LARSEN & TOUBRO LTD,MUMBAI vs. ASST CIT RG 2(2), MUMBAI

The Revenue in its appeal has assailed the order of CIT(A) on solitary issue i.e. deleting disallowance of Rs.107.13 crores qua work-in-progress of Construction Contracts. The ground raised in appeal by the Revenue reads as under:

Shri Ajay Chandra representing the Department submitted that assessee is engaged in execution of civil projects. The assessee while determining work-in-progress (WIP) in respect of construction work valued the same after reduction of certain amounts on account of various adverse factors. The assessee in the past made similar adjustment to the WIP. Such reduction was treated as provision for contingent liability and was disallowed in the past . In the impugned assessment year the facts are identical and the manner of computation of WIP by the assessee is similar to earlier Assessment Years. The Assessing Officer following the view taken in the earlier Assessment Years allowed deduction of Rs.2,35,91,996/- i.e. difference between closing and opening construction WIP. The CIT(A) deleted the disallowance. The ld.

Per contra, Shri J.D.Mistry appearing on behalf of the assessee vehemently supported the findings of CIT(A) on this issue. The ld.Counsel for the assessee submitted that addition on account of difference between closing and opening of WIP is a perennial issue. The Assessing Officer has been making addition year after year for the same reason. The Tribunal taking a consistent view since 1994-95 has deleted the addition. The CIT(A) in the impugned order following the order of Tribunal and his predecessor in Assessment Year 2001-02 and 2002-03 deleted the addition. There has been no change in facts and the manner of determining WIP in assessment year under appeal.

Both sides heard. The short issue in appeal by the Revenue is with respect to deleting the disallowance of WIP. Both sides are unanimous in stating that this issue is recurring for the past several Assessment Years. The Tribunal has been consistently deciding this issue in favour of assessee. We find that in Department’s appeal for Assessment Year 2002-03 in similar ground was raised. The Co-ordinate Bench following the order of Tribunal in assessee's own case in ITA No.4265/Mum/1998 for Assessment Year 1994-95 dismissed Revenue’s ground of appeal. The relevant extract of the findings of Tribunal in assessee’s appeal in Assessment Year 1994-95 is as under:

In the result, appeal of the Revenue is dismissed.

The assessee in its appeal has raised as many as 10 grounds and two additional grounds. The grounds / additional grounds of appeal are taken up for adjudication in seriatim as under.

Shri J.D.Mistry, Sr. Advocate appearing on behalf of the assessee stated at the outset that majority of the issues raised in appeal by the assessee have already been considered and decided by the Tribunal in assessee's own case in the preceding Assessment Years.

During the period relevant to the assessment year under appeal the assessee paid an amount of Rs.46,20,000/- to various parties in respect of contracts received from Government Departments/Public Sector Undertakings.

Per contra, the ld. Departmental Representative vehemently supported the order of CIT(A) and prayed for dismissing the ground of appeal raised by the assessee. The ld. Departmental Representative submitted that the Tribunal has consistently decided this issue in favor of Department as assessee has failed to furnish any documentary evidence in support of the claim made.

We find that identical ground was raised by the assessee as additional ground of appeal in appeal for Assessment Year 2001-02. The Co-ordinate Bench decided the issue following the decision of Tribunal in assessee’s own case for Assessment Year 1998-99. No contrary material is placed before us by the Department. Hence, respectfully following the decision of Co-ordinate Bench we direct the Assessing Officer to accept assessee’s claim of depreciation. In the result, ground No.3 of assessee’s appeal is allowed.

