1. This appeal filed by the assessee and is directed against the order of Commissioner (Appeals)-1 dated 30-8-2002 at Mumbai for assessment year 1999-2000 in the matter of assessment under Section 143(3) of the Income Tax Act, 1961.
2. We have heard both the parties, perused the records and other applicable legal position.
3. The assessee has raised various issues which are of independent nature, therefore, we shall deal with them one by one.
"On the facts and the circumstances of the case, the learned Commissioner (Appeals) legally erred in confirming the action of the assessing officer in allowing depreciation of Rs. 3,19,79,068." 4. In ground No. 1, the issue is regarding optionality of claim of depreciation. The learned Counsel appearing on behalf of the assessee was fair enough in stating that this issue was covered against the assessee by the decision of the Special Bench of the ITAT, Ahmedabad Bench in the case of Vahid Paper Converters v. ITO (2006) 98 ITD 165 (Ahd)(SB) wherein it has been held that after the amendment of Section 32 and deletion of Section 34 with effect from 1-4-1988, the assessee has no option regarding claiming of depreciation and the depreciation is to be compulsorily allowed if not claimed by the assessee.
Respectfully following the ratio of Special Bench decision, we reject this ground of the assessee.
5. In ground No. 2, the assessee is aggrieved by the decision of the learned Commissioner (Appeals) in confirming the action of the assessing officer whereby the assessing officer disallowed a sum of Rs. 3,84,080 paid to the Town Planning Authority, Silvasa, treating the same as penalty. During the course of assessment proceedings, the assessing officer noted that a total sum of Rs. 3,84,080 was paid by the assessee to Town Planning Authority, Silvasa which comprised of an amount of Rs. 3,74,080 towards penalty imposed by the Town Planner and Rs. 10,000 of penal interest. The impugned payments were disallowed by assessing officer. The assessee preferred an appeal before the learned Commissioner (Appeals) who after considering the submissions made by the assessee and findings of assessing officer confirmed the action of the assessing officer. The learned Commissioner (Appeals) also rejected the alternate contention of the assessee that the amount was paid in respect of construction of shed, therefore, the same was of the capital nature for the reason that penalty was paid for infraction of law and as such this expenditure by itself did not bring any new asset into existence. Aggrieved by the decision of the learned Commissioner (Appeals), the assessee is in appeal before us.
6. The learned Counsel appearing on behalf of the assessee contended that the amount was paid only for technical violation and to regularize the construction and it was not in the nature of penalty and drew our attention to the order of the Town Planner to support his contention.
The learned Counsel also put forward alternative plea that the expenditure should be treated as capital nature as it was related to construction of building and accordingly, depreciation thereon may be allowed. It was also contended that if the expenditure was of the capital nature, the provisions of Section 37(l) of the Act would not be applicable and consequently the nature of such payment would be immaterial.
7. We have considered the rival submissions, material on record and orders of authorities below. Admittedly, the assessee has incurred an expenditure of Rs. 3,84,080 which is towards the construction of the building without taking permission from the concerned administrative/regulatory authority as evident from the order of such authority. Every prudent businessman is supposed to take necessary permissions and approvals so as to comply with the requirements of the law of the land. On perusal of the order of the Town Planner it is abundantly clear that the amount is in the nature of penalty and, therefore, the same is not allowable as per provisions of Section 37(l) of the Act. Had it been done, the assessee would not have been liable to pay this amount. Further, this amount by himelf has not brought any asset into existence and has been paid for the negligence or contravention of law by the assessee. Accordingly, the same is not of capital nature. Thus, we reject both contentions of the assessee. Thus, this ground of the assessee stands rejected.
8. In ground No. 3, the issue is related to disallowance of Rs. 2,03,309 on account of delay in deposit of PF and ESIC dues.
9. Briefly stated facts relating to this ground are that during the year under consideration the assessee deposited the employer's contribution towards PF and ESIC amounting to Rs. 2,25,396 after the due dates and disallowed the same on suo motu Similarly, the assessee deposited an amount of Rs. 2,03,309 pertaining to employees' contribution of PF and ESIC after due dates. The employees' contribution was included in the income of the assessee as per provisions of Section 2(24)(x) of the Act, however, since it was deposited after the due dates, no deduction under Section 36(l)(va) was allowed to the assessee and accordingly Rs. 2,03,309 were added by the assessing officer to the total income of the assessee. The assessee preferred an appeal before the learned Commissioner (Appeals) who after considering the submissions made by the assessee and the applicable legal provisions, confirmed the action of assessing officer. Aggrieved by the decision of the learned Commissioner (Appeals), the assessee is in appeal before us.
9A. The learned Counsel appearing on behalf of the assessee contended that the employer's contribution deposited after the due dates but before the due date of filing of return of income was allowable as deduction and for this contention, he put reliance on the decision of the Tribunal in the case of Addl, CIT v. Veslas RRB (India) Ltd. (2005) 92 ITD 1 (Delhi).
