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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri M. Balaganesh, AM & Shri Partha Sarathi Chaudhury, JM]
ORDER Per Shri Partha Sarathi Chaudhury,, JM: Both these cross appeals by assessee and revenue arise out of the order of CIT(A), Central-II, Kolkata vide appeal No. 82/CC-X/CIT(A)C-II/04-05 dated 30.09.2013. Since facts are common and both the appeals are arisen out of the same order of Ld. CIT(A), we dispose of both these appeals by this consolidated order for the sake of convenience.
First we take up Revenue’s appeal i.e. ITA No.2816/Kol/2013. The revenue has raised following grounds of appeal:
“1. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law that provisions for gratuity is not to be added to Book Profit, ignoring the fact that the provision for gratuity is unascertained liability not allowed to be deducted while computing Book Profit.
2. That on the facts and circumstances of the case, the Ld. CIT(A) erred in holding that liability of interest on turnover tax is allowable expenditure for computing Book Profit, ignoring the fact that provision for interest on turnover tax is unascertained liability.
3. That on the facts and circumstances of the case the Ld. CIT(A) erred in holding that provision for doubtful debt is allowable expenditure for computing book profit, ignoring the 2 M/s. Kesoram Industries Ltd., AY 1990-91 fact that provision for doubtful debt is not ascertainable, hence not allowed to be deducted while computing book profit.”
The facts of the case are that the assessee company filed its return of income for AY 1990-91 on 31.12.1990 declaring NIL income. The book profit u/s. 115J of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) was also shown at NIL. The revised return of income was filed on 27.05.1991. However, in this return also the income under the normal provisions as well as book profit u/s. 115J of the Act was shown at NIL. The AO processed the return of income u/s. 143(1)(a) of the Act, issued intimation dated 12.03.1991 wherein he computed the book profit u/s. 115J of the Act at Rs.42,86,748/- being 30% of Rs.1,42,89,160/- as against the book profit at NIL declared by the assessee company. While processing the return u/s. 143(1)(a) of the Act, the AO made prima facie adjustment of Rs.8,70,932/- on account of provision for doubtful debts, Rs.36,93,429/- on account of provision for gratuity and Rs.37,56,330/- on account of provision for interest on turnover tax. The AO did not allow deduction of business loss or depreciation whichever is lower as provided u/s. 115J of the Act. On receipt of intimation u/s. 143(1)(a) the assessee company filed a rectification petition u/s. 154 of the Act before the AO on 20.03.1991 objecting prima facie additions made while computing book profit u/s. 115J of the Act and not allowing deduction on account of business loss or depreciation whichever is lower. The AO passed an order u/s. 154 of the Act on 20.05.1991 but did not accept the contention of the assessee about the adjustment made and allowance of business loss or depreciation. Aggrieved by the order of the AO u/s. 154 of the Act, the assessee company filed an appeal before the Ld. CIT(A), which was decided vide Appeal No. 286/CC- X/CIT(A)C-I/91-92 dated 18.02.1992. The Ld. CIT(A) set aside the matter back to the file of AO with the direction to consider all the issues raised in the rectification application and give finding on them stating reasons therefor. The assessee company filed its submission and explanation with respect to each issue before the AO. The AO passed an order u/s. 251/154 of the Act on 25.05.1992 but did not accept the submission made by the assessee against the adjustment made by the assessee to compute book profit u/s. 115J of the Act and allowed deduction on account of loss or depreciation.
Aggrieved, the assessee company filed an appeal against the order u/s. 251/154 of the Act dated 25.05.1992. The said appeal was claimed to be decided in favour of the assessee by Ld. CIT(A) vide order dated 23.03.1993. In the meantime, the AO passed an 3 M/s. Kesoram Industries Ltd., AY 1990-91 order u/s. 143(3) of the Act on 31.03.1993. In the said order, the AO computed book profit u/s. 115J of the Act at Rs.41,62,753/- being 30% of Rs.1,38,75,842/- as per order dated 25.05.1992 passed by the AO u/s. 251/154/143(1) of the Act. However, in the order passed u/s. 143(3) of the Act, the AO did not give any reason as to why he was adopting the computation of income u/s. 115J of the Act as per the order u/s. 251/154 of the Act. The instant appeal is filed against the said computation of book profit u/s. 115J of the Act.
