SOUTHERN PETROCHEMICAL INDUSTRIES CORPORATION LTD.,CHENNAI vs. ITO, CHENNAI

आयकर अपीलीय अिधकरण “ए” �ायपीठ चे�ई म�। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, CHENNAI माननीय �ी महावीर िसंह, उपा ! एवं माननीय �ी मनोज कुमार अ%वाल ,लेखा सद( के सम!। BEFORE HON’BLE SHRI MAHAVIR SINGH, VP AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM 1.आयकरअपील सं./ ITA No.204/Chny/2023 (िनधा*रण वष* / Assessment Year: 2004-05) & 2.आयकरअपील सं./ ITA No.205/Chny/2023 (िनधा*रण वष* / Assessment Year: 2004-05) M/s. Southern Petrochemical ACIT / ITO बनाम Industries Corporation Limited Corporate Circle-6(2) / 88, Spic House, Mount Road, Guindy, Corporate Ward-3(1) / Vs. Chennai-600 032. Chennai-600 034. �थायीलेखासं./जीआइआरसं./PAN/GIR No. AAACS-4668-K (अपीलाथ�/Appellant) : (� थ� / Respondent) अपीलाथ�कीओरसे/ Appellant by : Shri R. Vijayaraghavan & Shri Saroj Kumar Parida (Advocates)-Ld. ARs � थ�कीओरसे/Respondent by : Shri Nilay Baran Som (CIT) & Shri AR V Sreenivasan (Addl. CIT)-Ld. DRs सुनवाईकीतारीख/Date of Hearing : 16-10-2023 घोषणाकीतारीख /Date of Pronouncement : 10-01-2024 आदेश / O R D E R

Manoj Kumar Aggarwal (Accountant Member)

Centre (NFAC), Delhi [CIT(A)] on 22.12.2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 19.12.2006. ITA No.205/Chny/2023 arises out of an order passed by learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] on 22.12.2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) r.w.s. 263 of the Act on 23.12.2009. The impugned order, in both the appeals, is a common order though it bears two different DINs. 2. In an assessment framed by Ld. AO u/s 143(3) on 19.12.2006, the returned loss of Rs.125.71 Crores was determined at income of Rs.107.68 Crores after certain adjustments and disallowances. In an assessment framed u/s 143(3) r.w.s. 263 on 23.12.2009 consequent to revisionary order dated 17.10.2008, the assessed income of Rs.107.68 Crores was re-determined at Rs.109.81 Crores after more adjustments. 3. The assessee assailed both these orders before first appellate authority vide common order dated 22.12.2022 which is in further challenge before us. The assessment framed u/s 143(3) is subject matter of ITA No.204/Chny/2023 whereas assessment framed u/s 143(3) r.w.s. 263 is subject matter of ITA No.205/Chny/2023. 4. The grounds raised by the assessee in ITA No.204/Chny/2023 are as under: - 1. The order of National Faceless Appeal Centre (NFAC), Delhi /CIT(A) is contrary to law, facts and in the circumstances of the case. 2. The CIT(A) / NFAC erred in confirming the disallowance of the interest paid to financial institutions u/s 43B amounting to Rs.41,99,00,000/ -. 2.1 The CIT(A) / NFAC ought to have appreciated that the interest converted in to loans and the same was not allowed as deduction in the relevant assessment year in which such provisions were made, are now reversed and credited to the profit and loss account. Hence such reversal provision credited to P&L but which were not allowed as deduction in the year in which they were made, cannot constitute income u/s 41(1) and hence has to be deducted from income.

