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Case Number

I.T.A No. 3213.Mum./2013 (Assessment Year 2009-10)

Advocates

Revenue by: Shri Pitambar Das
Assessee by: Shri K. Gopal

Judges

Sanjay Arora, A.M
Amit Shukla, J.M

Acts

section 143(3) of the Income Tax Act, 1961 (for short the Act)

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Smart Summary

Structured Summary of the Opinion (Amit Shukla, J.M.)

Factual and Procedural Background

This is an appeal by the Revenue against the order dated 13 February 2013 of the learned Commissioner (Appeals)-VIII, Mumbai, relating to the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2009–10. The Revenue challenged two principal aspects of the Commissioner (Appeals)'s order: (1) deletion of a disallowance of bond issue expenses of Rs. 9,13,519 and (2) deletion of an ad-hoc 2% addition in the value of closing stock under section 145A on account of direct expenses (freight, storage, etc.).

The factual record as recited in the opinion includes that the assessee incurred substantial bond issue expenses (figures quoted in the opinion include Rs. 248,98,771 and other related numbers), of which a portion (Rs. 9,13,519) was charged to the Profit & Loss account while the balance was carried to the security/share premium account. The Assessing Officer (AO) treated the portion charged to profit & loss as capital in nature and disallowed it. As to the second matter, the AO, relying on an audit report, applied section 145A and estimated direct expenses at 2% of the value of closing stock, making an addition (the opinion records this as Rs. 54,35,420 in one place).

Before the Commissioner (Appeals), the assessee relied on earlier orders in its own case (including Tribunal orders for prior assessment years) and on supporting accounting entries. The Commissioner (Appeals) deleted both the disallowance of the bond-related amount and the ad-hoc addition to closing stock. The Revenue appealed to the Tribunal. Both parties before the Tribunal acknowledged that issues were substantially covered by earlier Tribunal and High Court decisions concerning the assessee.

Legal Issues Presented

Whether the amount of Rs. 9,13,519 (bond issue / bond registration / Fitch rating related expense) debited to the Profit & Loss account is a revenue expense allowable under section 37 (or otherwise) of the Income Tax Act, or whether it is a capital expenditure and therefore not allowable.
Whether, under section 145A of the Income Tax Act, the Assessing Officer was justified in estimating and adding 2% of the total value of closing stock of raw material, stores and spares as representing direct expenses (freight, storage, etc.) where the assessee's records allegedly did not separately furnish such details.

Arguments of the Parties

Assessing Officer / Revenue

On bond issue expenses: The AO held that the purpose of issuing the bonds was to raise capital to pay loans taken in earlier years; consequently, bond issue expenses are in the nature of capital expenditure and disallowed.
On closing stock/direct expenses: Based on the audit report indicating the assessee did not consider direct expenses in valuing closing stock, the AO concluded such expenses should be loaded onto raw material and estimated these direct expenses at 2% of the total value of closing stock, making an addition under section 145A.

