ADDL CIT 3(2), MUMBAI vs. MANGALORE REFINER & PETROCHEMICALS LTD, MUMBAI

1240/10 &1826/M/10-MRPL

आयकर अपीलीय अिधकरण, मुंबई “ऐ” खंडपीठ म� Income-tax Appellate Tribunal -“A”Bench Mumbai सव�ी राजे��,लेखा सद�य एवं सी. एन. �साद, �याियक सद�य Before S/Sh.Rajendra,Accountant Member and C. N. Prasad,Judicial Member आयकर अपील अपील संसंसंसं./I.T.A./1240/Mum/2010,िनधा�रण िनधा�रण वष� वष� /Assessment Year:2006-07 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� Mangalore Refinery & Petrochemicals Ltd. Addl. CIT-Range-3(2) Maker Tower-F Wing, 16th Floor, Mumbai. Vs. Cuffe Parade, Mumbai-400 005. PAN:AAACM 5132 A (अपीलाथ� /Appellant) (��यथ� / Respondent) आयकर अपील अपील संसंसंसं./I.T.A./1826/Mum/2010,िनधा�रण िनधा�रण वष� वष� /Assessment Year:2006-07 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� Addl. CIT-Range-3(2) Vs. Mangalore Refinery & Petrochemicals Ltd. Mumbai. Mumbai-400 005. (अपीलाथ� /Appellant) (��यथ� / Respondent) राज�व क� ओर से / Revenue by: Shri Jasbir Chohan-CIT-DR अपीलाथ� क� ओर से /Assessee by:S/ Shri S.E. Dastur and Madhur Aggarwal सुनवाई क� तारीख / Date of Hearing: 30/03/2017 घोषणा क� तारीख / Date of Pronouncement:17/05/2017 लेखा सद�य सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER Rajendra A.M.- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dated 15/12/2009,of CIT (A)-7,Mumbai, the Assessing Officer (AO) and the assessee have filed cross appeals for the above-mentioned assessment year.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 25/10/2006, declaring total income of Rs.NIL. The AO completed the assessment on 18/12/2008, under section 143 (3) of the Act, determining its income at Rs.Nil.

ITA/1826/Mum/2010:

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

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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.

3.Next ground is about treating the interest of Rs. 5.02 crore (Rs. 1.07 crore-interest on Oil bonds +Rs.3.95 crore-Interest and discount charges +Rs.82,572-interest on housing loan)as business income as against income from other sources. Representatives of both the sides agreed that the issue was decided against the AO by the Tribunal,while adjudicating the appeal for the AY.s. 1999-2000 (supra), 2001-02(supra)and 2004-05(ITA/6385/Mum/2008,dtd.23.11.2016) and 2005- 06 (supra)as well as by the judgments of the Hon’ble Bombay High courts for the AY.s. 1999-00 and 2001-02.Following the above order/judgments we dismiss second ground,raised by the AO.

4.Next ground deals with payment to MRPL Education Trust and MRPL Janseva Trust.The Departmental Representative(DR)and the Authorised Representative (AR) agreed that identical issue was decided against the AO by the Tribunal while adjudicating the appeal for the AY.2004- 05(supra).We are reproducing the relevant portion of the order and it reads as under: “12. Insofar as Ground of appeal no. 3 is concerned, the same relates to disallowance of Rs. 40, 36,741/- made by Assessing Officer representing payment made to MRPL Education Trust and MRPL Janaseva Trust. Although in this Ground of appeal, the amount stated is Rs.40,36,741/-, but in effect the disallowance is to the extent of only Rs.31,72,704/-, as is evident from the orders of the authorities below. 13. In this context, the brief facts are that the Assessing Officer noted that payment of Rs.19,28,798/- was made to MRPL Janaseva Trust towards periodic deficit of their MRPL Hospital, which was in violation of Sec. 40A(9) of the Act. Similarly, payment of Rs.12,43,906/- made to MRPL Education Trust to cover the periodic deficit caused due to routine expenditure of MRPL school was also held to be in violation of Sec. 40A(9) of the Act. Hence, the disallowance of Rs.31,72,704/-. In the appeal before CIT(A), assessee canvassed that Sec. 40A(9) of the Act was not attracted to the impugned payments. The CIT(A) has since deleted the addition by following the order of his predecessor in the assessee’s own case for earlier assessment years. Against such a decision, Revenue is in appeal before us. 14. Before us, the only plea advanced by the ld. DR is to the effect that the payments have been made to an entity covered by Sec.40A(9) of the Act and, therefore, CIT(A) erred in deleting the disallowance. 15. On the contrary, the stand of assessee is that the impugned payments are made to the respective entities to cover their expenses of running school and hospital respectively and, therefore, it is not for the purpose of ‘setting-up or formation of or as contribution’ so as to come within the purview of disallowance u/s 40A(9) of the Act. 16. We have carefully considered the rival submissions. A perusal of the orders of authorities below reveal that the payments of Rs. 12,43,906/- and Rs.19,28,798/- to MRPL Education Trust and MRPL Janaseva Trust respectively have been made in order to make good the periodic deficit caused to such entities on account of expenses incurred by them in running school and hospital respectively. No doubt, the two trusts have been set-up by the assessee-company, but the impugned payments are not for ‘setting-up’ or