2.2 The CIT(A) / NFAC after having held at @ para 4.1.3.3 of the CIT(A) order that "the reversal of liability will become income in the years, the loan is waved off. But since the liability is not allowed and already taxed, the appellant's request makes sense". While in principle the same is correct but still upheld the disallowance made by the Assessing officer which is erroneous. 3. The CIT(A) / NFAC erred in confirming disallowance to the extent of Rs.608.29 lakh towards contract receipts not recognized. 3.1 The CIT(A) / NFAC ought to have appreciated that the appellant has entered into contracts which includes both supply of materials and labour. The erection charges are liable to TDS whereas supply of materials is not liable to TDS. However, in the books of account, the total contract income is reflected conjointly hence the contract income which suffered TDS u/s 194C will not be matching with the contract income reflected in the books of account. 4. The CIT(A) / NFAC erred in confirming sum of Rs.2,98,67,181/- representing electricity tax is only a contingent liability and disallowed while computing book profit u/s 115JB. 4.1 The CIT(A) / NFAC ought to have appreciated that TNEB has raised electricity tax demand of Rs.10.51 crores relating to consumption of captive power for the period from January 1986 to March 1994 which was disputed by the appellant by filing a Writ petition and the said demand was stayed by the Hon'ble High Court of Madras, subject to the condition that the appellant pay Rs.2 Crores. 4.2 The CIT(A) / NFAC ought to have appreciated that the balance amount of Rs.98,67,181/- debited to PL account represents the electricity tax imposed on the supply of TNEB power 5% of power cost and 10 paisa per unit on captive power by the Tamilnadu Tax on consumption or sale of Electricity Act, 2003 and the validity of the Act was challenged before the High Court. Hence should be allowed as ascertained liability. 4.3 The CIT(A) / NFAC ought to have appreciated that the provision was disallowed in the regular computation u/s 43B. Sec 43B applies only to liability which is otherwise allowable and hence the entire amount should be allowed in computing Book Profits. 5. The CIT(A) / NFAC erred in confirming the disallowance of Rs.5519.30 lakhs out of interest paid on borrowings used for the purpose of Business as being attributable to interest free advances given to Associate Companies. 5.1 The CIT(A) / NFAC ought have appreciated that the advances were made in the course of business hence no disallowance of interest is called for. 5.2 In any event, NFAC having observed that the Appellant has interest free funds of Rs. 117764. 99 Lakhs and advances was only to the extent of Rs. 94910 lakhs (Para 4.7.3.3) ought to have held that investments should be considered as having been made out of interest free funds and hence no disallowance of interest on borrowings is called for and deleted the disallowance. 5.3 The appellant reliance on among other decisions: CIT vs. Bharti Televenture Ltd 331 ITR 502 Del. Reliance Utility and Power Ltd. vs. CIT 313 ITR 340 (Born.) CIT vs. Hotel Savera 239 ITR 795 (Mad) CIT (LTU) Vs. Reliance Industries Ltd 307 CTR 121 SC PCIT v Sintex Industries 403 ITR 418 Guj confirmed by 93 Taxman.com 24 SC. 6. The CIT(A) erred in deleting the interest of Rs. 105. 73 crores excluded in the memo which represents interest income of AY 2001-02 Rs.57.26 Crores & AY 2002-03, Rs.48.46 Crores which were offered to tax in those two years. The amount was adjusted

against investment for AY 2003-04 but disallowed I not claimed for that year. However, as the creditor agreed to pay the interest during the current year, it was credited to P&L but excluded in the Memo as the amount was already offered to tax earlier and it would otherwise amount to double taxation of the amount.