Assessee

On bond issue expenses: The assessee explained that the total bond issue expenses were largely carried to the security/share premium account, with a portion (Rs. 9,13,519 described as Fitch rating expenses or bond-related expenses) charged to other expenses. The assessee relied on earlier year's Tribunal orders in its favour (including an order for AY 2006–07) and on subsequent confirmation by the High Court in CIT v. Hindustan Organic Chemicals Ltd. to contend the expenditure is revenue in nature and allowable.
On closing stock/direct expenses: The assessee produced a sample purchase day book and general ledger entries showing that purchase values (and the closing stock) were recorded inclusive of freight and other direct charges. The assessee contended the AO's ad-hoc 2% estimation was unwarranted and pointed to a string of earlier favourable orders (CIT(A) and Tribunal) for assessment years including 1999–00, 2002–03, 2004–05, 2006–07, 2007–08 and 2008–09.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Hindustan Organic Chemicals Ltd., ITA No. 399/2012 (High Court), order pronounced 11 July 2014	High Court affirmed the Tribunal's finding that bond-related expenses (bond registration charges) were revenue in nature and allowable under section 37; the HC found no perversity or error warranting interference.	The Tribunal/Bench followed the High Court confirmation and relied on it to affirm the Commissioner (Appeals)' allowance of the bond-related expenditure. The Court noted that both parties agreed the issue was covered by this High Court confirmation and affirmed the CIT(A) on ground No.1.
Tribunal order for assessment year 2006–07 (assessee's own case) — cited repeatedly	Held that certain bond-related/registration expenses were revenue in nature and allowable.	The Tribunal's earlier finding formed the factual and legal foundation for allowing the bond expense in the present year; the Bench followed that coordinate decision.
Tribunal order for assessment year 2008–09, ITA No. 7981/Mum/2011, order dated 9 November 2012	Addressed the application of section 145A where AO estimated direct expenses at 2% of closing stock; Tribunal deleted AO's ad-hoc addition after finding that the assessee consistently valued closing stock inclusive of freight.	The Bench relied on this Tribunal decision (and reproduced the reasoning) to conclude that the present year's facts were identical and to support deletion of the AO's 2% ad-hoc addition under s.145A.
Tribunal order for assessment year 2007–08, ITA No. 2201/Mum/2010 (order dated 13/01/2011) — reproduced in part	Found that when purchase records and general ledger show closing stock valued inclusive of freight and there is consistency year-to-year, the AO's estimate is not justified and deletion of the addition is warranted.	The reproduced reasoning was applied by the Tribunal in later years and was followed by the Bench in the present appeal to sustain the Commissioner (Appeals)' deletion of the 2% addition.
Orders of Commissioner (Appeals) for assessment years 1999–00, 2002–03, 2004–05 and 2006–07 (assessee's own case)	Consistent administrative/tribunal practice in the assessee's case that closing stock valuation included freight/direct expenses and related additions were deleted.	The Court treated these earlier year orders as consistent authorities showing no change in the assessee's stock valuation practice; this consistency supported the deletion of the AO's estimate under s.145A in the present year.

Court's Reasoning and Analysis

The Court proceeded issue by issue, applying settled appellate principles of following coordinate Bench/earlier Tribunal and High Court determinations in the assessee's own case where facts are identical or substantially similar.

Issue 1 — Bond issue expenses (Rs. 9,13,519):

The factual record showed substantial bond issue expenses incurred by the assessee, with most carried to the security/share premium account and Rs. 9,13,519 debited to other expenses in the Profit & Loss account (the assessee described this portion as Fitch rating expenses of bonds and similar items).
The AO characterised the expense as capital because the bonds were issued to raise capital to repay earlier loans and therefore disallowed the amount.
The assessee appealed and the Commissioner (Appeals) found the issue covered by an earlier year's Tribunal order (AY 2006–07) and directed the AO to allow the expenditure as a revenue expense.
Before the Bench, both parties agreed that the matter was covered by the Tribunal's earlier order; the assessee pointed to High Court confirmation in CIT v. Hindustan Organic Chemicals Ltd. (ITA No. 399/2012), in which the High Court had found the ITAT's finding that similar bond registration charges were revenue in nature not vitiated and not raising any substantial question of law.
Given the above, the Bench followed the High Court's confirmation and the coordinate Tribunal decision and affirmed the CIT(A)'s allowance. The Court concluded there was no reason to disagree with the prior appellate findings and dismissed Revenue's ground on this issue.

Issue 2 — 2% ad-hoc addition to closing stock under section 145A:

The AO relied on an audit report which, it was recorded, indicated that the assessee had not separately considered direct expenses (freight, storage, etc.) while computing the value of closing stock. In the AO's view, such direct expenses should be loaded onto raw materials and, in absence of detailed information, the AO estimated them at 2% of the value of closing stock, making an addition (the opinion records an addition of Rs. 54,35,420 in one place).
The assessee produced a sample purchase day book and general ledger demonstrating that the purchase value and closing stock figures for sample items were inclusive of freight and other direct charges. The assessee also relied on a sequence of favourable earlier decisions in its own case (CIT(A) and Tribunal) which found the valuation method consistent and inclusive of freight, thus rendering the AO's estimate unjustified.
The Commissioner (Appeals) deleted the addition after finding that the assessee had been valuing closing stock inclusive of freight charges and that there was no change in valuation method; the CIT(A) considered the closing stock of the previous year as the opening stock of the next year and held estimation was not justified.
The Tribunal (in reproduced earlier orders and a later order for AY 2008–09) had consistently taken the same view: where the assessee's records show consistent valuation of stock inclusive of direct expenses and the method has not changed, an AO's ad-hoc estimation under s.145A is not justified and should be deleted.
Finding the facts of the present year identical to those decided earlier, the Bench followed the coordinate decisions and found no infirmity in the Commissioner (Appeals)' deletion of the 2% addition; Revenue's ground on this issue was dismissed.