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for ‘formation’ of or as ‘contribution’ to the trusts so as to fall within the mischief of Sec. 40A(9) of the Act. The phraseology of Sec. 40A(9) of the Act itself clearly suggests that only sums paid by the assessee as employer towards ‘setting-up’ or ‘formation’ of or as ‘contribution’ to any trust, fund, society, etc. is to be disallowed whereas the expenses in question are not of the nature covered by Sec. 40A(9) of the Act and are instead incurred by assessee wholly and exclusively for the welfare of its employees and same is deductible u/s 37(1) of the Act. At the time of hearing, the learned representative for the assessee had also relied upon the judgment of Hon'ble Bombay High Court in the case of Bharat Petroleum Corporation Ltd, 252 ITR 43 (Bom), which also clearly supports the proposition that such like expenses which are incurred not for ‘setting-up’ or for ‘formation’ of or as ‘contribution’ to any trust, etc. are not covered within the scope of Sec. 40A(9) of the Act. Therefore, under these circumstances, we hereby affirm the ultimate conclusion of CIT(A) in deleting the addition. As a consequence, Revenue fails in its Ground of appeal no. 3 also.” 5.Last ground of appeal is about allowing depreciation.We find that the Tribunal had dealt the identical issue in the appeal for the AY.2004-05 as follow: “17. Insofar as Ground of appeal no. 4 is concerned, the same relates to the direction of CIT(A) contained in para 6 of his order whereby he has directed the Assessing Officer to allow depreciation based on the opening WDV of assets, calculated without reducing the depreciation thrust upon the appellant in Assessment Year 2001-02. 18. In this context, the relevant facts are that in the course of assessment proceedings, the Assessing Officer recalculated the depreciation allowable to assessee by reworking the WDV of assets. In the earlier Assessment Years of 2000-01 and 2001-02, assessee had not claimed depreciation but the same were allowed in the assessment order. As a consequence, the Assessing Officer reworked the WDV of the assets and scaled down the allowance of depreciation in the instant year. The CIT(A) noted that the earlier order of Assessing Officer for Assessment Year 2001-02 was reversed as depreciation could not be thrust upon the assessee and based on such precedent, he set-aside the action of Assessing Officer of reworking the WDV in the instant assessment year. Against such a decision of CIT(A), Revenue is in appeal before us. 19. At the time of hearing, it has been pointed out that the order of Assessing Officer for Assessment Year 2001-02 wherein assessee was 1allowed depreciation inspite of the fact that it was not claimed in the return of income, has since been reversed by the CIT(A) and even the appeal of Revenue against such an order has been dismissed by the Tribunal for want of requisite permission from COD. It is sought to be emphasised that the order of the CIT(A) for Assessment Year 2001-02 on this point has since become final. The aforesaid factual matrix has not been disputed by the ld. DR and in this view of the matter, we find no reason to find fault with the directions of CIT(A) that the adjustment of WDV done by Assessing Officer in order to recalculate the depreciation is untenable. As a consequence, the order of CIT(A) on this aspect is upheld and Revenue fails.” Respectfully following the above,we decide last ground of appeal against the AO.

