LMJ INTERNATIONAL LTD.,KOLKATA vs. D.C.I.T CIR - 8,KOLKATA, KOLKATA

The assessee in the present case is a Company, which is engaged in the business of import of Edible Oil and Pulses and export of Agro Commodities, Iron ore etc. The return of income for the year under consideration was filed by the assssee-company on 26.09.2009 declaring total income of Rs.2,93,51,430/-, which was subsequently revised on 01.06.2010 declaring total income of Rs.2,96,16,994/-. In the said return, deductions of Rs.3,68,38,770/- and Rs.5,04,44,366/- were claimed by the assessee under sections 80IA and 80IB of the Act respectively. During the course of assessment proceedings, the claim of the assessee for the said deductions was examined by the Assessing Officer and on such examination, he found that the assessee had claimed deduction under section 80IA in respect of profits derived from its stand-alone warehouses. According to him, ‘warehouse’ per se was not an infrastructure facility as defined in Explanation below Section 80IA(4), inasmuch as, the legislature in its wisdom had included a port and not a stand-alone warehouse in the definition of the ‘infrastructure facility’. He also referred in this regard to the definition of ‘warehouse’ given in the Customs Act as a building or part of a building used for the storage of merchandise. He held that the stand-alone warehouse thus was neither a Customs Freight Station (CFS) nor an Inland Container Depot (ICD) and the same, therefore, could not be treated as a “port infrastructure”

As regards the claim of the assessee for deduction under section 80IB(11A), the Assessing Officer found that the same was claimed by the assessee in respect of one Division situated under Visakhapatnam Port Trust and the other Division situated under Kolkata Port Trust. He also found that in both these Divisions, the assessee had used its own warehouses for storage of its own foodgrains and there were no such services provided by the assessee to any third party or outside party. He also found that similar was the case in respect of handling and transportation services rendered by the assessee-company. According to him, the assessee-company thus had computed only the notional profit in respect of these two Divisions for the purpose of claiming deduction under section 80IB(11A), which was not correct. In this regard, he rejected the contention raised on behalf of the assessee by relying on sub-section (8) of section 80IA by observing that the assessee could not produce any supporting evidence to prove that it was engaged in an “integrated business” as contemplated in section 80IB(11A). He also observed that sub-section (8) of section 80IA envisaged transfer of goods or services from an eligible business to any other business carried on by the assessee. He held that the assessee could not prove any such transfer and, therefore, the provision of section 80IA(8) could not be pressed into service in the assessee’s case. He accordingly disallowed the claim of the assessee for deduction under section 80IB(11A).

The disallowance made by the Assessing Officer on account of its claim for deduction under sections 80IA & 80IB was challenged by the assessee in the appeal filed before the ld. CIT(Appeals). During the course of appellate proceedings before the ld. CIT(Appeals), further details and documents were furnished by the assessee-company in support of its claim for deductions under sections 80IA and 80IB. The same were forwarded by the ld. CIT(Appeals) to the Assessing Officer seeking his comments. In the remand report submitted to the ld. CIT(Appeals), the Assessing Officer offered his comments and when the same were confronted to the assessee-company, it also filed its

The ld. CIT (D.R.) contended that specific reasons were given by the Assessing Officer while disallowing the assessee’s claim for deduction under sections 80IA and 80IB of the Act in the assessment order. He contended that the ld. CIT(Appeals), however, neither considered nor appreciated the adverse findings recorded by the Assessing Officer in this regard and gave relief to the assessee on irrelevant ground without considering the case made out by the Assessing Officer. He also contended that since the claim of the assessee for deductions under sections 80IA and 80IB was disallowed by the Assessing Officer, he never had an occasion to examine the correctness of the quantum of said deductions claimed by the assessee. He contended that the ld. CIT(Appeals) also failed to verify the correctness of the quantum of deduction claimed by the assessee and even did not give any opportunity to the Assessing Officer to do the same. He contended that since there was no gross total income declared by the assessee, it was not entitled for any deduction under sections 80IA or 80IB as per the specific provision contained in section 80AB.