Holding and Implications

Holding: The Tribunal dismissed the Revenue's appeal in its entirety. The two specific grounds raised by the Revenue were rejected and the Commissioner (Appeals)' orders were affirmed.

Core Ruling: REVENUE'S APPEAL DISMISSED (both ground no. 1 dealing with bond issue expenses and ground no. 2 dealing with the 2% ad-hoc addition to closing stock were dismissed).

Direct consequences:

The disallowance of Rs. 9,13,519 (bond issue / Fitch rating expense portion charged to Profit & Loss) is to be deleted and treated as allowable revenue expenditure in accordance with the Commissioner (Appeals)' direction and the earlier Tribunal/High Court findings cited by the Court.
The ad-hoc 2% addition to the value of closing stock under section 145A (added by the AO on account of alleged direct expenses) is to be deleted in the assessment for the year under appeal, consistent with the Commissioner (Appeals) and earlier Tribunal findings that the assessee valued stock inclusive of direct expenses and that estimation was unjustified.

Broader implications: The opinion primarily follows and applies earlier orders of the Tribunal and a High Court confirmation in the assessee's own case. The Court's result is consistent with prior decisions and does not purport to articulate a new or novel principle beyond affirming those coordinate and higher court findings.

Result Pronounced: Order pronounced in open Court on 6 August 2014; Revenue's appeal dismissed.

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Asstt. Commissioner Of Income Tax-4(2) Aayakar Bhavan, 101, M.K Road Mumbai 400 020 v. M/S. Hindustan Organics Chemicals Ltd. Harichandrai House, 81, M.K Road Mumbai 400 023 .

Amit Shukla, J.M:— The present appeal has been preferred by Revenue, challenging the impugned order dated 13th February 213, passed by the learned Commissioner (Appeals)-VIII, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short “the Act”) for the assessment year 2009—10, on the following grounds:—

“On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the disallowance of Rs. 9,13,519 of bond issue expenses without appreciating the fact that it had been incurred for raising capital and hence be treated as capital expenditure.

2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of 2% of the total value of raw material, stores and spares in closing stock made u/s 145A on account of direct expenses like freight, storage, etc.”

2. As regards the first issue i.e, disallowance of bond issue expenses of Rs. 9,13,519, it is seen from the material placed on record that the assessee has incurred bond issue expenses of Rs. 248,98,771 out of which the assessee has debited an amount of Rs. 9,13,519, to the Profit & Loss account and the remaining amount has been carried to share premium account. In response to the show cause notice, the assessee submitted as under:—

“During the year, the assessee has incurred Bond Issue expenses of Rs. 251812290/— of which Rs. 24898771/— were debited to Security Premium Account and Fitch Rating expenses of Bonds of Rs. 913519/— was debited to other expenses. These expenses are towards the bonds of Rs. 100 crores which are redeemable at end of one year (Please rerer Schedule 4 “Unsecure Loans” to the Audited Balance Sheet. Considering the same, the Bond issue expense of Rs. 24898771/— which were not claimed as expenses in Profit & Loss Account, the same are claimed in Computation of Income. Details of Bond Expenses are enclosed.”

3. However, the Assessing Officer rejected the assessee's contention and held that the purpose of issuing bond is to raise capital for the payment of loan taken in the earlier years and, therefore, the same is in the nature of capital. Hence, he disallowed the said claim.

4. Before the learned Commissioner (Appeals), besides relying upon various decisions also, relied upon the earlier year's order of the learned Commissioner (Appeals) as well as the order of the Tribunal especially order for the assessment year 2006—07. The learned Commissioner (Appeals) accepted the assessee's contention and found that this issue is covered in favour of the assessee by the earlier year's order of the Tribunal and after relying upon the Tribunal order for the assessment year 2006—07, directed the Assessing Officer to allow the expenditure as revenue expenditure.

