MANGALORE REFINERY AND PETROCHEMICALS LTD,MUMBAI vs. ADDL CIT 3(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ PER RAJENDRA, AM- अनुसार Challenging the orders dated 15/2/2013 of CIT(A)-4, Mumbai the assessee and the Assessing Officer (AO) have filed cross appeals for the year under consideration.Assessee-company, engaged in the business of refining of crude oil, selling of petroleum products and captive generation and distribution of power, filed its return of income on 26/10/2007 declaring total income at Rs.Nil under normal provisions of the Act. However, it offered the tax of Rs.122.06 crores on the net income of Rs.10,87,95,95,688/-. The AO completed assessment u/s.143(3) of the Act,on 25/11/2010,determining its income at Rs.Nil.He determined book profit of the assessee at Rs.10,93,60,33,285/-. ITA/3588/Mum/2013: 2.First Ground of appeal, filed by the assessee is about freight charges u/s. 40(a)(i) of the Act.It was agreed by representatives of both the sides that identical issue was deliberated upon and was decided by the Tribunal while deciding appeal for AY.2006-07(ITA/No. 1240/Mum/ 2010 dt.17/5/2017) we are reproducing the relevant portion of the order which reads as under :-

3435/M/15 & 3588/M/13- M/s. Mangalore Refinery & Petrochemicals Ltd.

3435/M/15 & 3588/M/13- M/s. Mangalore Refinery & Petrochemicals Ltd. of the assessee to deduct tax u/s 195 is limited only to the appropriate proportion of income chargeable under the Act. Thus, it can be seen that the said judgment in fact helps the assessee. The second question answered by the Supreme Court can be understood to mean that the obligation of the assessee to deduct tax u/s 195 is not there when the payment made to the non resident does not contain any proportion of income therein. In our view, right from the beginning, not only on the basis of the circulars of the Board, but also on the basis of the decision of the Tribunal in its own case, the assessee firmly believed that no part of the income paid to the foreign agent was taxable in India. Therefore, there was no question of deducting any tax at source on any proportion of the payment made to the non-residents. Thus, the judgment in the case of Transmission Corporation (supra) does not advance the case of the department in the present appeal. Finally, it may be pertinent to note that Circular No.786 dated 7-2-2000 i.e., the same has been issued after the judgment was rendered in the case of Transmission Corporation (supra) i.e., on 17-8-1999. The facts in the assessee's case remain governed by the Board Circular and hence, in the final analysis, respectfully following the earlier order of the Tribunal in the assessee's own case, we uphold the order of the CIT (A) deleting the disallowance."

3.Second Ground of appeal is about treating interest on bank deposits and miscellaneous interest as income from other sources.During the assessment proceedings,the AO found that assessee had earned income of Rs.21.03 crores, that it had treated the same as part of business income.He asked the assessee to explain as to why the interest should not be taxed under the head income from other sources. After considering the submission of the assessee ,dtd.16/11/2010, he held that the assessee had not established as to how the income earned by it by way of interest constituted business income, that it was carrying out business of refining of crude oil and selling the same, that earning of interest was never the objective of the assessee. Accordingly, he held that the disputed amount of Rs.12,30,90,115/- had to be taxed under the head income from other sources.

3.1.During the appellate proceedings,before the First Appellate Authority,the assessee made elaborate submissions and relied upon certain case laws. After considering available material