The first ground of appeal
relates to the position of law that provisions for gratuity is not to be added to book profit. The AO made an addition of Rs.36,93,429/- on account of provision made by the assessee on account of gratuity. It was contended before the AO that the provision made for gratuity is not an unascertained liability and, therefore, the same cannot be added to compute the boo profit u/s. 115J of the Act that the liability had been calculated on the basis of actuarial valuation towards future payments to the employees. The assessee submitted a copy of actuarial valuation certificate issued by the Advocate and registered valuer. However, the contention of the assessee was not accepted by the AO for the reason that there was change in the method of accounting from cash basis to lower the book profits for the year under consideration. On careful consideration of facts and law, the Ld. CIT(A) in his order on record, has stated that the AO was not justified in rejecting the claim of the assessee company for the reason that there was change in the method of accounting in respect of gratuity liability because the change made by the assessee was not proved to be malafide. The change was made on the basis of accepted principles of accounting and it is not correct to say that the change was made to reduce the profit of the year under appeal. That the Ld. CIT(A) further observed that the provisions for gratuity of Rs.36,93,429/- was made on the baiss of actuarial valuation for future payments to the employees and such a liability cannot be held to be an unascertained or contingent liability as held by the Hon’ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT 245 ITR 428 (SC). The similar view was taken by the Hon’ble Bombay High Court in the case of CIT Vs. Echjay Forging Pvt. Ltd. 251 ITR
15. (Bom) and also by the Hon’ble Gujarat High Court in the case of DCIT Vs. Inox Leisure Ltd. 351 ITR 314 (Guj.). the Ld. CIT(A) held that in view of the above factual position, accounting principles and judicial decisions, the AO was not justified in making addition of Rs.36,93,429/- on account of provisions for gratuity while computing the book profit
4 M/s. Kesoram Industries Ltd., AY 1990-91 u/s. 115J of the Act and, therefore, the Ld. CIT(A) directed the AO to delete the said addition. That being further aggrieved, the revenue has preferred this appeal before us.
The Ld. DR relied on the order of AO. The Ld. AR reiterated the submissions as made before the subordinate authorities and relied on the order of Ld. CIT(A).
We have perused the case records, facts and circumstances and heard the rival contentions and have arrived at our considered view that here the liability had been calculated on the basis of actuarial valuation towards future payment to the employees. The assessee had submitted a copy of the actuarial valuation certificate issued by the Advocate and registered valuer which is on record. We further observe that when the provisions for gratuity is made on the basis of actuarial valuation for future payments to employees such a liability cannot be held as contingent liability as held by the Hon’ble Apex Court in the case of Bharat Earth Movers Ltd., supra. We also observe that the ground of the AO for rejecting the claim of the assessee that there was a change in the method of accounting in respect of gratuity liability is not correct because the change made by the assessee was not proved to be mala fide as it is on record and the change was made on the basis of accepted accounting principles. On that basis of this finding, we do not find any infirmity in the order of Ld. CIT(A) on this issue, and, therefore, the relief granted to the assessee by the Ld. CIT(A) is sustained . This ground of appeal of revenue is dismissed.
The next ground of appeal relates to the liability of interest on turnover tax whether an allowable expenditure for computing book profit.
9. The AO had made an addition of Rs.37,56,330/- on account of provision for interest on turnover tax in the computation made u/s. 115J of the Act. It was submitted before the AO that the provision for interest on turnover tax is an ascertained liability and, therefore, same cannot be added to the book profit. It was submitted that the liability for interest on turnover tax is statutory liability u/s. 10A of Bengal Finance (ST) Act, 1941, which is not discretionary or optional under the Act. It was submitted beore the AO that the provisions of section 10A was inserted in the Bengal Finance (ST) Act, 1941 w.e.f. 01.10.1983. According to the provisions of the said Bengal Finance (ST) Act, 1941, interest for delayed payment on turnover tax is payable @ 2% by each English calendar
5 M/s. Kesoram Industries Ltd., AY 1990-91 month of default from the 1st day of such month next following the prescribed date up to the month preceding the month of full payment of such tax or up to the month prior to the month of assessment u/s. 11 in respect of such period, whichever is earlier. In terms of such provisions of sec. 10A, the liability of Rs.37,56,330/- was ascertain. It was further submitted before the AO that the liability on account of interest on turnover tax was accrued in the year under consideration after the case regarding payment of interest on turnover tax for delayed/non payment of turnover tax was decided on 11.07.1989 by the West Bengal Taxation Tribunal (which is the substitute for High Court for Sales Tax matters) in the case of Kingsway & Company & Ors. Vs. Commercial Tax Officer, Central Section (A.W) & Ors. In the said decision it was held as under:
The liability to pay interest is created by the statute and not by the judgment. Consequent, the contention that the interest may if at all be claimed from 24.02.1988, on which date the appeals were disposed of, cannot therefore be accepted. To accept such a position would only encourage dilatory tactic on the part of those who are likely to benefit from the delay in the disposal of cases and lifting of prohibitory orders. Such an interpretation would not only be against law but against public policy as well. We have already indicated that a party obtaining a stay order at his own choice does so at his own risk. The liability to pay interest accrued from 01.10.1983 (i.e. the date of insertion of section 10A) and has become payable with effect from that date irrespective of the date of disposal of the appeals.