5. Before us, both the parties agreed that this issue stands covered by in favour of the assessee by the order of the Tribunal for the assessment year 2006—07. The learned counsel for the assessee Mr. K. Gopal, brought to our notice that the High Court has also confirmed this order of the Tribunal in the appeal filed by the Department in CIT v. Hindustan Organic Chemicals Ltd., ITA no. 399/2012 order pronounced on 11th July 2014.

6. In view of the aforesaid submissions and also the fact that the High Court is confirmed the order of the Tribunal for the assessment year 2006—07, in the following manner:—

“10. As far as the second question is concerned, we find that the CIT (Appeals) as well as the ITAT merely followed the decisions in the case of this very Assessee in the preceding years in deleting the disallowance of Rs. 10,00,300 incurred towards bond registration charges and in view thereof, the ITAT came to the finding that the said expenditure was a revenue expenditure and hence allowable under section 37(i) of the Act. We are of the view that the aforesaid finding of the ITAT cannot be in any way said to be vitiated on the ground of perversity or any error apparent on the face of the record and therefore does not give rise to any substantial question of law which needs to be answered by this Court.”

Thus, we affirm the order of the learned Commissioner (Appeals) following the order of the High Court. Accordingly, the ground no. 1, raised by the Department stands dismissed.

7. As regards the disallowance made in the closing stock of raw material on ad—hoc basis @ 2% made under section 145A, the Assessing Officer on a perusal of audit report noted that the assessee has not considered the direct expenses while computing the value of closing stock. He held that the raw materials are required to be loaded with the direct expenses like freight shortage, etc., incurred on account of the same as no details of direct expenses has been furnished, therefore, he estimated 2% of the total value of the closing stock of raw materials and stores and spares to be representing the direct expenses incurred on account of raw material and accordingly an addition of Rs. 54,35,420, was made in the closing stock under the provisions of section 145A.

8. Before the learned Commissioner (Appeals), the assessee submitted as under:—

“The appellant, vide submission dated 05.12.2011, had submitted that the value of closing stock of raw material and stores includes freight charges and other direct charges incurred on raw material and stores. In support of the claim; appellant has submitted sample copy of purchase day book of item having purchase value of Rs. 3,56,54,540 (inclusive freight of Rs. 30,260/—) and General Ledger of the same item reflecting the closing value of stock at Rs. 3,56,54,540 (which is inclusive of freight). The same copy is submitted at Page no. 7 to 9. From the above your honours may observe that, the freight is included in the closing value of the stock. Therefore, the addition of Rs. 54,35,420 to closing stock of Raw Material and Stores and Spares is unwarranted and require deletion. Also, the issue is covered in favour of the appellant by CIT(A) for A.Y 2006—07, 2007—08 and A.Y 2008—09. The copy of the CIT(A) order for assessment year 2008—09 is enclosed for your reference at Page no. 10 to 20. Considering above, your honours are requested to delete the addition u/s 145A of the act.”

9. The learned Commissioner (Appeals), after following the earlier year order of the Tribunal in assessee's own case for various earlier years, allowed the assessee's ground.

10. Before us, it has been admitted by both the parties that this issue has been decided in favour of the assessee by the Tribunal uptill assessment year 2008—09.

11. After considering the order of the Assessing Officer as well as the learned Commissioner (Appeals) and also the earlier year's order of the Tribunal, we find that this issue has consistently been allowed by the Tribunal in favour of the assessee. In assessment year 2008—09, the Tribunal, vide order dated 9th November 2012, ITA no. 7981.Mum./2011, has decided the issue in the following manner:—

“4. Apropos Ground No. 2, it was stated to be covered by the earlier decision of the Tribunal rendered for A.Y 2007-08. The facts are stated to be identical. For the sake of convenience the relevant portion of the order of the Tribunal dated 13/01/2011 in ITA No. 2201.Mum/2010 on the similar issue is reproduced below:

“11. Ground No. 3 is directed against the action of the CIT(A) in deleting the disallowance of Rs. 58,09,097/- u/s. 145 of the Act.

