M/S. COROMANDEL SUGARS LTD.,,CHENNAI vs. DCIT, CC - 1 (2),, CHENNAI

The AO was not convinced and stated that the explanation of the assessee cannot be accepted for the reason that the method followed by assessee for accounting of its income is on the basis of mercantile system of accounting and hence, the same is to be assessed in this year. He also noted that the assessee has recognized buffer stock subsidy as revenue item in the earlier previous years on accrual basis. Aggrieved, assessee preferred appeal before CIT(A).

- 4 - & 3391/Chny/2019 stated that this cannot be a reason or ground to allow the change in method of accounting regularly employed by the assessee and not accounting the income. Aggrieved, assessee came in appeal before the Tribunal.

6.2 An appropriate amount in respect of such earned benefits, estimated on a prudent basis, is credited to income for the year even though the actual amount of such benefits may be finally settled and received after the end of the relevant accounting period.

6.3 A contingency related to a government grant, arising after the grant has been recognised, is treated in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date.

6.4 In certain circumstances, a government grant is awarded for the purpose of giving immediate financial support to an enterprise rather than as an incentive to undertake specific expenditure. Such grants may be confined to an individual enterprise and may not be available to a whole class of enterprises. These circumstances may warrant taking the grant to income in the period in which the enterprise qualifies to receive it, as an extraordinary item if appropriate (see Accounting Standard (AS) 5, Prior Period and Extraordinary Items and Changes in Accounting Policies).

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6.5 Government grants may become receivable by an enterprise as compensation for expenses or losses incurred in a previous accounting period. Such a grant is recognised in the income statement of the period in which it becomes receivable, as an extraordinary item if appropriate (see Accounting Standard (AS) 5, Prior Period and Extraordinary Items and Changes in Accounting Policies).

The ld.counsel for the assessee in view of the above argued that the standard mandate is that there should be reasonable amount of certainty or assurance for recognition of such income from Government grants in the form of buffer stock subsidy and accordingly, the assessee has rightly accounted for the income on receipt basis.

5.1 The ld.Senior DR however relied on the order of AO and that of the CIT(A) and argued that the amount is accrued in earlier years and the same has been disclosed by assessee regularly on accrual basis. He relied on the same case of Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd., (2013) 358 ITR 295 as referred by ld.counsel for the assessee. The ld. Senior DR stated that the Hon’ble Supreme Court in para 27 has considered this issue and noted as under:- “27. Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having

- 7 - & 3391/Chny/2019 been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.”

Hence, he argued that this judgment is actually in favour of Revenue and against assessee.

5.2 In reply, the ld.counsel for the assessee relied on para 21 of the judgment which reads as under:- “21. In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee.”

He argued that even para 27 talks about an hypothetical income i.e., income of import of goods and when no real income accrues but only has hypothetical income accrued to the assessee. This case will be applicable to the facts of the case but he argued that the Hon’ble Supreme Court has categorically followed the decision of Godhra Electricity Co.Ltd., vs. CIT, (1997) 225 ITR 746, wherein it

- 8 - & 3391/Chny/2019 is held that “what has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realization in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made “no income””. In view of the above, the ld.counsel stated that the assessee has rightly accounted for the income on reasonable certainty or assurance of recognized income from Government in the form of buffer stock subsidy accordingly. The assessee had changed the method of accounting from accrual to receipt or on substantial certainty but receipt which has not been disturbed by the AO.

5.3 In view of the above given facts, we find that the assessee has gone into the factum of reasonable certainty or assurance for recognizing the income from Government from buffer stock subsidy and changed the method of accounting accordingly from accrual to receipt and which has not been disturbed. Since the assessee has accounted the income based on guidelines, notes issued by ICAI and there is a certainty or assurance from Government to recognize this income, we are of the view that the assessee has rightly changed

- 9 - & 3391/Chny/2019 the systems and recognized the income accordingly. We accordingly delete the addition and allow this issue of assessee’s appeal.

Now before us, the ld.counsel for the assessee filed copies of Accounting Standard 2 issued by ICAI for the purpose of valuation of inventories and he referred to particular clause 12, which reads as under:-

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“12. Interest and other borrowing costs are usually considered as not relating to brining the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories.”

As pointed out by ld.counsel for the assessee, this issue is covered by the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. George Oakes Ltd., (2008) 303 ITR 357, wherein Hon’ble High Court has considered the AS-2 issued by ICAI for valuation of inventory and upheld the same by observing as under:- “4. Heard the counsel. The Institute of Chartered Accountant of India by its Accounting Standard AS 2 (Valuation of Inventory), has prescribed the standard for valuation of inventory. According to this standard, the inventory has to be valued at purchase cost price less commission and discount on purchase (if any) and the commission and discount on purchase in respect of the goods sold should be adjusted against cost of goods sold. Being compulsory the company has adopted the Accounting Standard AS-2 as per the guidelines prescribed by the Institute of Chartered Accountant of India. In this case there is a specific finding that the change in accounting method has not been found to have been made with a mala fide intention. Such a change in method of accounting is bona fide and the same is made mandatory by the Institute of Chartered Accountant of India to be followed in the preparation of financial accounts. Under such circumstances, in the year of change, some discrepancy is bound to happen in the profitability of the company as compared to previous year. However, in succeeding years, there will not be any discrepancy on this account. When the change of accounting method is bona fide and also the same is recognised in accounting principle, the resultant variation in income cannot be forced to be taxed upon the assessee. This Court in the case of Commissioner of Income-tax, Tamil Nadu Vs. Carborandum Universal Ltd., reported in 149 ITR 759, considered the scope of change of method of accounting and held as follows: "Therefore, in view of the findings of the Tribunal that the change of the method is bona fide and is intended to be followed in future, year after year, the change has to be accepted by the Revenue,

