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Income Tax Appellate Tribunal, “L” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Ramlal Negi (JM)
O R D E R Per B.R. Baskaran (AM) :
The assessee has filed this appeal challenging the assessment order dated 25-01-2016 passed by the AO u/s 143(3) e.w.s. 144C(1) of the Act in pursuance of direction given by the Ld DRP for assessment year 2011-12.
The assessee is aggrieved by the rejection of books of accounts; consequent estimation of income of the assessee for the year under consideration u/s 44BB(1) of the Act and not allowing set off of brought forward unabsorbed depreciation.
We shall first take up the issue relating to rejection of books of accounts. The assessee herein is a company incorporated in Singapore and it owns a drillship by name “Blackford Dolphin”, which is used to carry out deep sea drilling services. The assessee entered into a contract with M/s Reliance Industries Ltd and provided the “Blackford Dolphin” drillship on charter hire. The Ld A.R submitted that the assessee commenced its operations in India on 2 Blackford Dolphin Pte. Ltd.
29-01-2010 and completed the operations on 01-06-2010. The Ld A.R submitted that the assessee has maintained books of accounts for its Indian operations and declared total income on “net income” basis for assessment year 2010-11 and 2011-12. The Ld A.R submitted that the income so declared was accepted in assessment year 2010-11 in the assessment completed u/s 143(3) of the Act, wherein the unabsorbed depreciation of AY 2010-11 was also determined.
The assessee filed its return of income for AY 2011-12, i.e., the year under consideration declaring NIL income. During the course of assessment proceedings, the AO referred the matter relating to International Transactions to the TPO and the TPO did not make any variation in the International transactions.
However, the AO proposed to reject the books of accounts for the following reasons, which are stated in the draft assessment order as under :-
“7. During the assessment proceedings/ it was noticed that the assessee in the computation of income has claimed a depreciation of Rs. 81,92,00,459/- on Drill ship. From the records, it is noticed that this Drill ship entered into Indian waters on 29th January 2010 and the assessee has shown this Drill ship as introduction to block of assets. And the cost of this asset was shown at Rs. 2950,02,67,399/ by invoking section 43 of the IT Act, 1961(Explanation-11) and a depreciation at the rate of 7.5 percent (50% of 15%) was claimed as on 31.03.2010. It is further noticed that the said Drill ship left Indian waters on 06.06.2010 as the business operation in India of the assessee ceased due to termination of contract. It has been claimed by the assessee that the accounting has been based on liquidation basis of accounting. Although, the business operation ceased w.e.f. 01.06.2010, the assessee has presented its account up to 31.03.2011 and the assets were shown as block of assets in the balance sheet as on 31.03.2011. Since apparently, the accounts of the assessee did not present true and correct state of affairs and the same cannot be relied upon. The assessee, vide order sheet noting dated 05.03.2015 was requested to Show Cause as to why the books of accounts shall not be rejected by invoking provisions of section 145(3) of the IT Act.”
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The assessee made detailed submissions and objected to the proposal of the AO. The AO was not convinced with the contentions of the assessee. Accordingly, after considering the submissions of the assessee, the AO rejected the books of accounts and determined the total income u/s 44BB of the Act @ 10% of the Gross receipts in the draft assessment order passed by him.
The assessee filed objections before the Ld DRP objecting to the draft assessment order passed the AO. The Ld DRP, however, confirmed the rejection of books of account and also confirmed the determination of income u/s 44BB(1) of the Act. Accordingly the AO passed the final assessment order.