ITA/1240/Mum/2010

6.First ground,raised by the assessee,pertains to disallowance of freight charges u/s.40(a)(i) of Rs.75.38 crores paid to foreign shipping companies.During the assessment proceedings,the AO found that the assessee had paid freight charges to foreign shipping companies for import of crude oil.He held that the assesse had failed to deduct TDS u/s. 195 of the Act, that expenses

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claimed on payment of freight charges was liable to be disallowed u/s. 40 (a)(i),that the provision of section 44B were duly applicable.Before him,the assessee relied upon the Memorandum No.480/6/83-FTD, dated 12.04.1984 and Memorandum No.480/1/95-FTD dated 16.11.1995 regarding non taxability of foreign remittances through telegraphic transfers(TT).However,the AO did not accept the submissions of assessee and made addition of Rs.75.38 crores to its income. 6.1.Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority(FAA)and relied upon the instructions contained in the above referred two memoran - dums dated 12.04.1984 and 16.11.1985. It also filed a copy of the order of the FAA-XXXIII, Mumbai order dt.27/02/2004 wherein similar issue was decided in favour of the assessee.It also made reference to double taxation agreement entered into between India and other countries specially Cyprus, Malta and Qatar. The FAA drew the attention of the assessee to the case of Poompuhar Shipping Corporation Limited (297ITR-AT-219) and held that payment to the shipping company for use of ship would be in nature of royalty. After considering the objections raised by the assessee in that regard he held that the assessee had tried to draw fine distinction between the “Time Charter” and “Voyage Charter”, that the difference would not affect the taxability of remittances made to foreign shipping companies for import of crude oil,that it had not produced any evidence to support the claim that other companies had also used the same ship for import of their crude oil,that specific provisions of section 44B were clearly attracted to the facts of the case.He referred to the instruction No.480/6/83 and held that only those remittances made to foreign shipping companies would not attract payment of tax where the payments had been made through telegraphic transfer through a bank in the foreign country,that it had admitted that remittances to foreign shipping companies were made through an SBI Branch at Mumbai and not through a foreign bank situated outside India,that the assessee had contended that all TT.s,made through a Branch situated in India/through a bank situated abroad would not attract TDS provisions of section 44B,that the interpretation of the assessee would render the provisions of section 44B and section 195 useless, that the freight charges paid by it to foreign shipping company would attract the provisions of section 44B and section 195 of the Act. He confirmed the disallowance made by the AO u/s.40(a)(i) of the Act.However, considering the DTAA entered between India and Cyprus and Malta he held that the assessee had no responsibility to deduct tax at source in respect of the payments made to shipping companies of

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Cyprus, Malta etc., that substantial part of payments were made to shipping companies belonging to other countries other than Cyprus, Malta etc.Accordingly,he directed the AO re-compute the disallowance after reducing the amount of payments made to shipping companies belonging to Cyprus, Malta, Qatar and United Arab Republic.

6.2.Before us the Authorised Representative (AR) argued that no chargeable income had arisen to the shipping companies in India,that no payment was received in India,that provisions of section 44B(2)(ii) were not applicable, that the foreign shipping company had no office in India, that money was transferred through TT.s via bank in India. He referred to pages No.105-108 of the PB and relied upon the cases of Udhavdas Kewalram(66ITR463)Avon Organic Ltd.(55 SOT260)and further argued that it was not a royalty, that the case of Phumpuhar Shipping (supra)was not relevant for deciding the issue. The Departmental Representative (DR)supported the order of the FAA and stated that money was not remitted through a bank that payment was made in India with SBI,that if payment was made in or outside India provision of section 44 B would be applicable.He relied upon the case of Phumpuhar Shipping(supra).

6.3.We have heard the rival submissions and perused the materials above.We find that the FAA has held that payment to the shipping company for use of ship would be royalty,that the provisions of section 44B were applicable to the facts of the case,that only payments made to shipping companies of specified countries would not attract payment of taxes,that TT.s.were made from Mumbai,that payment was not made through banks located outside India.He had also relied upon the case of Poompuhar Shipping(supra). 6.3.1.Before proceeding further,it would be useful to understand the scheme of section dealing with income of shipping companies.In section 44B of the Act, no procedure for assessment and collection of tax is provided. Non-obstante clause refers only to sections 28 to 43A of the Act. In other words, income from shipping accrued or deemed to have accrued to a non-resident ship- owner or charterer falls outside the scope of the trade and business normally so understood. The incidence of tax under section 44B of the Act is on a non-resident engaged in the business of operation of ships owned or chartered by him or it, and if such income constituted the amounts earned on account of the carriage of passengers, livestock, mail or goods shipped from any port in India and the amount so received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods, etc.In the case before