As regards the claim of the assessee for deduction under section 80IB(11A), he contended that even if there are no transactions with the third party, assessee is eligible for deduction under section 80IB. In support of this contention, he relied on the decision of the Hon’ble Calcutta High Court in the case of CIT –vs.- ITC Limited [236 taxman 612], wherein it was held that deduction under section 80IA cannot be denied to the assessee merely because power generated by the assessee in its entirety was consumed by other business of the assessee and was not sold to outsiders.

As regards the relief allowed by the ld. CIT(Appeals) by directing the Assessing Officer to allow the claim of the assessee for deduction under section 80IB in respect of profit derived from the business of handling, storage and transportation of foodgrains, it is observed that the same is challenged by the Revenue on the ground that such business was not carried on by the assessee-company with any outside or third party and it was, therefore, not eligible for deduction on notional profit claimed to have been derived from the said business. As rightly contended by the ld. Counsel for the assessee,

The issue raised in Ground No. 3 of the Revenue’s appeal relates to the deletion by the ld. CIT(Appeals) of the disallowance made by the Assessing Officer under section 40(a)(ia) on account of payment made by the assessee-company of ocean freight to sub- agents and Indian beneficiaries.

As noted by the Assessing Officer during the course of assessment proceedings, the assessee-company had not deducted tax at source from the payments made to various parties on account of ocean freight aggregating to Rs.29.64 crores. In this regard, reliance was placed on behalf of the assessee on the CBDT Circular No. 723 dated 19.09.1995 to contend that the said payments on account of ocean freight having been made to the shipping agents of non-resident ship owners, tax was not required to be deducted. This contention raised on behalf of the assesese-company was not found tenable by the Assessing Officer in the absence of any supporting evidence produced by the assessee to prove that the parties to whom the said payments had been made were all agents of non-resident ship owners. He held that the onus that lay on the assessee was not discharged and the amount of ocean freight was disallowed by him by invoking the provisions of section 40(a)(ia) for the failure of the assessee to deduct tax at source.

The disallowance of Rs.29.64 crores made by the Assessing Officer on account of ocean freight by invoking the provisions of section 40(a)(ia) was challenged by the assessee in the appeal filed before the ld. CIT(Appeals). During the course of appellate proceedings before the ld. CIT(Appeals), details and documents were filed by the assessee to support and substantiate its case that the amount of ocean freight was paid either to NRI shipping owners or their resident sub-agents. The said details and

At the time of hearing before the Tribunal, the ld. D.R. relied on the order of the Assessing Officer in support of the revenue’s case on this issue. The ld. Counsel for the assessee, on the other hand, invited our attention to the relevant portion of the remand report submitted by the Assessing Officer to the ld. CIT(Appeals) at page no. 4 of the paper book to point out that the claim of the assessee to the extent of Rs.28.24 crores was accepted by the Assessing Officer himself in the remand report. He, however, fairly and frankly pointed out that the said amount to the extent of Rs.3.56 crores was paid by the assessee on account of ocean freight to resident sub-agents of NRI ship owners, which are not covered by the CBDT Circular No. 723 dated 19.09.1995. He, however, contended that this issue is covered by the decision of the Hon’ble Delhi High Court in the case of CIT –vs.- Continental Carriers (Pvt. Ltd.) [163 Taxman 479], wherein it was held that payments made to resident agents or sub-agents of the foreign shipping companies do not attract TDS under section 194C of the Act. He also relied on the decision of the Bangalore Bench of this Tribunal in the case of Ascent Circuits Pvt. Ltd. – vs.- ACIT rendered vide its order dated 22.08.2014 in ITA No. 659/Bang./2011, wherein a similar issue was decided in favour of the assessee by the Tribunal by relying on the decision of the Hon’ble Delhi High Court in the case of Continental Carriers (Pvt. Ltd). As regards the balance disallowance of Rs.1.40 crores, which is deleted by the ld. CIT(Appeals) by relying on the decision of the Special Bench of this Tribunal in the case of Merlin Shipping & Transporters (supra), the ld. Counsel for the assessee agreed that