The first issue relates to the rejection of books of accounts. We heard the parties on this issue. The assessee had brought the “drill ship”, referred above, into India and claimed depreciation thereon by adopting the deemed WDV as the cost of asset as per Explanation 11 to sec. 43 of the Act. Even though the Indian operations were completed w.e.f. 06-6-2010 and the ship was taken away from the Indian waters, the assessee continued to show the same as part of its assets and depreciation was claimed by the assessee for AY 2011-12. This has been found fault with by the AO. Hence the AO proposed to reject the books of accounts. Further, the AO noticed that the cost of ship has been taken at two different figures, i.e., one for book purposes and another for income tax purposes. Hence the AO has taken the view that depreciation claim was incorrect and misleading. The final reasons given by the AO in the draft assessment order for rejecting the books of account are extracted below, for the sake of convenience:- 9.1 In view of the above observations, the financial statements submitted by the assessee cannot be relied upon and the Books of Accounts deserves to be rejected for the following reasons: -
a. Although there is no business of the assessee w.e.f. 6/6/2010 in Indian operation for which the assets were brought in, these assets have been shown as block of asset held by the assessee for the purpose of business at the end of the financial year, which is incorrect and misleading.
4 Blackford Dolphin Pte. Ltd. b. While the gross block of fixed assets, being the drillship, has been recorded at Rs. 1,617.85 crores in the balance sheet, (as representing its original cost less accumulated depreciation), however the value taken for calculating depreciation claim under the Income Tax Rules, 1962, has been on a gross block of Rs. 2,559.07 crores. c. During the F.Y. 2009-10 the assessee had shown fixed assets being Drill ship at Rs. 2559.07 Cr by debiting the same to Head Office and introducing the same into Indian operation. However for the same fixed assets on relinquishment as on 6/6/2010, no entry has been passed in the accounts. The resulted relinquishment would be transfer of capital assets at the invoice value of Rs 2559.07 Cr as per the customs invoice. d. Since the gross block value has been erroneously adopted by the assessee, for reasons stated above, the depreciation claim of the assessee is clearly incorrect and misleading. e. Though the assessee has re-exported the Drillship on 6.6.2010 upon the cessation of business activity (Indian Operation) and termination of the contract, resulting in the negation of its gross block of fixed assets, the assessee yet continues to include the same in its gross block as at 31.3.2011 and has claimed depreciation thereon. f. The audit report in Form 3CA/3CB has not been furnished and the financial statements are apparently unaudited. Therefore, the conditions prescribed in section 44BB (3) are not fulfilled. g. Though the financial statements are claimed to have been prepared on the liquidation basis of accounting, which requires an entity to measure their assets at the amount they expect to collect on sale, a perusal thereof shows that it is not so.
9.2 The erroneous and misleading character of the accounts of the assessee, is further evident from the following discussion related to its accounting for fixed assets and the computation of depreciation thereon:- a. The assessee has adopted an entirely different set of two figures, in respect of the gross block of its fixed assets and depreciation thereof, for the purpose of its financial statements and for the purpose of the Income Tax Act. b. The assessee continues to disclose in its balance sheet as at 31.3.2011, fixed assets which are re-exported therefore
5 Blackford Dolphin Pte. Ltd. relinquished and were no longer part of its project assets (Block of assets). c. Further by way of re-export of the fixed asset there is a relinquishment of assets which should have been shown by way of credit entry to the accounts of Head Office. During the F.Y. 09- 10 when the same assets were imported into Indian operations by debiting the Head Office to the extent of Rs. 2559.07 Cr, the assessee had shown these assets as acquired and the cost of acquisition was shown at Rs. 2559 Cr and depreciation was claimed accordingly, however no entry has been passed for reverting these assets back to the Head Office which should have been by debiting the accounts of Indian operation and crediting the Head Office by FOB value of the assets as shown in the customs documents.
The AO was of the view that the assessee should have removed the value of Drillship, since it has been taken back out of Indian waters. The AO has also observed that the assessee has not furnished tax audit report and hence the financial statements are apparently unaudited. The assessee claimed before the AO that the financial statements have been prepared on liquidation basis. The AO took the view that, in that case, the assets should have been shown at realisable value, which has not been done so. These factors lead the AO to come to the conclusion that the financial statements are not reliable and accordingly he rejected the books of accounts.