That before the AO it was submitted in consequence of the aforesaid judgment statutory interest u/s. 10A is compulsory and cannot be reduced or waived by any authority. Therefore, the liability of interest on turnover tax for delayed payment of the same is an ascertained liability. This statutory liability accrues without communication of any such demand. Thus, provision of interest on turnover tax of Rs.37,56,330/- was in respect of ascertained statutory liability and the same cannot be added to the book profit pursuant to explanation © to sec. 115J(1) and (1A). However, the contention of the assessee was not accepted by the AO for the reason that the liability was not accrued in the year under consideration but in earlier years. The Ld. CIT(A) in his order held that the AO was not justified in holding that the liability on account of interest on turnover tax was not accrued in the year under consideration. The fact remains that the liability of Rs.37,56,330/- was an ascertained liability and this fact has also not been disputed by the AO. The assessee had made provision for interest on turnover tax after the decision in the case of Kingsway & Co. supra and since it is an ascertained liability, therefore, same cannot be added to the book profit u/s. 115J of the Act. The Ld. CIT(A), therefore, directed that the AO to delete the said addition.
6 M/s. Kesoram Industries Ltd., AY 1990-91 11. We have perused the case records and arrived at our considered view that the Ld. CIT(A) in his detailed order provided the reasons carefully as to why the claim of assessee is justified herein. At the same time we also observe the decision of the West Bengal Tribunal in the case of Kingsway & Co., supra wherein the provisions for interest on turnover tax is determined as an ascertained liability and once it is so, the same cannot be added to the book profit u/s. 115J of the Act. We agree with the findings of the Ld. CIT(A) and the relief given to the assessee on this issue is, therefore, sustained. This ground of appeal of revenue is dismissed.
12. The third ground of revenue’s appeal relates to the provision of doubtful debt whether an allowable expenditure for computing book profit.
13. The AO has made an addition of Rs.8,70,932/- on account of provision for doubtful debts. It was submitted before the AO that the debts in respect of two paper manufacturing companies became irrecoverable because they had gone into liquidation. It was also contended before the AO that the aforesaid provision was not on account of liability but for diminution in the value of assets and, therefore, the same cannot be added to the book profit u/s. 115J of the Act. However, the contention of the assessee was not accepted by the AO for the reason that the provisions for bad debts is not an ascertained liability and the moment the debt becomes bad, it becomes ascertained liability and has to be written off. In this case, the debt has not become bad yet. Hence, the provision is merely a contingent one and has to be added to the book profit. The Ld. CIT(A) in his order held that the issue is decided in favour of the assessee company by the jurisdictional High Court of Kolkata in the case of ICI (India) Ltd. Vs. CIT 347 ITR 442 (Cal) in which the decision of Hon’ble Apex Court in the case of CIT Vs. Comnet Systems & Services Ltd. 305 ITR 409 (SC) was followed by the Hon’ble Calcutta High Court. The Ld. CIT(A) held on the basis of the judicial principles and decisions that the AO is directed to delete the addition of Rs.8,70,932/- from the computation u/s. 115J of the Act on account of provision for doubtful debts.
14. We have perused the case records and heard the rival contentions and arrived at our considered view that there is no infirmity in the order of the Ld. CIT(A) and his findings are based on the decision of the jurisdictional High Court in the case of ICI Ltd., supra
7 M/s. Kesoram Industries Ltd., AY 1990-91 which is in turn followed the decision of Hon’ble Supreme Court in the case of Comnet Systems & Services ltd., supra and hence, the relief granted by the Ld. CIT(A) on this issue to the assessee is sustained. This ground of appeal by the revenue is dismissed.