We have considered rival submissions and also perused the relevant material available on record. It is observed that out of the total disallowance of Rs.29.06 crores on account of ocean freight by invoking the provisions of section 40(a)(ia), the claim of the assessee that ocean freight having paid to the NRI Ship owners or agents of the NRI Ship owners, there was no requirement of deduction of tax at source as per the CBDT Circular No. 723 dated 19.09.1995 was accepted by the Assessing Officer himself to the extent of Rs.28.24 crores in the remand report submitted to the ld. CIT(Appeals) after verifying the relevant details and documents filed by the assessee. In view of the said remand report, the ld. CIT(Appeals) deleted the disallowance made by the Assessing Officer on this issue to the extent of Rs.28.24 crores. As pointed out by the ld. Counsel for the assessee, the amount of Rs.28.24 crores, however, was inclusive of an amount of Rs.3.56 crores paid by the assessee on account of ocean freight to resident sub-agents of NRI ship owners and, therefore, the same is not covered by the CBDT Circular No. 723 dated 19.09.1995. The said amount still cannot be disallowed under section 40(a)(ia) in view of the decision of the Hon’ble Delhi High Court in the case of Continental Carriers (Pvt.) Limited (supra), wherein it was held that payments made to resident agents or sub-agents of the foreign shipping companies do not attract TDS under section 194C of the Act. We, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) deleting the disallowance made by the Assessing Officer under section 40(a)(a) on account of ocean freight to the extent of Rs.28.24 crores. The deletion of disallowance by the ld. CIT(Appeals) to the extent of balance amount of Rs.1.40 crores going to Indian beneficiaries by relying on the decision of the Special Bench of ITAT in the case of Merlin Shipping & Transporters (supra), however, is not justified as the said decision of this Special Bench of ITAT has been subsequently overruled by the Hon’ble Calcutta High Court. As contended by the ld. Counsel for the assessee in this regard, the assessee could not raise its alternative contention on this issue keeping in view that the issue was covered by the Special Bench of ITAT in the case of Merlin Shipping & Transporters. In

In Ground No. 4, the revenue has challenged the action of the ld. CIT(Appeals) in deleting the disallowance of Rs.5 crores made by the Assessing Officer on account of provision for loan redemption reserve while computing the book profit of the assessee under section 115JB of the Act.

While computing its book profit under section 115JB, the assessee-company had deducted the provision of Rs.5 crores made for loan redemption reserve. The Assessing Officer found that no such reserve, however, was deducted by the assessee-company in its profit & loss account and the same was shown only in the appropriation account below the line in the Profit & Loss Account. As the said amount was not debited by the assessee-company while computing its net profit as per the Profit & Loss account, the Assessing Officer held that the same could not be allowed while computing the book profit under section 115JB. He accordingly disallowed the deduction claimed by the assessee on account of loan redemption reserve while computing its book profit under section 115JB.

The disallowance made by the Assessing Officer on account of its claim for deduction for loan redemption reserve while computing the book profit under section 115JB was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and after considering the submission made by the assessee as well as the material available on record, the ld. CIT(Appeals) deleted the said disallowance for the following reasons given in his impugned order:-

The ld. D.R. invited our attention to the profit & loss account of the assessee- company for the year under consideration placed at page no. 11 of the paper book to show that the loan redemption reserve of Rs. 5 crores was not debited by the assessee to its profit & loss account and the same was shown only as appropriation below the line in the said profit & loss account. He contended that this relevant aspect considered by the Assessing Officer while disallowing the claim of the assessee for deduction on account of loan redemption reserve, however, was not appreciated by the ld. CIT(Appeals) while giving relief to the assessee on this issue.

The ld. Counsel for the assessee, on the other hand, contended that the profit & loss appropriation account is required to be taken into consideration for the purpose of computing book profit under section 115JB. In support of this contention, he relied on the decision of Mumbai Bench of this Tribunal in the case of Duke Offshore Limited –vs.- DCIT [45 SOT 399] as well as the decision of the Hyderabad Bench of this Tribunal in the case of Gulf Oil Corporation Limited –vs.- ACIT [111 ITD 124]. He also contended that the nature of loan redemption reserve is similar to the debenture redemption reserve and the same, therefore, is allowable as deduction while computing book profit under section 115JB as per clause (b) of Explanation 1 to Section 115JB. In support of this