9B. The learned departmental Representative, on the other hand, supported the orders of the revenue authorities and placed reliance on the decision of the Tribunal in the case of Swarup Vegetable Products Industries Ltd. v. Joint CIT Section 43B could not be held as retrospective and, therefore, the benefit of this amendment was not available to the defaults in deposit of employer's contribution towards PF and ESIC for the period before 1-4-2004.
10. We have considered the rival submissions, material on record and orders of authorities below. Admittedly, the assessee has deposited employees' contribution towards PF and ESIC after due date as prescribed under the respective legislations. As per the provisions of Section 2(24)(x) of the Act the employees contribution is deemed to be the income of the assessee and the corresponding deduction is allowable under Section 36(l)(va) of the Act if the same is deposited within the prescribed time. In our considered opinion, the provisions of Section 43B are not attracted in case of employees contribution towards PF and ESIC, therefore, time-limit cannot be extended beyond the due dates as prescribed in respective Act. Therefore, deduction for employees' contribution deposited belatedly but before the due date of filing of return cannot be allowed. In this view of the matter, we hold that the orders of revenue authorities are in accordance with law and accordingly we decline to interfere. The alternative ground is regarding the observation of learned Commissioner (Appeals) in treating the employer's contribution as part of disallowance under Section 43B of the Act. We find that the assessee had suo motu disallowed the employer's contribution deposited after the due dates, therefore, the observations of the learned Commissioner (Appeals) does not adversely affect the assessee. Thus, the alternative ground is dismissed as being infructuous.
"On the facts and in the circumstances of the case, the learned Commissioner (Appeals) legally erred in setting aside, subject to verification, the disallowance made by the assessing officer in respect of Modvat.
4.1 Without prejudice to the above and in the alternative, the Learned Commissioner (Appeals) legally erred in not giving relief as sought for by the appellant." 12. Briefly stated facts of this ground are that during the course of assessment proceedings, the assessing officer noted that while complying to the requirements of the provisions of Section 145A introduced with effect from 1-4-1999, the assessee adjusted the value of opening stock also. The assessing officer was of the opinion that Section 145A required i.e., adjustment in the value of closing stock by the amount of un-utilised Modvat credit for the purposes of determining the income chargeable under the head profits and gains of the business/ profession. In view of the assessing officer, the difference worked out by the assessee on the opening stock at Rs. 34,33,530 was not in accordance with the provisions of law and the same was added to the amount of adjustments determined by the assessee at Rs. 7,74,711.
Accordingly, total disallowance at Rs. 42,08,241 was worked out. In doing so, the assessing officer, relied on the decision of the Hon'ble Bombay High Court in the case of Melmould Corpn. v. CIT (Bom). The assessee being aggrieved by the decision of the assessing officer, preferred an appeal before the learned Commissioner (Appeals). In the appellate proceedings, the assessee drew attention of learned Commissioner (Appeals) to the observations of Auditors in the Tax Audit Report to contend that the adjustment on account of Modvat had to be made both in respect of opening stock and closing stock. It was also pointed out that for the assessment year 1998-99 an amount of Rs. 7,85,386 was added to the income of the appellant under Modvat provisions. The learned Commissioner (Appeals) after considering the submissions made by the assessee was of the opinion that the decision relied on by the assessing officer was not applicable to the facts of the case on hand gave relief to the assessee. The relevant portion of the findings of the learned Commissioner (Appeals) is extracted below: "I have carefully considered the above. The working given by the AR at page 57 of the Paper Book does not fully explain as to how the opening stock figure of Rs.34,33,530 was arrived at and what was the closing stock figure of the preceding year. However, I do not agree with the view of the assessing officer that no adjustment at all should be made to opening stock, while applying the provision of Section 145A of the Act. Moreover, the AR has stated that in the preceding year an addition of Rs. 7,85,386 has been made to the closing stock by the assessing officer on account of Modvat. If this the case, the assessing officer should have taken at least that into account while arriving at the opening stock figure of this year. The assessing officer is directed to verify this position from the assessment order of the preceding year and make suitable adjustments. It is to be clear that if, in appeal by the appellant against that addition, it has been allowed by the appellate authority, there will be no need to make the adjustment. The assessing officer is also directed to verify the statement filed by the appellant showing the adjustments on account of Section 145A. If the opening stock is exclusive of Modvat credit, then it should be notionally added to arrive at the figure of closing stock under Section 145A of the Act." 13. During the course of hearing the learned Counsel appearing on behalf of the assessee submitted that in principle the learned Commissioner (Appeals) agreed with the contention of the assessee that the value of both opening stock and closing stock had to be modified.
