Alfa Laval India Ltd. vs Deputy Commissioner of Income Tax

J.P. Devadhar, J.—This tax appeal u/s 260A of the IT Act, 1961 is filed by the assessee against the order of the Income Tax Appellate Tribunal (''ITAT'' for short) dt. 4th Jan., 2001 relating to the asst. yr. 1989-1990.

According to the assessee the following substantial questions of law arise out of the order the Tribunal, namely :

"1. Whether, on the facts and in the circumstances of case, the Tribunal is right in law in upholding the addition of Rs. 15,15,667 made to closing stock by the AO?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing: to exclude the amount of Rs. 81,33,667 from the book profits as defined in Section 32AB(3) of the IT Act, 1961?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest from customers, sales-tax set off and other refunds, claims, etc. do not form part of the business profit for calculating deduction u/s 80HHC ?"

The assessee is a public limited company engaged in the business of manufacture, designing and commissioning of complete plants for dairy and food processing industry.

Question No. 1

In the assessment year in question, the assessees had written off a sum of Rs. 28,00,000 under the head manufacturing and other expenses. The assessee explained that the write off is mainly on account of obsolete items which were not moving for the last 3 years, in view of the change in designs or specifications due to its technological upgradation. Accordingly, the assessee had valued the closing stock of obsolete items at 10 per cent of the cost. The AO held that the assessee has neither furnished the list of obsolete items nor produced any records to show that the items were not moving. The AO took the realisable value of obsolete items at 50 per cent of the cost and accordingly added back Rs. 15,15,656.

On appeal filed by the assessee, the CIT(A) deleted the additions by the AO by taking into account that the actual realisation of the obsolete items in the subsequent year was less than 10 per cent of the cost. On further appeal filed by the Revenue, the Tribunal set aside the order of the CIT(A) and restored the order of the AO on the ground that the assessee had failed to produce the necessary evidence in support of its claim.

Mr. Inamdar, learned senior advocate appearing on behalf of the appellant submitted that the valuation of the obsolete items were backed by the auditor''s report. In the auditor''s report, it was clearly stated that the stock of the finished goods, stores, spare parts and raw materials of the company have been physically verified by the management and that the procedure for verification of the stock and valuation of stocks adopted by the management are reasonable and adequate and the same are in accordance with the normally accepted accounting principles. The counsel submitted that all the books and records maintained by the company were made available at the time of assessment. He submitted that the value of the closing stock has been taken as the opening stock of the subsequent year. The AO has not given any justifiable reason for valuing the obsolete items at 50 per cent of cost. Apart from the books, the summary of the obsolete items whose value has been written off were placed before the AO. Accordingly, Mr. Inamdar submitted that the AO was not justified in valuing the obsolete items at 50 per cent of cost on the ground that the list of obsolete items were not produced by the assessee and the Tribunal was not justified in upholding the order of the AO.

Mr. Desai, learned senior advocate appearing on behalf of the respondents on the other hand, submitted that in the absence of any material to show that the items were obsolete and were not moving for the last 3 years, the AO was justified in taking a realisable value of the obsolete items at 50 per cent of the cost.

In the present case, there is no dispute that the duly certified auditor''s report placed before the AO clearly justified valuation of obsolete items at 10 per cent of cost. There is no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower. It is also not in dispute that the value of the closing stock has been taken as the value of the opening stock in the subsequent year. Moreover, it is also not disputed that the obsolete items were in fact sold in the subsequent year at a price less than 10 per cent of the cost. Under the circumstances, it could not be said that the valuation of the obsolete items done by the assessee and certified by the auditors was not proper or arbitrary. The AO in fact has arbitrarily valued the items in question at 50 per cent of the cost without disclosing the basis of such valuation. The AO had not doubted the correctness of the certificate of the auditors regarding the valuation of obsolete items. The summary of the obsolete items were before the AO. There is nothing on record to show that the assessee was called upon to furnish the list of obsolete items or that the assessee was called upon to establish that the items were not moving for 3 years. Under these circumstances, it could not be said that the assessee has failed to furnish list of obsolete items and failed to establish that the said items were not moving. In the absence of any basis for valuing the obsolete items at 50 per cent of the cost, the Tribunal could not have upheld the findings of the AO on the ground that the list of obsolete items were not produced by the assessee. Accordingly, we answer the question No. 1 in the negative, that is, in favour of the assessee and against the Revenue.