12. The AO noted that the tax audit report showed that the assessee company had not considered the direct expenses while computing the value of closing stock. The AO, therefore, was of the view that such expenses were required to be loaded with for valuing the closing stock and the direct expenses, freight, storage, etc. were incurred on account of purchase of raw material. Since no details of the direct expenses had been furnished, the AO estimated the direct expenses at 2% of the total value of closing stock of raw materials and stores, which resulted in to the addition of Rs. 58,09,097/- to the closing stock in accordance with the provisions of section 145A of the Act. Aggrieved, the assessee carried the matter in appeal before the CIT(A).

13. Before the CIT(A), the AR of the assessee submitted that the AO had made addition of Rs. 58,09,97/- on estimate basis towards the transportation cost and other direct cost like freight, storage as incurred to closing stock of raw materials and a spare parts. He further submitted that no details were asked for by the AO. It was further submitted that the value of closing stock of raw materials and the stores were recorded at cost inclusive of freight and transportation. The AR submitted that the purchase book and general ledger of a particular day reflects that the purchase is accounted at Rs. 2,90,70,603/- which is inclusive of freight of Rs. 58,850/- and the general ledger reflects that the closing stock of Rs. 11,9,27,965/- is inclusive of freight. It was also brought to the notice of the CIT(A) that the issue is covered in favour of the assessee by the order of CIT(A) for AY 1999-00, 2002-03, 2004-05 and 2006-07. After considering the submissions of the assessee, the CIT(A) deleted the disallowance made by the AO by holding as under:

“4.3 I have considered the fact. It is seen that the appellant has been valuing its closing stock of raw material inclusive of freight charges as reflected from the purchase day book and general ledger of item having the value of Rs. 2.90 crore. It is further seen that there is no change in the valuation of the stock. I find that the valuation method has not been changed by the AO in past year and that no adjustment to this effect was made in the subsequent year. The closing stock of previous year would be the opening is stock of the year and therefore estimation of the stock is not justified. Further the appellant is consistently following the same method of valuation of closing stock. This issue is also covered in favour of the appellant by the order of CIT(A) for Assessment Years 1999-00, 2002-03, 2004-05 and 2006-07 dated 17/12/2010. In view of these facts, the addition made by the AO is deleted. This ground of appeal is therefore allowed.”

14. Aggrieved by the order of CIT(A), the revenue is in appeal before us.

15. The learned DR besides relying upon the order of the AO submitted that since no details of direct expenses filed by the Assessee, the AO estimated the direct expenses at 2% of the total value of closing stock of raw materials and stores, which is proper and the same is in accordance with the provisions of section 145 of the Act.

16. On the other hand, the learned counsel for the assessee has strongly relied upon the order of the CIT(A).

17. We have considered the rival submissions, perused the record and gone through the orders of the authorities below. It is seen that since no details of the direct expenses were furnished, the AO estimated the direct expenses at 2% of the total value of closing stock of raw materials and stores, which resulted in to the addition of Rs. 58,09,097/- to the closing stock in accordance with the provisions of section 145A of the Act. The CIT(A) gave a finding that the appellant has been valuing its closing stock of raw material inclusive of freight charges as reflected from the purchase day book and general ledger of item having the value of Rs. 2.90 crore and there is no change in the valuation of the stock. The CIT(A) held that the closing stock of previous year would be the opening is stock of the year and therefore estimation of the stock is not justified. The CIT(A) finally deleted the addition following the earlier orders of CIT(A) in assessee's own case.”

5. The facts of the present year are similar. The A.O applied section 145A of the Act. He has observed that audit report has revealed that assessee company did not consider direct expenses while computing value of closing stock. According to AO raw material was required to be loaded with the direct expenses like freight, storage etc. incurred on account of the same. In absence of details he estimated direct expenses to the tune of 2% of the total value of the closing stock of raw material and accordingly addition of Rs. 6,81,25,800/- was made which has been deleted by Ld. CIT(A) as mentioned above.

6. We have heard both the parties on this issue. The facts being identical to A.Y 2007-08, therefore, respectfully following the decision of Co-ordinate Bench in assessee's own case, we find no infirmity in the relief given by the Ld. CIT(A). Ground No. 2 of the revenue is dismissed.”

12. Thus, consistent with the view taken in the earlier years, we do not find any merit in the ground raised by the Department and the same is dismissed.

14. In the result, Revenue's appeal is dismissed.

Order pronounced in the open Court on 6th August 2014

Asstt. Commissioner ... v. M/S. Hindustan Organ...