However, the learned Commissioner (Appeals), with regard to the addition of Rs. 7,85,386 made in earlier year in respect of closing stock of that year observed to exclude the same to that extent from the value of opening stock, if the addition made in earlier year was deleted by the appellate authority and such observations were not warranted in view of the findings of learned Commissioner (Appeals) that both opening stock and closing stock were to be adjusted as per inclusive method under Section 145A. The learned Counsel in this regard also referred to the memorandum explaining the provisions in Finance (No. 2) Bill, 1998 as in 231 ITR (St.) 201 to show that the adjustment under Section 145A had to be made both in respect of opening and closing stock. The learned Counsel also referred to the language employed in the Section 145A to contend that if only value of the closing stock had to be modified, the Legislature would have specifically provided for valuation of closing stock only. He also drew our attention to notes to Clauses and Memorandum explaining the object of provision of Section 145A to contend that both referred to adjustments to, be made in the value of opening stock as well as closing stock. It was also contended that this was a notional adjustment in the value of stock, therefore, both opening and closing stock had to be notionally adjusted to arrive at the correct figure of the profits. The learned Counsel also brought to our notice the fact that against the order of the learned Commissioner (Appeals) no appeal was filed by the department, therefore, the order of the learned Commissioner (Appeals) became final to this extent. It was also argued that construction of the provisions of Section 145A so as to restrict the modification to the valuation of closing stock only leaving aside opening stock was not correct. The learned Counsel further contended that it was a deeming provision for the purposes of computing business income and it could have never been the intention of the Legislature to artificially inflate profits in the first year of amended provision, therefore, the value of the opening stock had to be necessarily modified.
14. The learned departmental Representative, on the other hand, narrated the factual matrix of the case and contended that only the value of closing stock had to be modified by the amount of unutilized amount of Modvat credit. During the course of proceedings, the issue of powers of Tribunal arose in a sense that Tribunal could not issue any direction which might put the assessee in a more adverse position. In this regard, the learned D.R. put his strong reliance on the decision of Hon'ble Calcutta High Court in the case of CCAP Ltd. v. CIT wherein the Hon'ble court observed that it was the bounden duty of the Tribunal to decide the issue on hand regardless of the fact that in some cases the benefit could accrue to either party.
It was also pointed out that the Tribunal was competent to issue appropriate directions to the learned Commissioner (Appeals) and placed his reliance on the decision of the Hon'ble Supreme Court in the case of Bhavana. Chemicals Ltd. v. CIT (1998) 231 ITR 507 (SC) and also on the decision of the Ahmedabad Bench of the Tribunal in the case of Abhinav Finance & Leasing Co. Ltd. v. Ly. CIT (2002) 81 ITD 331 (All).
It was also contended that power of learned Commissioner (Appeals) was co-terminus with that of assessing officer, therefore, matter could be remanded back to learned Commissioner (Appeals) to decide the issue in accordance with the provisions of Section 145A of the Act. The learned Counsel, in the rejoinder, pointed out that the decision of the Hon'ble Calcutta High Court in the case of CCAP Ltd. (supra) was not applicable to the facts of the present case for the following reasons: - The Hon'ble Calcutta High Court had not considered the language of Section 254(l), which uses the word 'thereon'.
- The binding precedent of the Supreme Court in the case of Hukumchand Mills Ltd. v. CIT was not brought to the knowledge of the Hon'ble High Court, wherein it has been held that the powers of the Tribunal are to decide the points or grounds raised before it. It has been clearly laid down that the Appellate Tribunal has no power of enhancement, which the first appellate authority has.
- The Hon'ble Calcutta High Court had neither discussed nor distinguished the contrary settled law in the cases of CIT v. Cochin Refineries Ltd. and Orissa Weavers Co-operating Spg. Mills Ltd. v. CIT . The Hon'ble High Court had also not considered or distinguished the earlier decision of the same High Court in the case of CIT v. Anand & Co. .
All these decisions were cited by the counsel appearing before the High Court as recorded on page No. 252 of the decision.
- Without prejudice to the above, in the decisions of the jurisdictional High Court in the cases of Ciba of India Ltd. v. CIT , Pokhrai Hirachand v. CIT and J.B. Greaves v. CIT it had been clearly laid down that it was not open to Tribunal to adjudicate or give finding on question which was not in dispute and which do not form the subject-matter of the appeal before it.
- Without prejudice to the above, the Hon'ble High Court nowhere laid down that the Tribunal had power of enhancement. It merely stated that the Tribunal should lay down the correct proposition of law. It may be distinctly noted that in the case the Tribunal was dealing with the departmental appeal and relief was sought by the assessee who was not in a appeal. Therefore, there was no question of enhancement to the income of the assessee as the relief sought would have reduced the total income. Had it been the case of enhancement. The Hon'ble Calcutta High Court would have certainly referred to the provisions of Section 254 and other binding precedents, which do not permit enhancement.