3435/M/15 & 3588/M/13- M/s. Mangalore Refinery & Petrochemicals Ltd. he held that the assessee had received interest income from six sources i.e., bank deposits, (Rs.9.77crores),interest from NMPT(Rs.4 crores); interest and recovery of discount charges (Rs.2.85crores);miscellaneous interest (Rs.2.76 crores),interest on housing loan(Rs.82,572/-) and interest on oil bonds(Rs.1.90 crores). Referring to the order of his predecessor he held that interest on bank deposit was taxable under the head income from other sources,that while deciding the appeal for AY. 1999-2000, the Tribunal had held that interest received for NMPT was to be assessed as income from business and profession,that his predecessor had followed the order of the Tribunal for AY.s 2003-04 to 2006-07. Finally, he held that interest on NMPT was taxable under the head business and profession.With regard to remaining items of interest(except miscellaneous interest Rs.2.76 crores),he held that the Tribunal had decided the issue in favour of the assessee while adjudicating appeal for AY 1999-2000. He observed that under the item miscellaneous interest there were 10 items -BG Sales- (Rs.2.56 crores); LC sales-(Rs.37,710/- );CAPS-(Rs.15,671/-); Interest charges for delay in collection-BIOCON Ltd.-(Rs.1,643/-);Interest for Advance against Equity-(Rs.9,71,520/-); Interest recovered from M/s. Elite Engineering Works-(1,934/-);Interest charged @ 8% for payment made on behalf of KRPL-(Rs.2,49,252/-); Interest on Mobilisation Advance @ 13% -M/s. N.R. Patel & Co.-(Rs.6,97,419/-); Other Deductions-(Rs.14,018/-) and Call/Allotment Money received along with Interest –Rasmond Paul-(Rs.9,235/-).He held that Bank guarantee sale (BG sales) and sales on letter of credit (LC Sales)were having direct nexus with the business of the assessee, that interest’s received from these items (Rs.2.56 crores) plus (Rs. 37,710/-) were assessable as income from business and profession,that other interest were rightly assessed under the head income from other sources. 3.2.During the course of heating before us, the Authorised Representative stated that the issue of interest on bank deposit was discussed by the Tribunal while deciding the appeal for AY.s 1999-2000,2005-06 and 2006-07,that the Tribunal had decided the issue in favour of the assessee,as far as interest on bank deposit is concerned. With regard to miscellaneous interest of Rs.19.60 lakhs he stated that the assessee had filed appeal for three items only i.e.,mobilization advance-Rs.6.97 lakhs; interest on advance against equity -Rs.9.71 lakhs; and interest charged for payment made on behalf of KRPL-2. 49 lakhs, that these items were related with business of the assessee, that interest arising on these items had to be assessed under the head business income.The Departmental Represen -

3435/M/15 & 3588/M/13- M/s. Mangalore Refinery & Petrochemicals Ltd. tative(DR) stated that in the earlier year,the Tribunal had decided the issue against the assessee with regard to miscellaneous interest.

3.3.We find that while deciding the appeal for AY.2006-07 (ITA/1240/Mum/2010 dtd. 17/05/17) the Tribunal deliberated upon and has decided the issue as under :- 8.Next ground is about treating interest on bank deposit (Rs.6.42 crores) and Miscellaneous interest (Rs.1.38 crores) under the head income from other sources. We find that while deciding the issue of interest on bank deposit for the AY 2005-06 (supra), the Tribunal had dealt the issue of interest on bank deposit at para-3 of page-3 and 4. It reads as under :- 3.Ground No. 2 relates with treatment of certain interest incomes under the head ‘business income’. AO noted that the assessee earned various interest incomes totaling Rs.15.36 Crores which were taxable under the head ‘Income from other sources’ against which set-off of brought forward business loss was not available to the assessee. The break-up of the interest income was as follows: Item No. Particulars Amount (Rs.) 1. Interest on Bank deposits 92,66,526/- 2. Interest from New Mangalore Port Trust 5,31,18,256/- 3. Interest /Discount charges from customers 4,44,73,925/- 4. Misc. Interest 77,41,574/- 5. Interest on Contractors’advances 1,369/- 6. Interest on Housing Loans 3,70,202/- 7. Interest on call money 32,072/- 8. Interest on Income tax Refund 3,86,55,665/- Total 15,36,59,589/- After perusal of assessee’s contentions and relying upon decision in assessee’s own case for earlier years, CIT(A) concluded that Interest on item No. 1,2, 3, 5,6, & 7 was assessable under the head ‘Business Income’ which has been assailed before us by the revenue.No serious arguments have been raised by either side against item Nos. 5,6 & 7 and therefore,we are not inclined to disturb the finding of Ld. CIT(A) in that respect. The assessee availed working capital facilities from bank which remained idle at times and to off set the interest cost, it placed idle funds as Fixed deposits with Bank and earned interest thereon.Similarly,the assessee approached New Mangalore Port Trust (NMPT) do develop infrastructural facilities such as construction of new oil berth, dredging, providing fire-fighting equipment for the use of assessee and paid advance towards the same to NMPT and earned interest thereupon. The Ld. AR, while contending that these transaction were inextricably linked with the business of the assessee, drew our attention to following decisions of Tribunal & Hon’ble Bombay High court in assessee’s own case to lead that the issue stands squarely covered in favour of assessee:- i) (Bombay High Court AY 2001-02) order dated 06/09/2016 ii) ITA No. 76/Mum/2003 (Mumbai ITAT for AY 1999-00) order dated 31/12/2003 iii) ITA No. 6476/Mum/2003 (Mumbai ITAT for AY 2000-01) order dated 06/05/2008 iv) ITA No. 1655/Mum/2006 (Mumbai ITAT for AY 2001-02) order dated 11/03/2013 The copies of these pronouncements have been placed before us. A perusal of these orders vouches for the stand of Ld. AR and even otherwise, analyzing the nature of above transactions, we are inclined to hold that these two items shall be assessable under the head ‘Business Income’ The only item left is interest & discount charges received from the customers. The Ld. CIT(A) has made the following observation in his appellate order:- “Third component is against interest and discount charges received from customers amounting to Rs.4,44,73,925/-. The facts are that in the normal course of business appellant sells its finished products on receipt of advance except from oil marketing companies.However,some of the parties lift products of appellant by submitting bank guarantees. In such a case,