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us,the AO or the FAA has not established the basic fact that payment made by the assessee fall within the scope of the provisions of section 44B. 6.3.2.It is said that the Act,being a taxing statute,has to be understood by reference to its language and that it is not the function of the judicial forums to stretch a taxing statute to rope in items of income which are not explicitly covered by the relevant taxing provision. No income can be brought to taxation on the basis of the intention or scheme of the Act. Section 5(2) of the Act,levies a tax on the total income of a non-resident; this provision is subject to the provisions of the Act and, therefore, obviously,chargeability of an item of income has to be proved by the AO who wants to tax it.As far as the provisions of TDS are concerned there is no need to say that same would be applicable only if the income is chargeable to tax.The words of section 195(1) in clear terms, lay down that tax at source is deductible only from “sums chargeable” under the provisions of the Act, i.e., chargeable u/s.4,5 and 9 of the Act.In the case under consideration, the basic fact of chargeability of the disputed amount has not been proved.The shipping companies are not residents of India nor they are having permanent establishment in India. Payments by the assessee were through TT.s.The FAA has held that as the payments were not made in foreign bank so the income has to be treated arisen in India.He was of the opinion that if the payments were made in foreign country only then the payments would have been considered to be covered by the instructions issued by the CBDT.In our opinion,the FAA had taken a very extreme view.In the present age of technical advancement it cannot be imagined that TDS provisions will not be applicable only if payments are made in a foreign country and payment made by TT.s in India is not payment outside India.The idea behind the Memorandums referred in the earlier paragraphs is to ensure that shipping companies should be subjected to the TDS provisions,if they receive payment in India.We find that in case of Avon (supra) the assessee had made TT.s. at Hyderabad and the Tribunal had held that such payments were covered by the Memorandums. Therefore,we are of the opinion that payments made through TT.s.,even though made via SBI Mumbai,by the assessee to foreign shipping companies is as per the provisions of the CBDT Memorandums and therefore,TDS provisions would not be applicable in the case under conside -ration.As far as the matter of Poompuhar(supra) is concerned it is sufficient to say that fact of both the cases are clearly distinguishable.The Tribunal in that matter had decided that the assessee should have a regularity of business of operating ship as a condition to attract section 44 B of the Act.Therefore,by importing that ratio the FAA had wrongly held that payment received

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was royalty.We would also like to reproduce the relevant portion of the order,dealing with the similar issue,of the Avon Organic Ltd.(supra) and it reads as under: “6. We have heard rival submissions and perused the material on record. As revealed from the assessment order, the AO has come to the conclusion that the commission payments were deemed to have been received in India only because the telegraphic transfer of the remittances towards commission was made from a bank in India. Apart from these things, the AO has got no other material on record to show that the foreign agents either rendered any services in India or have any permanent establishment in India. Only because the remittances towards commission were telegraphically transferred to the foreign agents from the banks in Hyderabad will not lead to the inference that the income to the foreign agents accrued or arose in India in terms of section 5(2)(a) of the Act. The ITAT, Hyderabad Bench in the case of Dr. Reddy's Laboratories (supra) took note of the decision of the Hon'ble Supreme Court in the case of Transmission Corpn. of A.P (supra) and held in the following manner: "In the case of Transmission Corporation (supra), the facts were that the assessee had entered into certain agreements with certain foreign parties for supply of equipments. Another set of contracts entered into were for assembling, erection, testing and commissioning of the equipment. Pursuant to these contracts, payments were made by the assessee to the foreign parties without deducting tax under s. 195 of the Act. The contention of the assessee was that s. 195 would be applicable only where the payment to the non resident is wholly income chargeable to tax as it provides that any person responsible for paying to a non resident 'any sum chargeable under the provisions of this Act', shall, at the time of payment, deduct income tax thereon at the rates in force. In other words, the contention was that when the payments made to the non resident were not entirely income, but a trading receipt, there is no question of deduction of income tax at the source as the section does not provide for it. To this contention, the Supreme Court answered that the assessee who made the payments to the non residents was under an obligation to deduct tax at source u/s 195 of the Act in respect of the sums paid to them under the contracts entered into. It further held that the obligation 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." 7. In case of Divis Laboratories Ltd. (supra), the ITAT, Hyderabad Bench while interpreting the provisions contained under s. 195 held that unless the income is liable to tax in India, there is no obligation to deduct tax. In order to determine whether the income can be deemed to accrue or arise in India, it has to be consistent in the context of section 9. As per section 9, the basic criteria provided in the section is about accrual of or arising of income In India by virtue of connection with the property in India or control or management vested in India. Unless these conditions were satisfied, it cannot be held that income has accrued or arisen in India. This