The ld.Counsel for assessee submitted that during the period relevant to assessment year under appeal the assessee has earned income from tax free bonds Rs.11,55,000/-. The said income was claimed as exempt u/s. 10(15) of the Act by the assessee. The Assessing Officer made disallowance of Rs.47,000/- on account of interest attributable to earning of interest income and disallowed the same u/s. 14A of the Act. The ld.Counsel for the assessee submits that the assessee is having own interest free funds to cover investments, hence, disallowance u/s. 14A of the Act on account interest expenditure is not warranted. In support of his submissions he placed reliance on the decision in the case of HDFC Bank Ltd. ,383 ITR 529 (Bom) and the decision in the case of Reliance Utilities & Power Ltd., 178 taxmann.com 135 (Bom). We find that the Assessing Officer has made disallowance u/s.14A of the Act solely on account of interest expenditure. The contention of the assessee is that assessee is having own funds sufficient to cover the investments. It is no more res-integra that where the assessee is having mixed bag of; own interest free funds and borrowed interest bearing funds, it shall be presumed that the assessee has made investments from own interest free funds. Similar disallowance made by Assessing Officer in Assessment Year 2001-02 & Assessment Year 2002-03 was deleted by the Co-ordinate Bench . We deem it appropriate to restore this issue to Assessing Officer for the limited purpose of verification of availability of assessee’s own funds matching investments. In the result, ground No.4 of appeal is allowed with aforesaid directions.

Similarly the difference of Rs. 51.61 Crores arising out of assignment of sales tax liability of Rs.71.34 Crores to be paid in future date at its present value of Rs. 19.73 Crores has not resulted in any benefit or perquisites and thus not covered by the provisions of section 28(iv) of the Act as section 28(iv) proposes to tax ‘benefit’ or ‘perquisite’ arising from business of the assessee. In the present case the pre- payment of a deferred sales-tax loan liability at the net present value, does not result in any ‘benefit’ to the assessee. Besides the case of the assessee is squarely covered by the decision of the coordinate bench in Cable Corporation of India Ltd. vs. Deputy Commissioner of Income-tax(supra) wherein on identical facts, the Tribunal has concluded that the assignment of such liability, at the net present value, cannot be charged to tax either under section 41(1) of the Act or under section 28(iv) of the Act.The provisions of section 28(iv) of the Act are not applicable to the facts of the present case as monetary benefit is not covered by the said section. Section 28(iv) of the Act uses the phrase - ‘whether convertible into money or not’, which would mean that cash benefits are not covered by the said section. This issue is covered in favour of the assessee by the decision of the Apex Court in the case of CIT vs. Mahindra & Mahindra Ltd.93 taxmann.com 32(SC) wherein the Apex Court has held that waiver of loan is a monetary benefit and, hence, it does not come within the ambit of section 28(iv) of the Act. Therefore, the amount of Rs.51,60,87,976/- is to be regarded as capital receipt which is not chargeable to tax.