3435/M/15 & 3588/M/13- M/s. Mangalore Refinery & Petrochemicals Ltd. appellant charges interest from the date of sale to the date of actual payment by said parties.Appellant also receives discount on these transactions. Both discount and interest are directly related to business income of appellant. Therefore, these have to be considered as business income of appellant, Assessing Officer is directed accordingly” The revenue has nowhere rebutted / disputed the above findings. Hence, in view of the same,we find that these items constitute art and parcel of the business of the assessee and hence rightly been found assessable under ‘Business Head’ by First Appellate authority.The ground of revenue’s appeal is partly allowed.” Respectfully following the same we hold that interest on bank deposit has to be treated as business income. First part of Ground of appeal no.3 is decided in favour of the assessee.

“8.1.With regard to miscellaneous income of Rs.1.38 crores, the AR argued that the Tribunal had dealt with the issue while deciding the appeal for the AY 2005-06, that certain items therein were of similar nature, that same were held to be income from business.The DR stated that the assessee had not filed any detail about the miscellaneous interest before the FAA. 8.2.We have heard the rival submissions and perused the material available on record.We find that the FAA has given a categorical finding of fact about total interest of Rs.16.84 crores. With regard to miscellaneous interest of Rs.1.38 crores he has specifically mentioned that assessee has not filed details about the so called miscellaneous interest income. Nothing was brought on record to prove that details of the disputed amount were ever furnished before the revenue authorities.‘Interest income’can be assessed under the head ‘business income’ as well under the head ‘income from other sources’depending upon the facts of the case.We find that the FAA had dealt with interest in bank deposit interest on NMPT and interest on discount charges etc. along -with the miscellaneous interest. Thus, the details about the remaining interest income were made available to him.It is not known as to why the assessee did not furnish the details of so called miscellaneous interest income. Whether the interest income was of the similar nature or not has not been proved. It was the duty of the assessee to substantiate its claim. Because of the failure of the assessee to support the claim made by it,we are of the opinion that order of the FAA should not be disturbed. Second part of third Ground raised by the assessee is decided against the assessee.” On a query by the bench,the AR fairly agreed that in the statement of facts the details of three items were not filed,that there was no documentary evidence to prove the claim regarding the three items mentioned above.As there is no evidence to prove that the interest, except for the bank interest, BG sales and LC sales ,was arising out of day to day business activity of the assessee,so,we uphold the order of the FAA to that extent.Ground No.2 is decided in favour of the assessee in part. 4.Ground No.3 is about addition on account of provision for advances doubtful of recovery while computing book profit u/s. 115JB of the Act.During the assessment proceedings,the AO found that the assessee had had made provision for advances doubtful of recovery,amounting to Rs.5.64 crores. He held that the liability on account of provision for doubtful debts and advances was not an ascertained liability, that same was to be added to the book profit of the assessee invoking the provision of section 115JB of the Act. 4.1.Before the FAA the assessee made submissions and relied upon certain case laws.After considering the available material the FAA held that the provision was not against any 3435/M/15 & 3588/M/13- M/s. Mangalore Refinery & Petrochemicals Ltd. ascertained liability, that same was to be added to book profit as per clause (c)of Explanation 1 below sub section 2 of section 115 JB. 4.2.Before us,the AR stated that the liability was not unascertained. He relied upon the cases of Vijaya Bank(190taxmann257); Tainwala Chemicals & Plastics India Ltd.(47SOT116); and Vodafone Essar Gujarat Ltd. (Tax Appeal No.749 of 2012-dtd. 4/8/2017).The DR left the issue to the discretion of the Bench. 4.3.We have heard the rival submissions and perused the material on record. In the case of Tainwala Chemicals and Plastics India Ltd.(supra),one of the question of law raised by the department was as under “(k) Whether, on the facts and circumstances of the case the Tribunal was justified in upholding the decision of the CIT(A) in deleting the addition on account of provisions for doubtful debts to the book profit u/s.115JB of the Act……” The Hon'ble High Court while dealing with the other question i.e., question (c ) alongwith question (k) held as under : “3. In so far as question (c) is concerned, the Tribunal by the impugned order has followed the decision of the Apex court in the matter of Vijaya Bank V/s. Commissioner of Income Tax reported in 322 ITR 166, wherein it has been held that once the provision of doubtful debt has been debited to the profit and loss account and corresponding provision has been credited or reduced from the debtors account in the balance sheet, then, this would amount to writing off. In the present case, the Tribunal recorded a finding of fact that the respondent – assessee has debited the provision of doubtful debt to the profit and loss account and correspondingly reduced the assets by reducing the amount of unsecured loans. On the aforesaid facts, the Tribunal held that this would amount to writing off of the debt. Thus, on examination of facts it concluded that the respondent – assessee has written off the loan and would be entitled to the claim of bad debts. The Tribunal by the impugned order also recorded a finding of fact that once the respondent– assessee has lent surplus money and offered the interest to tax as business income, then the activity of the respondent – assessee of lending money is a business activity. Therefore, the debt qualifies for deduction under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961. In view of the finding of fact recorded by the Tribunal that the provision has been written off and reliance placed on the decision of the Apex Court in the matter of Vijaya Bank (supra), we see no reason to entertain question (c).