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Tribunal further held that section195 has to be read along with charging sections 4, 5 and 9 of the Act. The provisions contained u/s 195 were not meant that the moment there is a remittance, the obligation to deduct TDS automatically arise.Considering the fact that the AO has not brought any material on record to show that the foreign agents have rendered any part of the services in India or have a permanent establishment and business connection in India, it cannot be said that any part of the commission payment made to them accrued or arisen in India requiring deduction of tax u/s 195(1) of the Act. We are also fortified by the decision of the ITAT Bombay Bench discussed above. In the aforesaid view of the matter, we fully agree with the finding of the CIT (A) that no disallowance u/s 40(a)(i) could be made. We therefore uphold the order of the CIT (A) and dismiss the ground raised by the department.” Considering the above,first ground of appeal is decided in favour of the assessee.

7.Second ground of appeal deals with addition of custom duty amounting to Rs.176.97 crores.It was brought to our notice that identical issue was discussed and decided by the Tribunal in favour of the assessee,while adjudicating the appeal for AY.s. 2004-05 and 2005-06 in ITA/6835 &7341/Mum/2008.dt.23.11.2016 and C.O.104/Mum/2009-dtd.22.12.2016.We would like to reproduce the para 26-42 (Pg-No.16 to 29 of the Tribunal order for the AY 2004-05 supra and it reads as under : “26. Insofar as the Cross objection filed by the assessee is concerned, we have already reproduced hereinabove the various Grounds raised by the assessee. In this context, it is notable that the Cross objection was initially filed by the assessee on 12.6.2009, which was accompanied by a solitary Ground of cross objection. Subsequently, on 6.5.2013 the assessee filed a Memorandum of Additional cross objections. In para 3 of our order, we have reproduced the Revised/Consolidated and Additional cross objections filed by the assessee. At the time of hearing, the ld. DR raised a preliminary point that the Memorandum of Additional cross objections filed by the assessee on 6.5.2013 be not admitted as it is filed belatedly without any justifiable reasons. In this context, the learned representative for the assessee pointed out that the original Memorandum of cross objections and the Memorandum of Additional cross objections filed on 6.5.2013 have been consolidated and the Memorandum of Revised/Consolidated and Additional cross objections have been filed so as to have a better clarity on the dispute. It has also been pointed out that no new plea has been raised in the subsequent Memorandum of cross objections and, therefore, the revision in the Memorandum of cross objections cannot be considered as a delay in filing of the cross objection. In our considered opinion, in the original Memorandum of cross objection filed by the assessee, the challenge was with respect to the disallowance of Rs.40,41,81,196/- 17 being provision on account of Customs duty. Even in the Revised and Additional cross objections, the challenge remains the same although different facets of the dispute have been brought out. Therefore, the stand of the ld. DR to assail the filing of Revised/Consolidated and Additional cross objections, as being delayed, is based on a wrong perspective and is hereby rejected. 27.Now,we may take up the merits of the disallowance of Rs.40,41,81,896/- made by the Assessing Officer, which is sought to be challenged by the assessee on various limbs. In order to appreciate the controversy, the following background of the dispute is relevant. The appellant-company procures a portion of its raw material (i.e. crude oil) through imports. A significant portion of the imports is against the Advance licences obtained for 8