We have also perused the decision relied upon by the revenue to support the orders of the authorities below but find that the same are distinguishable on facts or reversed or not a good law in view of the subsequent decisions. In the case of CIT vs. Sunderam Iyengar & Sons Ltd. (supra), the assessee used to receive deposits in the course of its trading transaction on sale of Coca Cola in glass bottles of, etc. which are refundable on return of the said bottles. During the relevant year, such deposits outstanding for a number of years were transferred by the assessee to the Profit & Loss Account as no longer payable to the said customers. On these facts, the Apex Court held that the amount was received by the assessee in the course of trading transaction and the same is chargeable to tax as trading receipts when the said amount becomes the assessee’s own money. The Apex Court further held that because of the trading transaction, the assessee has become richer to the extent of the amount transferred to Profit & Loss Account and, hence, the amount so transferred is to be treated as income of the assessee. In the present facts are distinguishable and, therefore, the decision of the Apex Court is not applicable as the Supreme Court was neither concerned with section 28(iv) or section 41(1) of the Act, but with the issue of whether the amount received by an assessee in the course of a trading transaction, should be treated as income of the assessee or not. In the present case, the allegation of the Assessing Officer and the Commissioner of Income-tax (Appeals) is that the provision of section 41(1) or section 28(iv) of the Act is applicable which issue is not there before the Hon’ble Supreme Court. Further, the Supreme Court has held that the amount is treated as income of the assessee as the assessee had become richer by the amount which is transferred to the Profit & Loss Account. In the present case, the assessee has discharged its complete obligation by paying the net present value of the obligation and, therefore, there is no question of the assessee either becoming richer or poorer on such transaction. The Apex Court in the cases of Balkrishna Industries Ltd. (supra) and Mahindra & Mahindra Ltd. (supra) has specifically dealt with the provisions of section 41(1) and section 28(iv) of the Act and, therefore, the said decisions are applicable to the case of the Appellant. So far as the decision in Solid Containers Ltd. v DCIT (supra) is concerned, the counsel of the assessee submitted that the finding in this decision by the Bombay High Court is contrary to the decision of the Apex Court in Mahindra & Mahindra Ltd. (supra) and, therefore, the said decision is no longer good law. The finding by the High Court that the provision of section 28(iv) of the Act is applicable to a waiver of loan is contrary to the decision of Mahindra & Mahindra Ltd. (supra) wherein the Apex Court has held that waiver of loan being a monetary benefit is not covered under section 28(iv) of the Act. Even for applicability of section 41(1) of the Act, the Apex Court has held that waiver of loan amounts to cessation of a liability other than a trading liability, for which no deduction has been claimed in earlier years and, therefore, does not come within the ambit of section 41(1) of the Act. Thus the decision of the Bombay High Court in Solid Containers Ltd.(supra) which had taken a contrary view, is no longer good law. Further the decision of Solid Containers Ltd.(supra) is further not applicable to the present case as in the present case, the Appellant has discharged the full liability at net present value which cannot be said to be a case of either waiver or cessation of the liability, which was the fact before the High Court. The decision in the case of CIT vs. Ramaniyam Homes Pvt. Ltd.,(supra) relied upon by the ld DR has been reversed by the Apex Court by the common judgment dated 24th April 2018 in Mahindra & Mahindra Ltd.(supra).Therefore, the reliance on the decision of the Madras High Court by the Revenue is wholly misplaced and completely unjustified. The facts in the case of CIT vs. Aries Advertising Pvt. Ltd.(supra) are altogether different vis a vis the facts in the present case as in the case before the High Court, there was actual write off credit balance (trading liabilities) and, accordingly, the High Court held that the assessee therein had received a benefit in respect of a trading liability which came within the ambit of section 41(1) of the Act whereas in the present case, there is no question of any benefit being received by the Appellant as the appellant has discharged the net present value of a future liability not can the present case be said to be of remission or cession of the liability. Therefore, this decision is clearly inapplicable to the facts of the present case. In the case of CIT vs. ICC India Pvt. Ltd. (supra), the Hon’ble High Court has held that share application amount was a capital receipt and was never received towards trading purpose and, therefore, the question of applicability of section 41(1) does not arise. The High Court has, therefore, dismissed the appeal of the Revenue. Although the High Court has noted that if the loan was received for trading purposes, the provision of section 41(1) of the Act may be applicable; however, as the fact in the present case was not a case of receipt of loan towards the trading purposes, the High Court has not considered whether other conditions of section 41(1) are fulfilled or not. In the case of Indian Seamless Steels & Alloys Ltd. vs. ITO (supra). The Tribunal in paragraph 16 of the order has noted that the assessee therein has transferred its deferral sales-tax loan to third party for a consideration which is higher than the amount payable to the Sales-tax Deptt. The Tribunal has further noted that the assessee therein has sold its ‘sales-tax incentive’ and what it has received is not sales-tax benefit but sale consideration on transfer of its entitlement and such sale consideration is a benefit directly arising from business and is, therefore, revenue receipt. In the present case of the Appellant, the Appellant has, in fact, paid a consideration to the other Company for taking over its obligation, which amount is lesser than the amount payable to the Sales-tax Department. The facts in this case are different is further clear from the reliance by the Tribunal on decision of Sun & Sand Hotels Pvt. Ltd. vs. DCIT (ITA No.7125/MUM/2007) wherein also it was a case of transfer of sales-tax entitlement for a consideration which was held as revenue receipt. Therefore, the Appellant submits that the said decision is clearly inapplicable on the facts of the present case. Even otherwise, the Appellant submits that the decision of the Tribunal being contrary to the decisions in Balkrishna Industries Ltd. (supra) and Mahindra & Mahindra Ltd. (supra), is not applicable to the Appellant. In view of these facts and decisions as discussed above we are inclined to set aside the order of CIT(A) on this issue by holding that Rs. 51.61 Crores is a capital in nature. The AO is directed accordingly. The ground of the assessee is allowed”. No contrary material is placed before us by the Revenue, hence, following the decision of Co-ordinate Bench in assessee's own case in preceding Assessment Years, ground No.5 of appeal is allowed for parity of reasons.