Question No. 2

With a view to comply with the instructions contained in circular of the Company Law Board dt. 31st Dec., 1986, the assessees, during the year had changed the basis of working out depreciation and on account of such reworking Rs. 81,33,607 was credited to the P&L a/c. This was done by way of adjustment of current period''s depreciation charge in the P&L a/c. The AO took the view that for working out relief u/s 32AB, depreciation written back has to be reduced from the book profits. On appeal filed by the assessee, the CIT(A) held that there is no provision for addition of the depreciation written back to the book profit. The CIT(A) held that the amount withdrawn from the provisions made for meeting the liabilities is liable to be reduced from the profits while computing deduction u/s 32AB of the IT Act. Since the depreciation written back in the present case, is not a provision for any liability, the CIT(A) held that the depreciation written back cannot be deducted from the profits while computing deduction u/s 32AB of the IT Act. On further appeal filed by the Revenue, the Tribunal held that the assessee had erroneously increased the profit by Rs. 81,33,667 being the depreciation written off for the purpose of relief u/s 32AB of the Act and accordingly upheld the order of the AO in deducting the amount of Rs. 81,33,667 from the book profits while computing profits of business eligible for deduction u/s 32AB of the Act.

Mr. Inamdar, learned senior advocate for the assessee submitted that the Tribunal committed a fundamental error in misconstruing the amount ''written back'' as the amount ''written off''. Referring to Note 6 to the Account (p. 93 of the paper book) Mr. Inamdar submitted that in the earlier years the depreciation was provided as per specified life determined according to the rules of depreciation prescribed under the IT Rules. In compliance with the circulars of the Company Law Board, the assessee had reworked the depreciation on the straight line method on the basis of specified life determined in accordance with the provisions of the Companies Act, 1956 for the respective years in which the assets were added/installed upto 31st Dec., 1987. He submitted that the resulting higher depreciation provided upto 31st Dec., 1987 amounting to Rs. 81,33,607 has been adjusted from the current period''s depreciation charge in the P&L a/c. This change in method of providing depreciation, he submitted, has resulted in reduced depreciation/increased profit before tax amounting to Rs. 81,33,607 for the above period. Mr. Inamdar submitted that the depreciation write back was necessitated on account of implementing the circulars issued by the Company Law Board. Therefore, the amount written back could not be read as the amount written off so as to reduce the same from the profits for working out the relief u/s 32AB of the Act,

Mr. Desai, learned senior advocate for the Revenue on the other hand submitted that in the present case the AO has not disturbed the net profits determined on the basis of the books of account maintained by the assessee. According to Mr. Desai, since the assessee had erroneously increased the profit by Rs. 81,33,667, the same was rightly reduced from the profits for the purpose of working out relief u/s 32AB of the Act. Mr. Desai submitted that the decision of this Court in the case of Kinetic Motor Co. Ltd. Vs. Deputy Commissioner of Income Tax, relied upon by the assessee is distinguishable on facts, because, in that case while computing total income u/s 115J of the IT Act, the AO doubted the change in the method of accounting adopted by the assessee. In the present case, the AO has not doubted the change in the method adopted by the assessee. He submitted that for computing relief u/s 32AB, the amount written back has been rightly reduced. Therefore, there is no error in the order passed by the Tribunal,

In our opinion, the Tribunal as committed an error in construing the amount of depreciation written back as the amount written off. As per the circular issued by the Company Law Board, it was necessary for the assessee to rework the depreciation. As a result of which increased profits to the tune of Rs. 81,33,667 had to be written back by way of adjustment in the P&L a/c. Therefore, no fault could be found with the adjustment made by the assessee in the P&L a/c. For working out relief u/s 32AB(3) of the IT Act, the profits of the business are required to be reduced by an amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the P&L a/c. In the present case, there is no withdrawal of amount from reserves or provisions and, therefore, the amount written back and credited to the P&L a/c. On account of reworking of the depreciation, as per the circulars of the Company Law Board, could not be reduced from the" profits eligible for relief u/s 32AB of the IT Act. There was neither double relief nor writing off of the depreciation as held by the Tribunal. Once the reworking of the depreciation as per the Board circular is found to be in accordance with the provisions of the Companies Act, 1956, the Tribunal could not have held that the assessee has erroneously increased the profit. The increased profits arising on account of implementation of the circulars of the Company Law Board were not excludible from the book profits for the purpose of relief u/s 32AB of the IT Act. Accordingly, we answer the question No. 2 in the negative that is in favour of the assessee and against the Revenue.

Question No. 3

Although the third question framed by the assessee pertains to the interest from customers, sales-tax set off and other refunds, claims, etc. being not treated as part of the business profit, at the hearing of the appeal. Mr. Inamdar submitted that the claim is restricted only to the interest from customers and sales-tax set off. Therefore, the question to be considered is, whether the Tribunal was justified in holding that the interest from customers and sales-tax set off do not form part of business profit for calculating deduction u/s. 80HHC?

