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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARIANDSHRI GEORGE GEORGE K
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ANDSHRI GEORGE GEORGE K, JUDICIAL MEMBER
ITA No.2181/Bang/2017
Assessment year : 2013-14
M/s Star Metallics & Power (P) Vs. The Asst. Commissioner of Ltd., Income-tax, Metal & Ferro Alloys Plant Circle-1, Mariyammanahalli, Vyasankere, Bellary. Hospet. PAN – AALCS 1058 P ASSESSEE REVENUE
Revenue by : Smt. Priyadarshini Besaganni, JCIT (DR) Assessee by : Smt. Prathibha, Advocate
Date of hearing : 17.11.2021 Date of Pronouncement : 29.11.2021
O R D E R Per Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order of CIT(A), Gulbarga dated 28/9/2017. This appeal by the assessee is directed against the order of CIT(A), Gulbarga dated 28/9/2017.
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The assessee has raised following grounds:-
“1. The learned CIT(A) erred in passing the order in the manner which he did.
On the facts and in the circumstances of the case, the learned CIT(A) ought to have appreciated the explanation made by Assessee and ought to have cancelled the action of the AO towards reducing the loss by Rs.4 crores alleging the fixed cost of Rs.4 crores has accrued for the relevant year.
The learned CIT(A) ought to have appreciated the fixed cost of Rs.4 crores did not accrue to the Assessee in the relevant year even by considering the terms of the old agreement dated 23.09.20 10 and accordingly the impugned addition as confirmed is uncalled for and liable to be deleted.
The learned CIT(A) ought to have appreciated that the method followed by the Assessee was strictly in accordance with the contract between the parties duly agreed to between them and it was also accepted by the Revenue for the preceding years and thus the impugned addition confirmed is opposed to law and liable to be deleted.
The learned CIT(A) ought to have appreciated that even the other contracting party did not claim deductions for the impugned addition as expenditure in the relevant assessment year and consequently confirming the inclusion of income in the hands of the Assessee is opposed to law and unwarranted.
Without prejudice, the learned CIT(A) having confirmed the conversion charges in accordance with the agreement dated 23.09.2010 ought to have excluded the additional income offered by the Assessee for the period from 01.10.2012 to 31.03.2013 in accordance with the duly agreed terms which was recorded in the agreement dated 24.04.2013.
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Without prejudice, the addition as confirmed by the learned CIT(A) is arbitrary, excessive and ought to be deleted in full. 8. For these and such other grounds that may be urged at the time of hearing, the Assessee prays that the appeal may be allowed.”
Since all the grounds are relating to taxing amount of Rs.4 crores, which is not disclosed by the assessee.
Facts of the case are that
The assessee is a Private Limited Company carrying on business of manufacture of Ferro Alloys and Generation of Power for Captive Consumption. The Assessee filed the return of income for the relevant year through e-filing on 27.09.2013 declaring loss of Rs.18,35,88,041. The Assessee had entered into an agreement with M/s Sandur Manganese & Iron Ores Ltd., (hereinafter referred to as SMIORE) vide agreement dated 29.09.2010 which was named as Conversion Agreement for conversion of manganese ore to silicomanganese and ferromanganese at the assessee's ferroalloys plant for SMIORE on account of furnace owned by the assessee which had captive power facility
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to produce the required products. SMIORE has agreed to provide the required quantity of manganese ore, reductants and electrode paste at the Assessee's plant free of cost for conversion. The Assessee has agreed to produce and supply the entire silicomanganese or any other ferroalloy product so produced. The conversion fee was to be determined in two parts viz., fixed cost per month to meet manpower, administration, finance cost etc and variable cost per tonne of ferroalloy produced. As agreed to the conversion cost was split into two viz., fixed cost and variable cost which was to be based on production of silicomanganese which has been clearly agreed to in Clause 8 of the agreement for which necessary bills have to be raised by the Assessee. On account of increased expenditure, the conversion cost has been originally agreed to was not feasible and a revised tariff was agreed to between the parties in the relevant year with effect from 01.10.2012. The parties have reduced to writing the terms through the Conversion Agreement executed on 24.04.2013. Accordingly, for the relevant assessment year the Assessee was entitled to the conversion charges payable by SWORE with effect from 01.10.2012. For the prior
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period, conversion cost was to be paid as per the two components viz., fixed cost and variable cost in accordance with production of silicomanganese as per the previous agreement. The parties hereto have clearly understood that the payment tariff was on the basis of actual production agreement by the Assessee for SMIORE. The months in which there is no production SWORE has no obligation to make any payment.