The Ld DRP confirmed the view taken by the AO. In addition to the defects pointed out by the AO, the Ld DRP observed that the assessee has recorded only those transactions which in the opinion of the assessee were necessary for preparation of income tax return of the company. It noticed that the expenses relating to drilling have not been recorded. It also noticed that the assessee did not maintain separate bank accounts for Indian operations and no cash flow has been prepared. The Ld DRP noticed that the assessee has brought the assets into its books by passing a journal entry, i.e., by debiting asset account and crediting the Head office account. The Ld DRP questioned the same and took the view that the assessee has not shown that the above said asset has been removed from the books of Head office.
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Accordingly the Ld DRP questioned the eligibility of the assessee to claim depreciation also.
We notice that the tax authorities are finding fault with mainly with the depreciation claim of the assessee. As noticed earlier, the drillship was brought into India in the immediately preceding year and in that year, the depreciation claim has been allowed. We also noticed that the cost of asset, for the purpose of income tax, has been computed as per Explanation 11 to sec. 43 of the Act and the same has been accepted in the immediately preceding year. It is a fact that the cost of drillship has been taken at a lower figure for book purpose and different figure has been adopted for Income tax purposes for the purpose of claiming depreciation. But the fact remains that the cost adopted by the assessee for the purpose of claiming depreciation in the immediately preceding year has been accepted by the assessing officer and consequently, what was relevant for the year under consideration is the opening WDV. After having accepted the cost of drillship in the immediately preceding year, in our view, it may not be right on the part of the AO to question the same in the year under consideration.
From the paper book, we notice that the financial statements have been audited by Ms Maddi & Co., Chartered Accountants. We also notice that the Annexure to Tax audit report in Form 3CD is also furnished. Main audit report in Form 3CA is not placed in the paper book, for which only explanation from the assessee is required and the same cannot be a ground to suspect the otherwise audited accounts.
The AO has expressed the view that the “realizable value of drillship” should have been shown in the books of accounts and further, effect of transfer of assets to outside India should have been given effect to in the books. Before us, the assessee submitted that even if the drillship is shown at realizable value in the books, the same would not affect the depreciation claim of the assessee for the reason that the provisions of sec. 43(6)(c)(i)(B) mandate
7 Blackford Dolphin Pte. Ltd. reduction of moneys payable in respect of any asset “which is sold or discarded or demolished or destroyed” during the previous year from the WDV. The Ld A.R submitted that the assessee continues to own and use the asset in the foreign waters and hence it cannot be said that the asset has been sold or discarded or demolished or destroyed. We notice that the assessee has taken its own view in this matter. In any case, the entry passed or not passed in the books of account is not going to bind the assessing officer. Hence this reasoning of the AO cannot be a ground to support rejection of books of accounts.
We have noticed that the Ld DRP has included certain other reasons also. Since the assessee has not purchased the drillship, but has brought it from its head office, it is normal to bring the asset into the books by passing journal entry. Hence the same cannot be found fault with. The revenue will not be affected, if the assessee did not claim any other expenditure. If the AO is able to show that the assessee has incurred expenditure outside the books, then other course of action is available to the AO. We notice that it is not the case of the AO that the assessee has incurred any expenditure outside the books. Hence we do not find merit in the observations of Ld DRP that the expenses relating to drilling have not been recorded. The Ld DRP has also expressed the view that the “drillship” should have been removed from the books, since the same has been taken outside India. We have noticed earlier that the assessee has given different interpretation and hence the same cannot be a ground to reject the books of accounts, as the same will, at the most, affect depreciation claim, if the contentions of the assessee are not accepted. At this juncture, we make it clear that we are not expressing any view on the contentions of the assessee and we are only visualizing possible effects.
In view of the foregoing reasons, we are of the view that the various reasons given by the tax authorities do not justify rejection of books of accounts. Accordingly we set aside the order passed by Ld CIT(A) on this issue.
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Since we have set aside rejection of books of accounts, the alternative grounds urged by the assessee will become redundant. In that case, the AO is required to determine the total income on the basis of books of accounts of the assessee. Accordingly we direct the AO to examine the books of accounts of the assessee and assess the total income in accordance with the law, after affording adequate opportunity to the assessee.
In the result, the appeal of the assessee is treated as allowed for statistical purposes.
Order has been pronounced in the Court on 18.7.2018.