellant prays that the order of CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer restored. 4) The appellant craves leave to amend or alter a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OF FUNDS D 273,101,036 276,272,686 Fixed Assets 182,011,350 156,584,089 Gross Block 91,089,686 119,688,597 Less : Depreciation 2,093,573 Net Block E 18,250 18,250 Capital Work in progress Investments Current Assets, Loans and advances. F G H I 65,292,373 154,708,758 Inventories 178,539,820 177,247,830 Debtors 3,363,454 3,159,792 Cash Bank Balances 215,319,971 288,695,051 Loans Advances 462,515,618 623,811,431 Deferred Tax Assets (refer note no.17 of schedule w) 41,007,272 41,007,272 503,522,890 664,818,703 Less: J Current Liabilities Provisions 491,326,969 589,761,735 Net Current Assets 12,195,921 75,056,968 K Miscellaneous Expenditure 336,948 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the inability to explain allowability and also certain specific audit observations the AO disallowed the entire interest of Rs.4,59,54,419/- by applying the provisions of section 36(1)(iii) as well 40A(2) of the Act. 3.4 Before Ld. CIT(A) one of the contentions for allowability of the interest expenditure was that sufficient own funds were available with the assessee in the shape of shareholder capital, advance against share application money, creditors, interest free advances, advances from customers and distributors minus advance on which interest was paid were available to the tune of Rs.51,24,17,994/-. It was submitted that out of these funds the loans and advances to directors, relatives, firms in which directors are interested amounting to Rs.4,82,82,401/- were advanced. It was submitted that even after the said advance a sum of Rs.46,41,35,593/- was available which was excess than the amount advanced by the assessee being interest free. On these facts of the case Ld. CIT(A) has found that loans and advances including interest free deposits in advances to the directors and to the firms in which directors were interest and/or to the relatives of the directors, total amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Schedules Amount (Rs.) As at 31/3/2004 (Rs.) Share Capital A 89,464,440 Advance against Share application money 3,100,000 Creditors J 199,218,854 Advance from Customer/Distributors J 375,733,860 Less: Advances on which interest Paid 95,300,000 Interest free advances 280,433,860 280,433,860 572,217,154 LESS: LOANS AND ADVANCES TO DIRECTORS / RELATIVES / FIRMS IN WHICH DIRECTORS ARE 34,373,055 EXCESS FREE RESERVES AVAILABLE 537,844,099 Statement Showing the free reserves available as on 31/3/2005: TOTAL FREE RESERVES: Particulars Schedules Amount (Rs.) As at 31/3/2005 (Rs.) Share Capital A 89,464,440 Advance against Share application money 3,100,000 Creditors J 168,493,335 Advance from Customer/Distributors J 309,860,219 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Woolcombers of India Ltd., 134 ITR 219 and also in view of the decision of Hon ble Supreme Court in the case of East India Pharmaceutical Company Ltd. vs. CIT, 224 ITR 624 that if there are funds available, both interest free and overdraft / or loans taken, then presumption would arise that investment would be out of interest free funds generated or available with the company, if interest free funds were sufficient to meet the investment. Finding that the presumption was established in that case on account of being available a sum of Rs.398.19 lacs, therefore, CIT as well as Tribunal were right in deleting the disallowance. He submitted that the figure in the above charts will clearly show that excess free reserves available with the assessee were to the tune of Rs.46,41,35,593/- and Rs.32,13,27,067/- for assessment years 2005-06 and 2006-07 respectively. Therefore, Ld. A.R submitted that no disallowance, as sustained by Ld. CIT(A) is called. 4.3 Ld. A.R further submitted that though passing reference has been made by the AO to the provisions of section 40A(2) but it has not been specifically mentioned that how the said provisions are applicable to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention Ld. A.R placed reliance on the decision of Hon ble Karnataka High Court in the case of CIT vs. Sridev Enterprises, 192 ITR 165 (Kar), wherein it has been held that in case where in the previous assessment years assessee s claim regarding interest on borrowed capital was allowed, it will not be equitable for the revenue to take different stand in respect of the amounts which were the subject matter of previous years assessment, consistency and definiteness of approach being necessary. Consequently, in view of aforementioned decision of Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd.(supra) no disallowance should have been made as section 40A(2) was not applicable. 4.6 Ld. A.R also relied upon the decision of Allahabad High Court in the case of CIT vs. Radico Khaitan Ltd., 274 ITR 354 (All), wherein it has been held that in a case where assessee has sufficient funds in the capital reserve and surplus other than the borrowed funds, the assessee is entitled to full allowance of interest on borrowed money. 5. On the other hand, relying upon the assessment order it was submitted by Ld. DR that assessee had utilized interest bearing borrowed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case assessee had demonstrated that it had sufficient funds. He further submitted that though it has been held by Hon ble Supreme Court in the case of Radhasaoumi Satsang (supra) that principle of res-judicata is not applicable to income tax proceedings but at the same time it has been held that what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as the fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. So far as it relates to the arguments of Ld. DR that interest is wrongly deleted by Ld. CIT(A), Ld. AR submitted that each and every details was filed before AO as well as Ld. CIT(A) from which it has been ascertained that what is advanced by the assessee to its associated persons as interest free advance was only a sum of Rs. 3,27,82,401/-. He submitted that, therefore, the order of Ld. CIT(A) identifying the said amount as interest free advances cannot be said to be wrong as it is a finding of fact recorded by him. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Against these amounts the interest free advances are only to the tune of Rs.3,58,90,863/-, Rs.4,82,82,401/- and Rs.5,17,61,226/- for assessment year 2004-05, 2005-06 and 2006-07 respectively. These interest free advances, are in any case less than the share capital and share application money owned by the assessee. Here the arguments of Ld. A.R is that share capital and advance against share application money are to be considered as own funds and these are sufficient to meet the amount advanced by the assessee as interest free to its associate concerns. This contention is supported by the decision of Hon ble Bombay High Court in the case of CIT vs. Reliance Power Utilities (supra). In that case the assessee had invested Rs.389.60 crores in Reliance Gas Ltd. and Rs.1.01 crore in Reliance Strategic Investment Ltd. The AO recorded a finding that the sum of Rs.213 crore was invested out of assessee s own funds and Rs. 147 crore were invested out of borrowed funds and calculating interest @12% per annum for three months from Jan.2000 to March 2000 and a sum of Rs.4,40,00,000/- was disallowed. One of the contentions, inter alia, for contesting the disallowance was that assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. CIT (1981) 23 CTR (Cal) 204 : (1982) 134 ITR 219 (Cal). It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC). 8. We have heard learned counsel for both the parties. In our opinion the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs. 172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31St March, 1999, is fallacious. Firstly, we are not concerned with the balance sheet as of 31st March, 1999. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the learned counsel has been unable to point out to us from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the P L a/c and the balance sheet would not show whether shareholders funds have been utilised f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal 11. Considering the above, in our opinion, there is no merit in this appeal which is accordingly dismissed. 6.3 If the facts of the present case are considered in the light of the aforementioned decision of Hon ble Jurisdictional High Court then for the years under consideration share capital and advance against share application money for both the years will be a sum of Rs.9,25,64,440/- which in any case exceeds much from the interest free advances made by the assessee which for these years are only a sum of Rs.4.82 crore and Rs.5.17 crore. According to the aforementioned decision of Hon ble Bombay High Court share capital and share application money can well be said to be available as own funds with the assessee and it cannot be said that since it was utilized in the assets, it lost its character of own funds. So far as it relates to decision relied upon by Ld. D.R, it can be mentioned that when decision of Jurisdictional High Court is available and that decision is subsisting, then reference cannot be made to the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing such method consistently for many years and such method is also as per Rule 9B of the Income tax Rules,1962. It was further explained that the depreciation was also claimed on the intangible assets. The AO being of the view that assessee was claiming 100% of the cost of video rights / other copy rights even in a case where small portion of the total bundle of rights was sold and even when small portion of the total period of rights were sold. The AO being of the view that only proportionate expenditure can be claimed, but he found that it is difficult to quantify such amount, therefore, he held assessee should be allowed expenditure only to the extent the amount received by the assessee as sale during the year and balance cost of acquisition should be taken as cost of acquisition or inventory of closing stock. The AO observed that by adopting such method the assessee is practicing a wrong practice which is not sanctioned by any method of accounting and thereby postponing its tax liability for few years. In this manner the AO has restricted the cost of purchase of these rights to the sale proceeds received by the assessee during the year and addition of Rs.1,30,73,926/- was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oretically be revenue neutral as it would effect the revenues and consequently the income of earlier or later assessment years also. Taking the example he observed that the unrealized amount of rights to be taken as closing stock in assessment year 2005-06 would have to be taken as opening stock in the succeeding assessment year i.e. A.Y 2006-07. It would, therefore, go towards reducing the income already declared in that year and tax liability on that account be reduced. Consequently, the effect would be revenue neutral. He also observed that AO has not given any reason for changing the consistent method adopted by the assessee and it has not been established that the assessee by adopting such method has avoided or shifted his tax liability indefinitely or permanently. Relying upon the aforementioned decision of ITAT in the case of IRB Infrastructure Ltd. (supra) Ld. CIT(A) has deleted the addition. The revenue is aggrieved, hence, has filed the aforementioned grounds for both the years. 8. After narrating the facts, Ld. DR submitted that AO was right in restricting the expenses to the extent of revenue derived by the assessee on these rights and Ld. CIT(A) has wrongly allowed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout giving any credit for adjustment to be carried out in respect of opening as well as closing stock of such rights. We find force in the observation of Ld. CIT(A) that without properly valuing the opening as well as closing stock of the assessee, the AO could not adopt such course of action. The portion of bundle of rights which were standing on 1st Day of the relevant accounting year has not been taken into consideration, similarly closing stock has not been valued probably on account of difficulty to be faced in this respect. If assessee was adopting the consistent method which has not been disturbed in past, without making a proper adjustment on account of impact of earlier years and without stating the reasons that as to why the method adopted by the assessee was wrong and contrary to the accounting principle, the expenditure could not be restricted to the amount of revenue earned by the assessee, as such action of the AO is contrary to the aforementioned decision of Hon ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (supra). The AO has accepted that these are allowable expenditure but he has restricted the same to the extent of revenue earned by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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