The assessee had claimed deduction of Rs.2,03,164/- u/s. 80HHC of the Act. The assessee in ground No.6 of appeal has assailed recomputation of deduction by the Assessing Officer u/s. 80HHC on different facets. The same are as under:

The ld.Counsel for the assessee submits that in assessment proceedings the Assessing Officer held that the assessee has not reduced gross interest received from profits and gains of business. Accordingly, 90% of the interest received on ICD, subsidiary and associate companies and customers treated as business income by the assessee was reduced from the profits and gains of the business. There should be no reduction of interest for computing profits u/s. 80HHC of the Act. The ld.Counsel for the assessee pointed that this issue has been decided by the Tribunal in assessee's own case in preceding Assessment Years and recently in appeal for Assessment Year 2001-02 and Assessment Year 2002-03.

We find that the Co-ordinate Bench while deciding the appeal for Assessment Year 2001-02 and Assessment Year 2002-03 following the decision of Tribunal in assessee's own case in for Assessment Year 2001-02 restored the issue back to the file of Assessing Officer. Both sides are unanimous in stating that the facts relating to Assessment Year under appeal on this issue are identical, hence, respectfully following the decision of Co-ordinate Bench we restore this issue back to the file of Assessing Officer with similar directions.

Hire of Plant & machinery 104,955,976 a. Profit on sale of license granted under import 663,000 B Custom duty drawback & excise duty drawback 1,165,000 C Other export incentives 24,000 13 Rent on premises leased 48,705,068 14 Insurance claims 3,170,570 15 ERDC Design fees 87,000 16 Loading and transportation charges at quarry 261,440 17 Soil investigation testing 1,395,009 18 Staff deputation cost 2,267,291 19 Materials transfer 611,453 20 Sale of empty tins and drums & compensation received 3,980,488 21 Cost of services 3,857,193 22 Freight charges 1,778,745 23 Others 51,408,102 24 Forfeiture of security deposit 98,000,000 25 Bond money from employees 337,000 26 Exchange gain 46,349,986 27 Pumping & freight charges for RMC 224,746,713 28 Service charges 6,079,672 29 Technical fees 9,868,200 30 Commercial leadership fees 216,275,767 31 Other receipts 15,408,681 32 Learning centre charge from units 1,343,705 33 Incentives from mutual funds 214,626 34 Corporate incentives- Maruti Cars 980,397 Sub- Total (C) 843,935,082 The assessee has included aforesaid receipts in profits eligible for deduction u/s. 80HHC of the Act. The Assessing Officer held that the Miscellaneous Receipts are not directly derived from export activity, hence, not eligible for deduction u/s. 80 HHC of the Act.