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import of raw material for manufacture of products meant for exports. The Customs duty on the import of crude oil is provided on all imports and Provision to the extent of Rs.40,75,50,184/- was outstanding as on 31.3.2004 towards Customs duty on crude oil imported against Advance licences pending completion of export obligations. Subsequently, upto 30.9.2004 assessee fulfilled export obligations with respect to Customs duty amounting to Rs.40,41,81,896/-. The assessee-company adjusted the said amount of Rs.40,41,81,896/- against the Provision for Customs duty outstanding on 31.3.2004 and claimed it as a deduction u/s 43B of the Act. The Assessing Officer has disagreed with the assessee on the ground that there was no actual payment of Customs duty and, therefore, the said amount was not deductible in terms of Sec. 43B of the Act. According to the Assessing Officer, provision of Sec. 43B of the Act categorically states that the deductions thereof are to be allowed only on the basis of actual payment only. The assessee carried the matter in appeal before CIT(A) contending that the action of Assessing Officer was erroneous inasmuch as assessee-company had fulfilled its export obligations before the due date of filing of return of income thereby complying with the conditions laid down in Sec. 43B of the Act to claim the deduction of Rs.40,41,81,196/- comprised in the liability for Customs duty outstanding as on 31.3.2004. The CIT(A) has since affirmed the disallowance made by the Assessing Officer. In coming to his decision, the CIT(A) held that Sec. 43B of the Act was not applicable at all in the case of assessee because the liability for payment of Customs duty of Rs.40,41,81,196/- did not arise during the previous year relevant to the assessment year under consideration and, therefore, there was no question of considering the plea of assessee of having paid the said sum before the due date of filing of return of income in order to claim the benefit of deduction u/s 43B of the Act. 28. In this background of the matter, the learned representative for the assessee has made varied submissions by pointing out that CIT(A) was not correct in holding that the liability for payment of Customs duty of Rs.40,41,81,196/- did not arise during the year. According to the assessee, the Assessing Officer was correct in deducing that the provisions of Sec. 43B of the Act was applicable thereby implying liability arose in the year under consideration, but erred to the extent of holding that fulfilment of export obligations by 30.9.2004 did not amount to payment of Customs duty within the meaning of Sec. 43B of the Act. Further, it has been pointed out that having regard to the manner in which assessee has treated the amount relating to the Customs duty in its books of account, the entire exercise is unnecessary and is tax neutral over the years. The learned representative has in detail argued on the aforesaid propositions, which we shall elucidate further in the subsequent paras. 29. On the contrary, the stand of the ld. DR appearing for the Revenue is in support of the orders of authorities below. 30. Pertinently, the entire controversy revolves around the provisions of Sec. 43B of the Act. Sec. 43B of the Act was inserted by the Finance Act, 1983 w.e.f. 1.4.1984 and prescribes for certain deductions to be allowed only on actual payment while computing the income chargeable to tax under the head ‘Profit and gains of business or profession’. Shorn of other details, insofar as it is necessary to appreciate the controversy in question, the salient features of Sec. 43B of the Act are as follows. Broadly speaking, Sec. 43B of the Act provides that deduction for any sums payable by the assessee by way of tax or duty, cess or fee or any other sum prescribed shall, irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which the said sum is actually paid. It is a non-obstante clause prescribing that notwithstanding anything contained in any other provisions of this Act, “a deduction otherwise allowable” under the Act in respect of the sums prescribed therein shall be allowed only in computing the income from profit and gains of business of that previous year in which such sum is 9

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actually paid irrespective of the previous year in which the liability to 20 pay such sum was incurred by the assessee according to the method of accounting regularly employed. In the instant, the case made out by CIT(A) is that Sec. 43B of the Act is not applicable in the present case for the reason that the amount of Rs.40,41,81,196/- is not a deduction otherwise allowable under this Act. According to the CIT(A), the liability for the impugned Customs duty does not arise because assessee has obtained clearance of the imported material without payment of Customs duty, and that the ultimate liability may or may not arise inasmuch as on a future date, if the assessee is able to meet the export obligations, the charge of Customs duty would not arise. For this reason, according to the CIT(A), the charge of Customs duty is only a contingent liability, happening of which is not certain and, therefore, a contingent liability cannot be considered to be an amount “otherwise allowable under this Act”. Therefore, he inferred that Sec. 43B of the Act is not applicable. 31. On this aspect of the matter, the stand of assessee is based on the provisions of Customs Act, 1962, which we shall refer to a little later. Before that, we may refer to the pertinent fact-situation. As noted earlier, assessee is importing a portion of its raw material, i.e., crude oil by utilizing the Advance licence benefits obtained for import of raw material for manufacture of products meant for export. As on 31.3.2004, assessee- company has made a Provision of Customs duty of Rs.40,75,50,184/- on crude oil imported against Advance licence pending completion of export obligations. Upto 30.9.2004, assessee has fulfilled the export obligations corresponding to the Customs duty liability of Rs.40,41,81,896/-. In its computation of income, assessee adjusted the aforesaid amount of Rs.40,41,81,896/- against the Provision for Customs duty as on 31.3.2004 and claimed it as deduction u/s 43B of the Act. We may also briefly touch upon the accounting treatment accorded by the assessee to such transactions. At the time of import of raw material,assessee creates a ‘Provision of Customs duty’ on such imports by debiting ‘Customs duty on raw material’ account and crediting ‘Customs duty-Advance licence’ account. The ‘Customs duty Advance licence’ account is shown as a liability outstanding in the Balance-sheet and subsequently, on fulfilment of the export obligation, the ‘Customs duty Advance licence’ account is debited and ‘Export licence benefit received’ account is credited and is offered as income. In the context of the instant fact- situation, it may be appreciated that assessee had created a Provision of Rs.40,75,50,184/- in the year under consideration, being Customs duty payable on import of raw material and the same was debited to the Profit & Loss Account. Subsequently, by 30.9.2004,assessee fulfilled its export obligations to the extent of Rs.40,41,81,896/- and adjusted the same against liability, which was offered as income in the next year. Considering the fulfilment of export obligations to the extent of Rs.40,41,81,896/- as a payment/discharge of liability of the Provision of Customs duty as on 31.3.2004, in terms of the first proviso to Sec. 43B of the Act,assessee claimed a deduction. 32. The first question to be decided is as to whether the Provision of Customs duty of Rs.40,75,50,184/- created by the assessee as on 31.3.2004 is a liability which has arisen so as to fall within the expression “a deduction otherwise allowable under this Act” in Sec. 43B of the Act. For the said purpose, the learned representative for the assessee referred to Sec. 12 of Customs Act, 1962 to emphasise on the timing of crystallisation of charge of Customs duty. The Customs duty is levied on goods imported into or exported from India. Sec. 143A of the Customs Act, 1962, which is relevant for the present purpose reads as under :- “SECTION 143A : Duty deferment. –