Without prejudice to the above, the facts of the case are clearly distinguishable inasmuch as the Hon'ble High Court has considered a case wherein identical facts were involved in the grounds of appeal challenged before it and the other part of the order, which was not challenged. Whereas in the present case there is remarkable distinction between the addition, which has been challenged before the Hon'ble Tribunal by the assessee and the one which has become final and not challenged by the department. Whereas the assessee has challenged the valuation of opening stock which has not been allowed by the Commissioner (Appeals) on the ground that in the earlier year the addition was made to the value of the closing stock which has since been deleted. As against this, the other part of the order deals with the valuation of opening stock simplicitor, de hors valuation of the closing stock of the preceding year. Thus, the decision to be taken in respect of the assessee's appeal would not apply to the other part of the addition in respect of which the order has become final.
The learned Counsel further contended that issue of powers of Tribunal would come into play only when the appeal was decided against the assessee on merits.
15. We have considered the rival submissions, material on record and orders of authorities below. Admittedly, Section 145A as enacted by the Finance (11) Act, 1998 with effect from assessment year 1999-2000 provides that the valuation of purchase and sale of goods and inventory for the purpose. of computation of income from business or profession shall be made on the basis of method of accounting regularly employed by the assessee but this shall be subject to certain adjustments.
Therefore, it is not necessary to change the method of valuation of purchase, sale and inventory regularly employed in the books of account. However, adjustments provided under Section 145A would have to be made while computing the income for the purpose of preparing the return of income. The adjustments as provided under Section 145A are as follows: (a) Any tax, duty, cess or fee actually paid or incurred on inputs should be added to the cost of inputs (raw-materials, stores etc.); if not already added in the books of account.
(b) Any tax, duty, cess or fee actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account.
(c) Any tax, duty, cess or fee actually paid or incurred on the inventory the (finished goods, work-in-progress, raw materials etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts.
It is evidently clear from the language of Section 145A that the adjustments have to be made in respect of purchases, sale and inventory, therefore, the contention of the revenue that the value of closing stock only needs to be adjusted is not in accordance with the provisions of law and, therefore, the same is rejected. Admittedly, this is the first year applicable to provisions of Section 145A, therefore, the question foiconsideration is whether the opening stock as on 1-4-1998 should also be adjusted as required under Section 145A.From the perusal of the impugned order, it can be seen that working given by the A.R. to the learned Commissioner (Appeals) at page 57 of the paper book does not explain as to how the opening figure of Rs. 34,33,530 was arrived at and what was the closing stock figure of the preceding year. It is pertinent to know that ITAT vide order dated 31-1-2006 in appeal pertain to assessment year 1998-99 vide para 24 on page 8 restored the issue of addition if any on account of Modvat Credit keeping in view after ascertaining from the assessee whether Excise Duty paid on its purchases is included in the purchase shown in the Profit and Loss Account. In the impugned order also, the learned Commissioner (Appeals) has not examined whether Excise Duty paid is included by the assessee in the purchase shown in the Profit and Loss Account. Now whether the value of the opening stock is required to notionally adjusted by the amount of Modvat referable to such on account of insertion of Section 145A of the Income Tax Act with effect from 1-4-1999 is to be decided after finding out how the Excise Duty is accounted for by the assessee in the books of account. We, therefore, set aside the order of learned Commissioner (Appeals) on this issue and restore to the file of learned Commissioner (Appeals) with the direction that assessee should explain the working furnished before the learned Commissioner (Appeals) at page 57 of the paper book. After ascertaining the correct position of treatment given by the assessee in respect of Excise Duty on purchases, the learned Commissioner (Appeals) will adjudicate this issue afresh after giving opportunity of being heard to both sides.
15(A). Before parting with, with regard to change of value of opening stock if any required to be made on account of Modvat, it is essential to ensure that the assessee does not get double deduction on account of this Modvat. As per provisions of Section 145A of the Act, the sales are also to be inclusive of Excise Duty and hence, the assessce is entitled to deduction for the amount of Excise Duty payable on sales but because of Modvat available to the assessee on account of opening stock, purchases and closing stock and since the Modvat element is added to the value of opening stock and purchases as provided in Section 145A, the actual deduction allowable to the assessee on account of Excise Duty with regard to sales should be restricted to actual duty paid by assessee by excluding the Modvat element with regard to both opening stock and purchases during the year to ensure that the assessee does not get any double deduction on account of Modvat in the year of insertion of Section 145A of the Act ie. Assessment Year 1999-2000. The learned CIT should examine this issue and to ensure that no double deduction to be granted to the assessee on account of Modvat by including the same in opening stock and purchases and also in Excise duty payable against sales.
16. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.