3435/M/15 & 3588/M/13- M/s. Mangalore Refinery & Petrochemicals Ltd. find that while deciding the appeal for 2006-07 (supra), the Tribunal at para 10 pg-16 had held as under :- “10.Last ground is about claim of depreciation on assets which were created on capitalization of capital-work-in-progress.It was argued before us that WDV, as determined pursuant to the order of the FAA for the AY 2005-06 should be adopted. The DR stated that matter could be decided on merits. In our opinion the request made by the assessee is as per the provisions of law.The AO is directed to consider the figures for the earlier year for calculating the WDV. Last Ground is allowed.” We direct the AO accordingly.Fourth ground is allowed.

6.Last Ground of appeal is about addition made on account of provision for advances doubtful of recovery under the normal provisions of the Act i.e., 36(1)(vii). 6.1.Before us, the AR contended that similar issue was dealt by the Tribunal in the cases of LML Ltd.(72Taxmann.com207)and KEC Intl.Ltd.(33taxmann.com243), Tainwala Chemicals (47SOT169).We find that in the case of LML Ltd. (supra),the Tribunal has held that once the provision for doubtful debts has been debited to P&L account and corresponding provision had been reduced from debtors account in balance sheet then same would amount to writing off of the debts, that all the conditions laid down u/s.36(1) would be fulfilled. As stated earlier the assessee has passed necessary entries in P&L account as well as in the Balance sheet.Therefore,we allow Ground No.5.

ITA/3435/Mum/2013 7.The AO has raised three grounds. First Ground of appeal

,raised by AO,is about treating the interest received for NMPT,as business income as against income from other sources.The DR and AR agreed that identical issue was decided by the Tribunal against the AO while adjudicating the appeal for AY 2006

07. (supra).We are reproducing the operative part and it reads as under:- “2.First ground of appeal, raised by the AO, is about deleting the interest of Rs. 4.00 crore, received from New Mangalore Port Trust as business income as against income from other sources. It was brought to our notice by the representatives of both the sides that identical issue was decided in favour of the assessee by the Tribunal while adjudicating appeals for the AY.s1999-2000 to 2001-02(ITA/76/Mum/2003,dtd.31.12.2003,ITA/6476/Mum/2003 dtd.06.05. 2008and ITA/ 1655/Mum/2006,11.03.2013)and that the Hon’ble Bombay High Court had upheld the order of the Tribunal for the AY.2001-02.We find that similar issue was decided against the AO in the appeal no.ITA/7341/Mum/2008,AY.2005-06,Dtd.21.12. 2016.Respectfully following the above orders of the Tribunal and the judgment of the Hon’ble High Court,we decide first ground of appeal against the AO.” Following the same,we dismiss first Ground of appeal raised by the AO.

8.Second Ground deals with interest received by the assessee.While dealing with the ground No.2 of the assessee ,we had mentioned the basic facts about interest disallowance.The AO