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(1) When any material is imported under an import licence belonging to the category of Advance Licence granted under the Imports and Exports (Control) Act, 1947 (18 of 1947), subject to an obligation to export the goods as are specified in the said Licence within the period specified therein, the Assistant Commissioner of Customs or Deputy Commissioner of Customs may, notwithstanding anything contained in this Act, permit clearance of such material without payment of duty leviable thereon. (2) The permission for clearance without payment of duty under sub-section (1) shall be subject to the following conditions, that is to say – (a) the duty payable on the material imported shall be adjusted against the drawback of duty payable under this Act or under any other law for the time being in force on the export of goods specified in the said Advance Licence; and (b) where the duty is not so adjusted either for the reason that the goods are not exported within the period specified in the said Advance Licence, or within such extended period not exceeding six months as the Assistant Commissioner of Customs or Deputy Commissioner of Customs may, on sufficient cause being shown, allow, or for any other sufficient reason, the importer shall, notwithstanding anything contained in section 28, be liable to pay the amount of duty not so adjusted together with simple interest thereon at the rate of twelve per cent per annum from the date the said permission for clearance is given to the date of payment. (3) While permitting clearance under sub-section (1), the [Assistant Commissioner of Customs or Deputy Commissioner of Customs] may require the importer to execute a bond with such surety or security as he thinks fit for complying with the conditions specified in sub-section (2).” 33. Sub-section (1) of Sec. 143A of Customs Act, 1962 prescribes that where any material is imported under an import licence belonging to the category of Advance licence, the competent authorities can permit clearance of such material “without payment of duty” leviable thereon. Sub-section (2) provides the conditions for grant of permission for clearance of goods without payment of duty. It is noteworthy that in terms of Sec. 12 of the Customs Act, 1962 the charge of Customs duty gets crystallised with the import of goods into India, which in the present case implies that the charge of Customs duty gets crystallised when assessee brings into India its raw material, i.e., crude oil from a place outside India. The competent authorities under the Customs Act, 1962 are empowered in terms of the specific provisions of Sec. 143A of the Customs Act, 1962 to permit clearance of such goods under Advance licence without payment of Customs duty leviable thereon, subject to certain conditions. Thus, the clearance obtained by the assessee of its imported raw material without payment of Customs duty leviable after complying with the conditions, as imposed by the competent authorities, does not imply that the charge of Customs duty does not arise. Rather, the charge of Customs duty gets crystallised and is fastened to the imported goods once they are brought into India from a place outside India.Therefore, having regard to the said legal position under the Customs Act, 1962, it is wrong on the part of the CIT(A) to say that the liability of Customs duty in the context of the import of raw material, i.e., crude oil against the Advance licence benefit does not arise; rather, it is a case where though the charge of duty arises, but the goods have been permitted clearance without payment of duty subject to the conditions 11