- 12 - & 3391/Chny/2019 notwithstanding the fact that during the assessment year which is the first year when the change of method is brought about it has resulted in a prejudice or detriment to the Revenue. So long as the method of valuation adopted by the assessee gets recognition from the practicing acccountants and the commercial world for valuation of stock-in-trade, the adoption of that method could not be questioned by the Revenue unless the adoption of that method is found to be not bona fide or restricted for a particular year."

We noted that this issue is categorically clear that the ICAI has issued AS-2, Clause II wherein interest and borrowing cost are usually considered as not relating to bringing the inventories to the present location and therefore, usually not included in the cost of inventories. In view of this, we are of the view that the assessee has rightly excluded the same and we delete the addition. This issue of assessee’s appeal is allowed.

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2.The Commissioner of Income Tax (Appeals) erred in confirming the restriction of claim made u/s.80IA of Rs 16385892/-

2.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that the appellant has purchased power from public utilities at Rs 5.10 per unit and therefore for the purpose of claim u/s 8OIA, has adopted the actual sale value of Rs.4.44 per unit in respect of the power sold to KPTCL and has adopted the market price of Rs. 5.10 per unit, in respect of the power captive consumed.

2.2 The Commissioner of Incometax (Appeals) ought to have appreciated that in respect of power captively consumed, the cost of power consumed should be computed at the rate of which balance power was purchased by that unit, which will represent the market value of power consumed.

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“11.1 I have considered the submissions of the AR and the order for the assessment year 2011-12. In the said order, the rate at which the power was purchased from State Electricity Board should be adopted. The rate of Rs. 5.10 adopted by the appellant is not the rate at which the State Electricity Board sells the power but it was the rate at which the appellant claims to have purchased from public utilities. Therefore the order of the earlier year may not help the appellant especially when the appellant was not able to adduce any evidence to show that the State Electricity Board also sells the power at Rs.5.10. The further point to be considered in this appeal is the fact noted by the AO in that when enough power generated by the appellant's own power plant for its captive consumption then why sell the power to other entity and that too at a lesser rate. All things considered, I am of the view that the AO was justified in restricting the deduction claimed u/s 80IA and the disallowance of Rs.1,63,85,892/- made is confirmed and the ground raised is dismissed.”

consumers should be considered instead of the rate at which the power generating companies supply its power to the electricity board. The relevant findings of the Tribunal are as under:-

“31. We have considered the rival submission and perused the materials available on record.

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CIT(A) which calls for any interference. It may be mentioned here that the deduction u/s.80IA is the deduction from the total income of the assessee the profits and gains of an eligible undertakings. The Hon’ble Gujarat High Court has categorically admitted that the deduction u/s.80IA is permissible for captive consumption and even the rate at which the deduction is to be computed. Consequently, the issue is held in favour of the assessee and against the Revenue.”

18.6 In the present case, the facts are identical with that of the facts considered by the Tribunal in earlier year. The CIT(A) after considering relevant facts and also by following the decision of the ITAT, Chennai in the case of Eveready Spinning Mills (P) Ltd., vs. ACIT, (2012) 17 taxmann.com 254 and the decision in the case of Shri Velayudhaswamy Spinning Mills (P) Ltd., vs. DCIT, (2012) 19 taxmann.com 28 has deleted additions made by the AO by holding that market value of the power captively consumed should be computed considering the rate of power to a consumer in the open market and it should not be compared with the rate of power at which power could have been sold to SEBs because this is not the rate for which a consumer could have purchased power in the open market. Therefore, we are of the considered view that there is no error in the finding recorded by the ld.CIT(A) to delete additions made by the AO towards TP adjustment on deduction claimed u/s.80IA of the Act. Hence, we reject the ground taken by the Revenue.

12.1 As the issue is covered, respectively following the Co-ordinate Bench decision in the case of The India Cements Ltd., supra, we direct the AO to allow the claim of deduction u/s.80IA of the Act fully. This issue of assessee’s appeal is allowed.

- 17 - & 3391/Chny/2019 of section 14A r.w.rule 8D of the Income Tax Rules, 1962 (hereinafter the ‘Rules’) for an amount of Rs.20.26 lakhs.

sustained and the balance sum of Rs. 50,71,690/- is deleted. The appellant gets partial relief in this regard. This ground is therefore partly allowed.

We noted that the CIT(A) has restricted the disallowance to the extent of dividend income i.e., claimed by assessee as exempt and rest of the disallowance, he restricted because the investments were strategic in nature, which issue is covered by the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT, (2018) 402 ITR 640. We find no infirmity in the order of CIT(A) and the same is confirmed. This issue of assessee’s appeal is dismissed.

Order pronounced in the open court on 16th November, 2022 at Chennai.