Now, we take up the appeal preferred by the assessee vide . The assessee has raised following grounds of appeal: “1.On the facts and circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of Rs.20,479,843/- in computing adjusted book profit for the purpose of section 115J of the Act claimed by the appellant on account of unabsorbed loss being lower than brought forward business loss.
2. On the facts and circumstances of the case, the Ld. CIT(A) erred in proceeding on a wrong interpretation of the express provisions of the Act and therefore, not taking into consideration the details of business loss suffered and depreciation incurred by the appellant, the evidence of which were filed by the Appellant.”
The crux of the grounds of appeal of the assessee is that the Ld. CIT(A) erred in confirming the disallowance of Rs.20,479,843/- in computing adjusted book profit for the purpose of section 115J of the Act claimed by the assessee on account of unabsorbed loss is being lower than brought forward business loss. The AO did not allow deduction of lower of business loss or unabsorbed depreciation while computing the book profit u/s. 115J of the Act. On the other hand, the assessee has claimed that there was business loss of Rs.2,32,03,893/- whereas the unabsorbed depreciation was Rs.2,04,79,543/-, therefore, the AO should have allowed the deduction of lower of two i.e. 2,04,79,543/- to compute book profit u/s. 115J of the Act. In support of the claim that there was a business loss and unabsorbed depreciation the assessee submitted copies of director’s report for the year ended 31.12.1984, 31.12.1985, 31.12.1986, 31.12.1987 and 31.03.1989. Further, the assessee relied on provisions of section 205(1)(b) of the Companies Act, 1956. It was further argued by the assessee that the figures of business loss or depreciation are distinctly evident from the audited financials of the assessee and mere setting off these losses from the general reserves of the company should not be a ground for disallowing such deduction to the assessee. Further, the assessee is eligible to benefit or not is dependent upon the provisions of the Act and not on the accounting entries passed in the books of account. Further, the Ld. CIT(A) went on to analyse the provisions of section 205 of the Companies Act, 1956 and observed in his order that there is no dispute that the assessee company has claimed to have prepared its account and financial statement as per provisions of Companies Act. The Ld. CIT(A) held that there is also no dispute on the 8 M/s. Kesoram Industries Ltd., AY 1990-91 point that in the order under appeal the assessee had declared and paid dividend on the preference and equity shares then it is presumed that the assessee had declared and paid dividend complying the provisions of section 205(1)(b) of the Companies Act, 1956. If it is so, then the assessee was not having any loss or unabsorbed depreciation for set off or deduction as per explanation (iv) to sec. 115J(1A) of the Act because the loss or depreciation was already set off before declaration of dividend and there was no further loss or depreciation as per books which was required to be set off for the purpose of computation of book profit u/s. 115J of the Act. The Ld. CIT(A) goes on to say in his order that his decision is supported by the Director’s report for the year ended 31.03.1990 as well as the Balance Sheet as at 31.03.1990. In view of these findings the Ld. CIT(A) held that the AO was justified in not allowing deduction of lower of business loss or depreciation to compute the book profit u/s. 115J of the Act as claimed by the assessee. That being further aggrieved, the assessee is in appeal before us on this issue.