Accordingly, the conversion charges receivable by the Assessee was worked out, accounted and offered for taxation by the Assessee. The method of computation of conversion charges in pursuance of the agreements between the Assessee and SMIORE has been declared and offered for taxation after claiming expenditure by the Assessee. The method followed by the Assessee had been accepted by the Revenue for the assessment years 2011-12 and 2012-13 and the assessments had been concluded. For the relevant assessment year in similar manner when the income was offered for taxation, the ld.AO declined to accept the income declared and proceeded to estimate the fixed cost on the basis of Rs.40 lakhs per month as provided in the agreement
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dated 29.09.2010 and arrived at Rs.4,80,00,000/- for the relevant assessment year as against Rs.80 lakhs declared by the assessee up to September 2012 holding that fixed cost for the 12 months was required to be offered since the revised tariff was only in the agreement executed on 24.04.2013 which was not applicable for the relevant assessment year. While doing so, the AO did not appreciate the terms of the agreement dated 29.09.2010 and further failed to take notice of the understanding between the contracting parties which has been adopted in the preceding years and accepted by the Revenue and also failed to consider the revised tariff was effective from 01.10.2012 and the agreement of 24.04.20 13 was only the recording of the agreement between the parties which was effective from 01.10.2012.
The AO also failed to consider that conversion charges declared by the Assessee, strictly in accordance with both the agreements and there was no omission of any income by the Assessee. Further, while doing so by resorting to estimate the income as per the old agreement, the AO accepted the revised tariff for the
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period from 01.10.2012 to 31.03.2013, ignored the tariff for that period as per the old agreement whereby the enhanced rates as recorded in the agreement dated 24.04.2013 was also brought to tax, causing double addition. Accordingly, the loss declared by the Assessee was reduced by Rs.4 crores by the AO without appreciating the submission of the Assessee.
The ld.DR submitted that the assessee entered into conversion agreement dated 29/9/2010, as per which, the assessee had done processing/production for the month of April 2012 and September 2012 to March 2013 in all 8 months. In this circumstance, the assessee failed to explain why fixed conversion fee at least for 8 months, which was not disclosed in the books of account of the assessee. Similarly, revised conversion agreement entered on 24/4/2013 i.e after the end of relevant previous year with retrospective effect from 1/10/2012 is only afterthought and no importance could be given. Further, it was submitted that the assessee is following mercantile system of accounting and as such, this amount of income has been accrued to the assessee under mercantile system
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of accounting, though it was not received by the assessee, it should be recognized as ‘income’ of the assessee, which the assessee failed to do so. The same was brought to tax by the lower authorities. The same is to be confirmed.
We have heard both the parties and perused the materials on record. Under the Income-tax Act, liability to pay Income-tax arises on the accrual of income and it is not from the computation made by the assessee or AO. The section 4 of the Income-tax Act, is the charging provision in the Income-tax Act. The charge arises when the person earns income and computation of income there upon to be made. According to the provisions of Income-tax Act, 1961, when the final income envisaged by sec. 2(45) r.w section 2(24) of the Income-tax Act is also relevant. Section 2(45) As per Section 2(45) of Income Tax Act, 1961, unless the context otherwise requires, the term “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act. “Section 2(24) "income includes (i) profits and gains
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(ii) dividend;
[(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes 39[or by an association or institution referred to in clause (21) or clause (23)11, or by a fund or trust or institution referred to in sub-clause (iv) or sub- clause (v) 41[or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub- clause (via)] of clause (23C) of section 10 41 [or by an electoral trust]].
Explanation.—For the purposes of this sub-clause, "trust" includes any other legal obligation;]
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17;
43{( iiia) any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assssee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit;
(iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living;]
(iv) the value of any benefit or perquisite 44, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
[(iva) the value of any benefit or perquisite, whether convertible
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into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the "beneficiary") and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary;]
(v) any sum chargeable to income-tax under clauses (it) and (iii) of section 28 or section 41 or section 59;
[(va) any sum chargeable to income-tax under clause (iiia) of section 28;]
[(vb) any sum chargeable to income-tax under clause (iiib) of section 28;]
[(vc) any sum chargeable to income-tax under clause (iiic) of section 28;]
[(vd)] the value of any benefit or perquisite taxable under clause (iv) of section 28;
[(ve) any sum chargeable to income-tax under clause (v) of section 28;]
(vi) any capital gains chargeable under section 45;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule;
[(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members;]
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(viii) [Omitted by the Finance Act, 1988, w.e.f. 1-4-1988. Original sub- clause (viii) was inserted by the Finance Act, 1964, w.e.f. 1-4-1964;]
[(ix) any winnings from lotteries54, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.]