We have considered the rival submissions on this issue and also perused the relevant material available on record. It is observed from the profit & loss account of the assessee-company for the year under consideration placed at page no. 11 of the paper book that profit before tax and prior period items was shown at Rs.1393.87 lakhs, while the amount of loan redemption reserve of Rs.500 lakhs was shown in the appropriation account. While computing book profit under section 115JB, the profit of Rs.1393.87 lakhs was taken by the assessee-company as the starting point and the same was reduced by Rs.500 lakhs being the amount of loan redemption reserve. Since the said amount of loan redemption reserve was not debited by the assessee-company in its profit & loss account and was shown as appropriation below the line, the Assessing Officer added back the same while computing the book profit of the assessee-company under section 115JB. As held by the Hon’ble Mumbai Bench of this Tribunal in the case of Duke Offshore Limited –vs.- DCIT [45 SOT 0399] cited by the ld. Counsel for the assessee, language of section 115JB is very clear to indicate that starting point of the profit and loss should be the figure after the appropriation as well as any extraordinary item made or prior year expenses which the company may for the purpose of presentation show ‘below the line’. It was held that the amounts credited or debited to the profit & loss account below the line, therefore, cannot be ignored for the purpose of computing book profit under section 115JB. A similar view has been expressed by the Hyderabad Bench of this Tribunal in the case of Gulf Oil Corporation Limited –vs.- ACIT [111 ITD 124] cited by the ld. Counsel for the assessee, wherein it was held that Schedule VI of the Companies Act, 1956 in accordance with which profit & loss account of the Company has to be prepared for purposes of section 115JB does not make any distinction between profit & loss account and profit & loss appropriation account. It was held that all the items which are generally classified in the appropriation account are in fact to be included in the profit & loss account prepared as per Parts II and III of Schedule VI. Moreover, the loan redemption reserve is alike a debenture redemption reserve as rightly contended by the ld. Counsel for the assessee and as held by the Hon’ble Bombay High Court in the case of CIT –vs.- Raymond Limited [209 Taxman 65] the amount, which was set apart as a debenture redemption reserve is not a reserve

Now we shall take up the appeal of the assessee being ITA No. 230/KOL/2013, in which the following grounds are raised:-

As regards the issue involved in Ground No. 2 of the assessee’s appeal relating to the disallowance of Rs.37,39,560/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 40(a)(ia) on account of commission expenses, it is observed that payments of commission and brokerage exceeding Rs.2,500/- were made by the assessee-company to various parties totalling to Rs.37,39,560/-. According to the Assessing Officer, the assessee-company was liable to deduct tax at source from the said

We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that this issue has been decided by the ld. CIT(Appeals) vide his impugned order by relying on the decision of Special Bench of this Tribunal in the case of Merlin Shipping Corporation Limited, which has been subsequently overruled by the Hon’ble Calcutta High Court. The limited contention raised by the ld. Counsel for the assessee on this issue before us is that the assessee could not raise its alternative contention on this issue as the same then was covered by the decision of Special Bench of ITAT in the case of Merlin Shipping Corporation Limited. He has contended that an opportunity may, therefore, be given to the assessee to raise its alternative contention by sending the matter back to the Assessing Officer. We find merit in this contention of the ld. Counsel for the assessee and since the ld. D.R. has also not raised any objection in this regard, we set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh after giving the assessee proper and sufficient opportunity of being heard. Ground No. 2 of the assessee’s appeal is thus treated as allowed for statistical purposes.

As regards the issue raised in Ground No. 4 of the assessee’s appeal, the ld. Counsel for the assessee has submitted that the same has not been decided by the ld. CIT(Appeals) vide his impugned order inspite of fact that specific submission was made on behalf of the assessee-company before him in support of its case on this issue. He has contended that this issue may also be sent back to the Assessing Officer for deciding the same afresh after giving the assessee an opportunity of being heard. Since the ld. D.R. has not raised any objection in this regard, we restore this issue also to the file of the Assessing Officer for deciding the same afresh after giving the assessee an opportunity

In the result, the appeal of the Revenue is dismissed, while the appeal of the assessee is treated as partly allowed for statistical purposes.