The ld.Counsel for the assessee submitted that Tribunal has restored this issue to the file of Assessing Officer in Assessment Year 2001-02 and 2002-03. The facts are identical in the impugned Assessment Year. We find that similar issue was raised before Co-ordinate Bench in appeal by the assessee in Assessment Year 2001-02 and Assessment Year 2002-03. The Co-ordinate Bench placing reliance on the decision of Tribunal for Assessment Year 2000- 01 in decided on 29/10/2020. restored the issue back to the file of Assessing Officer. The Revenue has not placed on record any material to controvert the submissions of the assessee, hence, following the decision of Co-ordinate Bench, we restore sub-ground (c) to the Assessing Officer for parity of reasons.

We find that this issue was also considered by Co-ordinate Bench in the preceding Assessment Year and was restored to the Assessing Officer. Both sides are unanimous in stating that the facts relevant to the issue are identical to the facts in appeal for Assessment Year 2001-02. Hence, following the decision of Co-ordinate Bench, the issue in sub-ground (d) is also restored to the Assessing Officer.

In the result, ground No.6 is partly allowed for statistical purpose.

The assessee has claimed deduction of Rs.23,93,457/- u/s. 80HHE of the Act .In ground No.7 of appeal assessee has assailed computation of deduction u/s. 80HHE. The assessee has assailed recomputation u/s. 80HHE on multiple grounds:

The CIT(A) has held that the scheme of deduction u/s. 80HHE is similar to the scheme of deduction u/s. 80HHC of the Act, hence the ratio laid down while deciding the issue of deduction u/s. 80HHE of the Act may be applied to the deduction u/s. 80HHE of the Act. We find that assessee has assailed computation of deduction u/s. 80HHE on the same parameters as we have discussed while adjudicating ground No.6. Hence, the finding given by us while adjudicating ground No.6 would mutatis mutandis apply to ground No.7 including sub-grounds (a), (b) and (c). For parity of reasons, the ground No.7 of appeal is restored to the Assessing Officer for fresh adjudication in line with the directions of the Tribunal in the preceding Assessment Years.

The ld.Counsel for the assessee submitted at the outset that this issue has been considered by the Tribunal in the preceding Assessment Years. The facts in the impugned Assessment Year are identical. We find that the Co- ordinate Bench while deciding the appeal of assessee for Assessment Year 2001-02 has considered this issue in para 35 to 37 of the order. The Bench has allowed this ground of appeal by placing reliance on the order of Tribunal in assessee's own case for Assessment Year 1999-2000 and 2000-01. No contrary material has been brought to our notice by the Revenue. Hence, for parity of reasons ground No.8 of appeal is allowed.

The Special Bench in the case of Vireet Investments Pvt. Ltd. (supra) has held that while computing book profits u/s. 115JB of the Act disallowance made u/s.14A r.w.r. 8D shall not be considered. The Hon’ble Karnataka High Court in the case of Sobha Developers Ltd. vs. DCIT 125 taxmann.com 72 has reiterated that disallowance made u/s. 14A could not be added to book profits of assessee u/s.115JB of the Act. In light of aforesaid decisions, assessee succeeds on ground No.9 of appeal.

The assessee vide application dated 14/11/2018 has raised additional grounds of appeal

The ld.Counsel for the assessee submits that for adjudication of additional grounds no fresh documents are required to be furnished. These grounds can be decided on the basis of documents already on record. The Assessing Officer has already granted deduction on the basis of profits of business and profession under normal provisions of the Act. By virtue of these additional grounds the assessee is claiming deduction u/s. 80HHC and 80HHE of the Act under MAT provisions.

The additional grounds raised by the assessee are purely legal, hence, additional grounds are admitted for adjudication. Since, these grounds have been raised for the first time before the Tribunal, we deem it appropriate to restore this ground to the Assessing Officer for consideration and adjudication on merits after affording reasonable opportunity of making submissions to the assessee, in accordance with law. Hence, additional ground No.1 and 2 are allowed for statistical purpose.

In the result, appeal of the assessee is partly allowed.

To sum up, appeal of the Revenue is dismissed and appeal of assessee is partly allowed.