[Explanation.—For the purposes of this sub-clause,-
(i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called;
(ii) 'card game and other game of any sort" includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game;]
[(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948(34 of 1948), or any other fund for the welfare of such employees;]
[(xz) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation.—For the purposes of this clause", the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to clause (JOD) of section 10;]
[(xii) any sum referred to in 59[clause (Va)] of section 28;]
Following sub-clause (xiia) shall be inserted after sub-clause (xii) of clause (24) of section 2 by the Finance Act, 2018, w.e.f. 1-4-
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2019:
(xiia) the fair market value of inventory referred to in clause (via) of section 28;
[(xiii) any sum referred to in clause (v) of sub-section (2) of section 56;] 61[(xiv) any sum referred to in clause (vi) of sub- section (2) of section 56;]
[(xv) any sum of money or value of property referred to in clause (viz) "[or clause (viia)] of sub-section (2) of section 56;]
[(xvi) any consideration received for issue of shares as exceeds the fair market value of the shares referred to in clause (viib) of subsection (2) of section 56;]
[(xviz) any sum of money referred to in clause (ix) of sub-section (2) of section 56;]
[(xviia) any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56;]
Following sub-clause (xviib) shall be inserted after sub-clause (xviia) of clause (24) of section 2 by the Finance Act, 2018, w.e.f.'
1-4-2019:
(xviib) any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56;
[(xviiz) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee 61 [other than,—
(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1)
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of section 43; or
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by The central Government or State Government, as the cse may be];]
Now, it is necessary to go through the provisions of sec. 5 of the Act.
“In order to appreciate the rival submissions, it is necessary to take note of s. 5 of the IT Act and ss. 4 and 5 of the Interest-tax Act, which read thus: “5. Scope of total income.—(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which — (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-s. (6) of s. 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—' (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of
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this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.”
Further, section 145 is always relevant with regard to method of accounting as sub section (1) to section 145 states that - income chargeable under the head ‘profits and gains of business’ and profession or ‘income from other sources’ shall, subject to the provisions of sub sec.(2), be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. Therefore, to bring the receipt of conversion charges to be income as mentioned in sec.2(24) of the Income-tax Act, it is necessary that it should be computed in accordance with method of accounting regularly employed by the assessee. In the present case, the assessee, admittedly following the mercantile system of accounting and in such a method, deduction for expenses allowed irrespective of fact where such an amount has been actually paid or remained unpaid at the end of the financial year. In the similar manner, the income, under such a method of
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accounting is required to be recognized on accrual basis. In other words, when the assessee following mercantile system of accounting and right to receive such an income is accrued, then it is chargeable to tax and receipt of such amount, whether before or after accrual is of no consequences. In the similar way, some amount has been received, which does not represent income accrued for the year, it shall not be charged to tax and will assume the nature of liability till the time of its accrual. Only when such amount accrues as income, the earlier liability will get converted into income. Till that time, it will continue as liability, despite the fact that it was received. Thus, receipts relevant to tax under mercantile system of accounting are the fact of accrual of income during the financial year and actual receipt of income is irrelevant. In other words, receipt or non receipt of amount during the financial year is irrelevant consideration in determining whether income has accrued or not. In the present case, as per agreement entered by the assessee with the SMIORE Ltd., on 29/9/2010 fee to be determined in two part viz.,, (i) fixed cost per month to meet manpower, administration, finance cost etc., and (ii( a
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variable cost per tonne of ferroalloy produced. The said agreement reads as follows:-
“4.1 Further. The correctness of above receipts and workings has been verified with reference to the CONVERSION AGREEMENT dated: 29/09/2010 entered into by the assessee with SMIORE Ltd. The relevant portion and terms & conditions of the said agreement are re-produced as under:
"This Agreement is made and executed at Vyasankere, Hospet on Wednesday the 29th day of September 2010 by and between The Sandur Manganese & Iron Ores Limited, a company incorporated and registered under the provisions of the companies Act, 1956, having its Registered office at Lakshinipur, Sandur - 583 119 (hereinafter referred to as SMIORE which expression shall, unless repugnant to the meaning and context thereof, be deemed to include all of its delegates, executors, successors, legal heirs, administrators, assigns and authorized representatives) and represented by Nazim Sheikh – Executive Director of ONE PART AND Star Metallics and Power Limited a company incorporated and registered under the provisions of the Companies Act, 1956 having its Registered Office at Metal and Ferroalloys Plant, Vyasankere, Hospet - 583 222, Bellary District, Karnataka. hereinafter referred as SMPPL (which expression shall, unless repugnant to the meaning and context thereof, be deemed to include all of its Sucessors-in-interest, permitted assigns and authorized representatives) represented by S.H Mohan - Whole- time Director of the OTHER PART; Clause.J WHEREAS SMPPL is agreeable to produce and supply to SMIORE the entire SiMn (or any other ferroalloy to be produced. The norms of consumption of Mn ore, coke, electrode paste, power etc., will depend on grade and type of ferroalloy to be produced, and will be mutually discussed and arrived at on a quarterly basis;
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Clause.K WHEREAS SMIORE is agreeable to pay to SMPPL a conversion fee to be produced. Conversion costs payable as determined on the date of execution of this agreement is at Rs.40 lakh per month towards fixed costs and Rs.20.000 per tonne towards variable costs for Silicomanganese which shall be reviewed and altered, if necessary on a quarterly basis. Clause. L WHEREAS SMIORE hail pay an additional 5% of conversion cost (fixed plus variable) towards profit to SMPPL; Clause.M WHEREAS it is agreed by both parties that the conversion fee shall include all costs of manpower, repairs & maintenance, administration and other fixed costs, power. other raw materials, spares. consumables etc., used by SMPPL for production of ferroalloys other than Mn Ore, coke, electrode paste which shall be supplied free of cost by SMIORE to SMPPL. Conversion costs shall also include internal transportation, product handling, packing, loading, unloading etc.”