At the time of hearing before us, the Ld. AR brought to our notice the following chart :
FY ending on Business Loss Business Loss after Depreciation Depreciation adjustments debited in P&L required to be set A/c off u/s. 205 12/31/1984 5,691,124 5,281,104 4,573,136 4,573,136 12/31/1985 4,157,785 3,760,109 3,313,732 3,313,732 12/31/1986 3,407,665 1,938,244 4,176,873 1,938,244 12/31/1987 5,019,047 2,659,153 3,628,301 2,659,153 3/31/1989 4,928,272 3,301,526 4,787,501 3,301,526 Total 23,203,893 16,940,136 20,479,543 15,785,791 That as per the said chart assessee has claimed set off of loss of Rs.1,57,85,791/- and not Rs.2,04,79,843/- as appearing in the grounds of appeal. That in support of the set off of loss of Rs.1,57,85,791/- the AR referred to the decision of Hon’ble jurisdictional High Court in the case of M/s. Pieco Electronics & Electricals Ltd. (now known as Philips India Ltd.) Vs. CIT, WB-4 & Anr, of 2004 dt. 12.08.2011. The Ld. AR further stated that the facts in this case is substantially similar to that of the assessee’s case under consideration and that the Hon’ble Calcutta High Court has decided the issue in favour of the assessee. The substantial question of law formulated by the Court in the case were (i)
9 M/s. Kesoram Industries Ltd., AY 1990-91 whether on a true and proper interpretation of sec. 115J(1A) and clause (iv) of Explanation to section 115J of the Act in determining the amount of loss or depreciation what is required to be set off against the profit for the relevant previous year is the amount which according to the provisions of clause (b) of the first proviso to subsection (1) of section 205 of the Companies Act, 1956 is applicable in accordance with the alternative modes for such determination provided under the Companies Act, (ii) whether in view of the admitted position that for the previous year of the fifteen months period ending on 31.03.1989 loss of the assessee is Rs.16,48,78,073/- and for the same period the depreciation is Rs.13,85,66,473/- the amount of depreciation, therefore, being less than the quantum of loss should be required to be set off in view of clause (iv) of Explanation to sec. 115J of the Act. Thereafter the Hon’ble High Court went on to analyse section 115J of the Act as well as section 205 of the Companies Act, 1956. Thereafter the Hon’ble Calcutta High Court referred to the cases of Apollo Tyres Ltd. Vs. CIT AIR 2002 SC 2131 and Surana Steel (P) Ltd. Vs. DCIT (1999) 237 ITR 777 (SC) held that the admitted position is for the previous year ending on 31.03.1989 the loss of the assessee was shown as Rs.16,48,74,073/- for the self same period the amount of depreciation claimed was Rs.138,56,66,473/-. The question before the Bench was whether the amount of depreciation being less than the amount of loss should be required to be set off in terms of clause (iv) of the Explanation to sec. 115J of the Act. The Hon’ble Calcutta High Court observed that the answer to the aforesaid question is clearly given by the two decisions of the Hon’ble Supreme Court as stated above. Once loss is held to be arrived at after taking into account depreciation, there is no scope of disputing the contention of the assessee that the amount of depreciation of Rs.13,85,66,473/- is to be set off in terms of clause (iv) of the Explanation to section 115J of the Act. Thus, it was a duty of the AO to set off the said amount as the said duty falls within the purview of the limited power of making increases and deductions provided for in the explanation to the said section.
The Ld. DR, on the other hand, referred to the case of Hon’ble Madras High Court in the case of CIT Vs. Madras Fertilizers Ltd. (2013) 33 Taxman.com 623 (Mad) wherein the issue was decided in favour of the revenue. The Madras High Court had held that a perusal of P&L Account for the year 1988-89 showed that the entire loss including the depreciation for the year was duly set off as against the profits available in the year 1987- 88 by taking the depreciation and loss from the general reserve for an adjustment. After
10 M/s. Kesoram Industries Ltd., AY 1990-91 adjusting the unabsorbed depreciation as against the general reserve there remained nothing for the assessee to carry forward to the next year for the purpose of computing the profit, as given u/s. 205(1(b) of the Companies Act. Since the accounts of the assessee showed nil as regards the carry forward of loss and unabsorbed depreciation, the Commissioner rightly revised the order of the assessing Officer to take the entire book profit without any further adjustments for the purpose of working out 30 per cent profit u/s. 115J. The Hon’ble Madra High Court further opined that even though, the assessee contended that mere adjustment as against the general reserve by itself would not defeat the claim of the assessee for considering the unabsorbed depreciation in computation of the profit for the next year in terms of section 205(1)(b) of the Companies Act, yet, the fact remains that when the accounts were made up for the assessment year 1989-90, the loss and unabsorbed depreciation remained nil. On the factual position that the assessee had no unabsorbed loss or unabsorbed depreciation to be carried forward for any consideration in the year under consideration, rightly, the Commissioner of Income Tax gave the direction which is in accordance with the provisions of the Act as well as the Income Tax Act, 1961.
We have perused the case records, heard the rival submissions and arrived at a considered view that the case referred to by the Ld. AR is substantially similar in facts with regard to the assessee’s case herein and more so, the jurisdictional High Court has ruled the issue in favour of the assessee. Therefore, respectfully following the decision of the Hon’ble jurisdictional High Court of Calcutta this issue is decided in favour of the assessee and the disallowance of Rs.1,57,85,791/- in computing adjusted book profit for purpose of section 115J of the Act is deleted. Therefore, all the grounds of appeal of assessee are allowed.
In the result, the appeal of revenue is dismissed and that of the assessee is allowed.