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Asstt. Commissioner of Income Tax4(2) Aayakar Bhavan, 101, M.K. Road Mumbai 400 020 V/s M/s. Hindustan Organics Chemicals Ltd. 81, M.K. Road Mumbai 400 023
August, 08th 2014
                 ,   `' 

                 IN THE INCOME TAX APPELLATE TRIBUNAL
                               "H" BENCH, MUMBAI

      ,  ,    ,    

         BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND
                   SHRI AMIT SHUKLA, JUDICIAL MEMBER

                      . / ITA no. 3213/Mum./2013
                    (  / Assessment Year : 2009­10)

Asstt. Commissioner of Income Tax­4(2)
                                                              .................  /
Aayakar Bhavan, 101, M.K. Road
Mumbai 400 020                                                                Appellant


                                     v/s

M/s. Hindustan Organics Chemicals Ltd.
Harichandrai House, 81, M.K. Road                             ...................  /
Mumbai 400 023                                                            Respondent

  ./ Permanent Account Number ­ AAACH2663P


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


     /                                                  /
Date of Hearing ­ 31.07.2014                       Date of Order ­ 06.08.2014


                                         / ORDER

 ,     /
PER 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
                                                               M/s. Hindustan
                                                       Organics Chemicals Ltd.

                                                                            2

"the Act") for the assessment year 2009­10, 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 `
     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 ` 9,13,519, it is seen from the material placed on record

that the assessee has incurred bond issue expenses of ` 248,98,771

out of which the assessee has debited an amount of ` 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 ` 251812290/­ of which ` 24898771/­ were
     debited to Security Premium Account and Fitch Rating expenses
     of Bonds of ` 913519/­ was debited to other expenses. These
     expenses are towards the bonds of ` 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 ` 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."
                                                                   M/s. Hindustan
                                                           Organics Chemicals Ltd.

                                                                                3

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 2006­07. 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 2006­07, 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 2006­07. 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/s   Hindustan   Organic   Chemicals   Ltd.,    ITA   no.399/2012         order

pronounced on 11th July 2014.
                                                                M/s. Hindustan
                                                        Organics Chemicals Ltd.

                                                                             4

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 2006­07, 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 ` 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 ad­hoc 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
                                                                M/s. Hindustan
                                                        Organics Chemicals Ltd.

                                                                             5

direct expenses incurred on account of raw material and accordingly

an addition of ` 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 ` 3,56,54,540 (inclusive freight of ` 30,260/­)
      and General Ledger of the same item reflecting the closing value
      of stock at ` 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 ` 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. 2006­07, 2007­08 and
      A.Y. 2008­09. The copy of the CIT(A) order for assessment year
      2008­09 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 2008­09.
                                                                 M/s. Hindustan
                                                         Organics Chemicals Ltd.

                                                                              6


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
                                                      M/s. Hindustan
                                              Organics Chemicals Ltd.

                                                                   7

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
                                                            M/s. Hindustan
                                                    Organics Chemicals Ltd.

                                                                         8

      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."
                                                              M/s. Hindustan
                                                      Organics Chemicals Ltd.

                                                                           9




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.


13.           

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

              6th August 2014   
      Order pronounced in the open Court on 6th August 2014


            Sd/-                                              Sd/-
                                                          
                                                         
     SANJAY ARORA                                       AMIT SHUKLA
  ACCOUNTANT MEMBER                                   JUDICIAL MEMBER


 MUMBAI,  DATED: 6th August 2014


     / Copy of the order forwarded to:

(1)    / The Assessee;
(2)    / The Revenue;
(3)    () / The CIT(A);
(4)     / The CIT, Mumbai City concerned;
(5)    ,   ,  / The DR, ITAT, Mumbai;
(6)     / Guard file.
                                          / True Copy
                                          / By Order
 .  / Pradeep J. Chowdhury
   / Sr. Private Secretary
                                /   / (Dy./Asstt. Registrar)
                               ,  / ITAT, Mumbai

 
 
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