The explanation of assessee is that it has not received that income. The explanation offered by the assessee has been perused and found against the facts of the case. As per Clause-K, SMEORE is agreeable to pay to SMPPL a conversion fee to be determined in two parts, namely, fixed cost per month to meet manpower, administration, finance cost etc., and a variable cost per tonne of ferroalloy produced. Conversion costs payable as determined on the date of execution of this agreement is at Rs.40 lakh per month towards fixed costs and Rs.20,000 per tonne towards variable costs. From this, it is evident that the SMIORE has to pay
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fixed conversion fee of Rs.40.00 lakh per month to the assessee to meet manpower, administration, finance cost etc. irrespective the ferroalloy produced. Therefore, receipt of fixed conversion fee of Rs.40.00 lakh per month does not depends on production as explained by the assessee. Again, it is also evident from the statement of receipt that the assessee has done processing/production for the month of April-12 and Sept. 12 to March 2013 - in all 8 months. Under this circumstances, the assessee failed explain as to why fixed conversion fee at least for 8 months has not been recognized in the books. Similarly, revised conversion agreement entered into on 24/04/2013, after the end of relevant previous year, with retrospective effect from 01/10/2012, could be afterthought and hence cannot be relied upon.
The assessee emphasis is on the computation of income in accordance with the method of accounting regularly employed by it. This submission overlooks an important aspect which is laid down in the proviso to sub-s. (1) of s. 145. It states that in any case, where the accounts are correct and complete but the method
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employed is such that in the opinion of the AO the income cannot properly be deduced there from, computation shall be made upon such basis and in such manner as the AO may determine. 'Chargeable income is as per accrual of income. Therefore, the AO can, by applying s. 5 of the Income-tax Act, in the background of proviso to sub-s. (1) of s. 145 of the IT Act, compute income on accrual basis. The statute must be read as a whole and one provision thereof should be construed with reference to another provision, so as to make a consistent enactment of the whole statute. It is a rule now firmly established that intention of the legislature must be found by reading the statute as a whole. If the interpretation suggested by the counsel for the assessee is accepted, the very charging section would be rendered inoperative and ineffective, which is impossible to be done. The machinery provisions cannot be interpreted as to restrict the scope of the charging section. As a matter of fact, authorities are expected to construe the machinery provisions in such a manner that a charge to tax is not defeated. The CIT(A) was therefore correct in law in concluding that AO has rightly made computation of the income on accrual
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basis, rejecting the income of the assessee income of the assessee.
In our opinion, it cannot be said that fixed income of Rs.4 crores not accrued to the assessee. As per this agreement cited supra, the said income of Rs.4 crores has accrued to the assessee. The assessee has the right to receive it, if it is not actually received, which cannot go out of the total income of the assessee to say that it is not accrued to the assessee. As we discussed earlier, the said amount has been accrued to the assessee under the mercantile system of accounting as per the provisions of sec. 145(2) of the Income-tax Act and the same has to be brought to tax. The other contention of the assessee is that there was revised agreement dated 24/4/2013 with retrospective effect on 1/10/2012, which cannot be given any importance which is entered after the end of financial year 31/3/2013 and it is only self serving document so as to facilitate to tax payable by the assessee. Accordingly, we do not find any infirmity in the order of the lower authorities and all the grounds raised by assessee before us are dismissed.
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In the result, the appeal of the assessee is dismissed. Order pronounced in the open court on 29th Nov, 2021. Sd/- Sd/- (GEORGE GEORGE K) ( CHANDRA POOJARI) Judicial Member Accountant Member Bangalore, Dated, 29th Nov, 2021
/ vms /
Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.