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prescribed under the Customs Act, 1962. Ostensibly, the CIT(A) has obliterated the difference between arising of the liability of Customs duty and its payment. Before us, the learned representative for the assessee had justifiably placed reliance on the judgments of the Hon'ble Supreme Court in the case of Metal Box Company of India Ltd., 73 ITR 53 (SC) and Bharat Earth Movers, 245 ITR 428 (SC) to emphasise that the point of arisal of a liability is not the same as the point of time prescribed for its payment. Notably, in the present case, assessee, at the time of obtaining clearance of raw material without payment of duty complied with the conditions prescribed by the Customs Department by furnishing a Bond to the Customs authorities, which enabled the authorities to permit the assessee to clear the goods without payment of duty on the condition of fulfilling the export obligations, failing which the duty liable on such goods would be paid by the assessee together with interest. In fact, the learned representative pointed out that one of the conditions contained in Sec. 143A(2) of the Customs Act, 1962 prescribing paying of duty with interest if assessee was to default in meeting with export obligations itself would demonstrate that the liability for payment of Customs duty arises during the year of the clearance of goods. At the time of hearing, reliance has also been placed on the decision of the Ahmedabad Bench of the Tribunal in the case of Pratibha Syntex Ltd. v. Jt. Commissioner of Income-tax, 81 ITD 118 where it has been observed under somewhat similar circumstances that the Customs duty liability is not to be regarded as a contingent liability. 34. Therefore, in view of the aforesaid discussion, it is reasonable to conclude that the liability represented by the Provision of Rs.40,75,50,184/- being Customs duty payable on import of raw material arises during the previous year relevant to the assessment year under consideration as assessee brought the requisite goods into India from a place outside India. Therefore, under these circumstances, CIT(A) erred in taking the view that Sec. 43B of the Act is not applicable in the case of assessee on an erroneous ground that the liability of Customs duty did not arise in the instant year. 35. The first proviso to Sec. 43B of the Act prescribes that the disallowance u/s 43B of the Act would not apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under Subsection (1) of Sec. 139 of the Act in respect of the previous year in which the liability to pay such sum was incurred. On the strength of such proviso, the claim of assessee was that upto 30.9.2004, it has fulfilled export obligations amounting to Rs.40,41,81,896/- out of the total Provision for Customs duty outstanding as on 31.3.2004 and, therefore, claimed it as a deduction u/s 43B of the Act. The stand of the Assessing Officer was that the provisions of Sec. 43B of the Act envisaged deduction of sum which is actually paid, whereas in the instant case there was no actual payment of duty. In other words, the discharge of obligation to export the finished products as per the terms of the Advance licence benefit undertaken by the assessee has not been understood to be a sum actually paid for the purpose of Sec. 43B of the Act. In this context, the assessee relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Pratibha Syntex Ltd. (supra) where it has been held that if the liability for payment of Customs duty in relation to imports of raw material is liquidated by performing an act, it would tantamount to payment thereof and deduction u/s 43B of the Act ought to be granted for the Customs duty liability in the year of export as it went to reduce the Customs duty liability. 36. Before us, the ld. DR appearing for the Revenue has emphasised on the stand of Revenue to point out that the benefit of the first proviso to Sec. 43B of the Act can be availed only if the amount is actually or physically paid, which is not the case herein.

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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. 1,369/- Interest on Contractors’advances 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 14

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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) ITA No. 2470/2013 (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, 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

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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.

9.Ground No.4 is about addition made by AO on account for provision for custom duty while calculating book profit u/s.115JB of the Act. While deciding Ground No.2 we have already adjudicated the issue in favour of the assessee . Following the same Ground 4 stands allowed.

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.

As a result,appeal filed by the AO is dismissed and the appeal of the assessee is partly allowed. फलतः िनधा�रती अिधकारी �ारा दािखल क� गई अपील नामंजूर क� जाती है और िनधा�रती क� अपील अंशतः मंजूर क� जाती है. Order pronounced in the open court on 17th May, 2017. आदेश क� घोषणा खुले �यायालय म! "दनांक 17 मई, 2017 को क� गई । Sd/- Sd/- (सी. एन. #साद / C.N.Prasad ) (राजे�& / Rajendra) �याियक सद'य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; "दनांक/Dated : 17.05.2017. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ) 2. Respondent /#*यथ) 3.The concerned CIT(A)/संब, अपीलीय आयकर आयु/, 4.The concerned CIT /संब, आयकर आयु/ 5.DR “A ” Bench, ITAT, Mumbai /िवभागीय #ितिनिध, खंडपीठ,आ.अ.�याया.मुंबई 6.Guard File/गाड� फाईल स*यािपत #ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai. 16