In the assessment year in question, the assessee made a claim of Rs. 1,20,51,817 u/s 80HHC of the Act, based on the profits as per the return of income. The profits computed under the head ''Profits and gains of business or profession'' at Rs. 7,06,26,746 included ''Other income'' of Rs. 4,33,56,007 comprising of interest from customers, income from investments, export incentives, sales-tax set off, claims, refunds, etc. (see Schedule forming part of the P&L a/c at p. 95). The AO treated the export incentives under the caption ''Other income'' amounting to Rs. 2,42,66,453 as part of business profit and excluded the balance amount of Rs. 1,90,89,554 (Rs. 4,33,56,00/- Rs. 2,42,66,453) from the profits of business as if the same were not part of business profits and accordingly, reduced the said amount of Rs. 1,90,89,554 from the business income for computing deduction u/s 80HHC of the Act. On appeal filed by the assessee, the CIT(A) following his decision for asst. yr. 1988-89 held that the ''Other income'' comprising of interest from customers and sales-tax set off is part of the business income and accordingly, held that the assessee is entitled to relief u/s 80HHC, as claimed. On further appeal filed by the Revenue, the Tribunal following the decisions of this Court in the case of Commissioner of Income Tax Vs. Pink Star, , Commissioner of Income Tax Vs. Sudarshan Chemicals Industries Ltd., Rathi Engineering Works and Klockner Windsor (I) Ltd., and the decision of this Court in the case of Commissioner of Income Tax Vs. S.G. Jhaveri Consultancy Ltd., held that the interest from customers, sales-tax set off, claims, refunds, etc. do not have any nexus with the business activities of the assessee and, therefore, they are not to be included in the business profits for the purpose of computation of relief u/s 80HHC of the Act.

Before us, Mr. Inamdar, learned counsel for the assessee submitted that for computation of deduction u/s 80HHC what is relevant is the profits of the business as computed under the head ''Profits and gains of business or profession''. In the present case, the interest from customers, sales-tax set off, claims, refunds, etc. under the caption ''other income'' have been assessed under the head ''Profits and gains of business or profession''. Once these income are treated as part of business income and computed under the head ''Profits and gains of business or profession'', the same cannot be excluded from the business profits while computing deduction u/s 80HHC of the Act. Relying upon the decision of this Court in the case of Commissioner of Income Tax Vs. Bangalore Clothing Co., , Mr. Inamdar submitted that the amounts in question being part of operational income, the same could not be excluded for the purposes of deduction u/s 80HHC of the Act.

Mr. Desai, learned counsel for the Revenue on the other hand submitted that the income shown under the caption ''other income'' had no nexus with the business of the assessee. He submitted that there is nothing on record to show that the income from portfolio management, shown under caption ''other income'' was related to the business of the assessee. He relied upon the decisions of this Court in the case of Sudarshan Chemicals Ltd. (supra), S.G. Jhaveri Consultancy Ltd. (supra) and the decision of this Court in the case of Commissioner of Income Tax Vs. K.K. Doshi and Co., and submitted that the amounts in question were not part of the operational income and hence not includible for computing deduction u/s 80HHC of the IT Act.

In our opinion, the submissions made on behalf of the assessee deserve to be accepted. In the present case, the AO has computed the income by way of interest from the customers, sales-tax set off, claims, refunds; etc. under the head ''Profits and gains of business or profession''. To put it differently, the AO has not assessed the interest income from customers, sales-tax set off, etc. under the head ''Income from other sources'' or under any other head. Having assessed these income under the head ''Profits and gains of business or profession'', it was not open to the AO to treat these income as if assessed under the head ''Income from other sources'', so as to exclude the same from the business profits while computing the deduction u/s 80HHC of the IT Act. Perusal of the assessment order clearly shows that the amounts in question have not been assessed under the head ''Income from other sources'', but, the same have been assessed under the head ''Profits and gains of business or profession''. u/s 80HHC(3) relevant to asst. yr. 1989-90, the deduction was to be computed with reference to the profits of the business as computed under the head ''Profits and gains of business or profession''. In the present case, the interest income from customers and sales-tax set off have been computed and assessed under the head ''Profits and gains of business or profession'' as part of the operational income and not under the head ''Income from other sources''. Therefore, the said income could not be deducted from the business profits while computing the deduction u/s 80HHC of the IT Act. The decisions relied upon by the Tribunal have been distinguished in the case of Bangalore Clothing Co. (supra). In the case of Bangalore Clothing Co. (supra), it is held that the AO must ascertain the nature of receipt in each case independently. Interest income may or may not be out of business activity. If it is not part of operational business income, then, the AO would have been justified in excluding the same for the purpose of deduction u/s 80HHC of the Act. However, in the present case, the AO has accepted that the interest income received from customers as well as sales-tax set off are assessable under the head ''Profits and gains of business or profession''. Therefore, having accepted that the said income as part of the business profit, the same could not be excluded from business profits while calculating deduction u/s 80HHC of the Act.

Accordingly, we answer the question No. 3 by holding, that in the present case, the interest from customers and sales-tax set off received by the assessee being assessed as part of the business profits under the head ''Profits and gains of business or profession'', the same could not be excluded while calculating deduction u/s 80HHC of the IT Act.

In the result, the appeal is allowed in the above terms with no order as to costs.