As is evident, the disallowance which forms the subject matter of this appeal are five-folds i.e., (i) Disallowance u/s 43B of interest converted in to loans by financial institutions; (ii) Addition of Contract receipts not recognized by the assessee; (iii) Disallowance of Electricity Tax u/s 43B; (iv) Interest disallowance; (v) Assessment of interest income offered in earlier years. 5. The grounds raised by the assessee in ITA No.205/Chny/2023 are as under: - 1. The order of National Faceless Appeal Centre (NFAC), Delhi /CIT(A) is contrary to law, facts and in the circumstances of the case. 2. The CIT(A) / NFAC erred in confirming that the provision for bad and doubtful debts amounting to Rs.16,90,09, 556/- is towards an unascertained liability and added back while computing the book profit u/s 115JB. 2.1 The CIT(A) I NFAC ought to have appreciated that the provision represents money receivable from various parties and not towards meeting any liability within the meaning of explanation to section 115JB. 3. The CIT(A)/NFAC erred in confirming sum of Rs.2,98,67,181/- representing electricity tax is only a contingent liability and disallowed while computing book profit u/s 115JB. 3.1 The CIT(A) I NFAC ought to have appreciated that TNEB has raised electricity tax demand of Rs.10.51 crores relating to consumption of captive power for the period from January 1986 to March 1994 which was disputed by the appellant by filing a Writ petition and the said demand was stayed by the Hon'ble High Court of Madras, subject to the condition that the appellant pay Rs.2 Crores. 3.2 The CIT(A) / NFAC ought to have appreciated that the balance amount of Rs.98,67,181/- debited to P&L account represents the electricity tax imposed on the supply of TNEB power 5% of power cost and 10 paisa per unit on captive power by the Tamilnadu Tax on consumption or sale of Electricity Act,2003 and the validity of the Act was challenged before the High Court. Hence should be allowed as ascertained liability. 3.3 The CIT(A) / NFAC ought to have appreciated that the provision was disallowed in the regular computation u/s 43B. Sec 43B applies only to liability which is otherwise allowable and hence the entire amount should be allowed in computing Book Profits. 4. The CIT(A) / NFAC erred in confirming the disallowance of bad debts written off amounting to Rs.84,08,789/- in the memo of income which is included in the miscellaneous expenditure of Rs.1321.73 lakhs amounts to double deduction. 4.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the above provision made in the earlier year which was disallowed. When such debts become

irrecoverable the appellant reverses the provision already made towards Bad and Doubtful debts to that extent and credit the same to the P&L account by which the same if offered to tax in the subsequent years. The disallowance which from subject matter of this appeal are three folds i.e., (i) Adjustment of provision of bad and doubtful debts u/s 115JB; (ii) Disallowance of Electricity Tax under Sec.43B r.w.s. 115JB; (iii) Disallowance of bad-debts written-off. 6. The Ld. AR advanced arguments on impugned issues citing various judicial decisions and also filed written submissions to support the case of the assessee. The revenue also advanced arguments and filed written submissions in support of impugned order. Having heard rival submissions and upon perusal of case records, our adjudication would be as given in succeeding paragraphs. The assessee being resident corporate assessee is stated to be engaged in manufacturing and marketing of fertilizers, pharma, biotech products and providing engineering services. ITA No.204/Chny/2023 7. Disallowance u/s 43B of interest converted into loans by financial institutions 7.1 As per assessee’s Annual Report, the assessee claimed interest expenditure of Rs.9954.71 Lacs which include interest payable to banks and financial institutions. It transpired that out of said expenditure, interest to the tune of Rs.4199 Lacs was converted into loans during the years. As per explanations (3C) and (3D) to Sec.43B as inserted by Finance Act, 2006 with effect from 01.04.1989 and 01.04.1997 respectively, such conversion would not be deemed to be actual payment of interest and therefore, the prohibition contained u/s 43B (1) would apply with full force in respect of such interest converted

into loans. The assessee referred to the decision of Hon’ble Apex Court in the case of Gujarat Polycrete Pvt. Ltd. (246 ITR 463) and also CBDT Circular No.674 dated 29.12.2003 which provided that sales tax liability converted into loan shall be allowed as deduction in the year in which the conversion is permitted by the State Government. However, Ld. AO held that the said decision / Circular would apply only in respect of Sales Tax Deferral Schemes as notified by State Government and would not apply to interest liability converted into loans by banks and financial institutions. The Ld. AO relied on the decision of Hon’ble High Court of Madras in the case of Kalpana Lamps and Components Ltd. (255 ITR 491) wherein it was held that mere postponement of liability to pay interest does not amount to actual or constructive discharge. Further, the amendment made by Finance Act, 2006 would squarely apply and accordingly, the claim of interest to the extent of Rs.4199 Lacs was disallowed u/s 43B. 7.2 During appellate proceedings, the assessee reiterated its submissions. In the alternative, the assessee pleaded that the deduction of the same may be allowed in the year of payment or upon reversal of liability. The Ld.CIT(A) concurred with Ld. AO that the aforesaid decision of Hon’ble Apex Court in the case of Gujarat Polycrete Pvt. Ltd. (246 ITR 463) as well as CBDT Circular No.674 dated 29.12.2003 deals with Sales Tax Deferral Scheme. The decision was rendered before amendment to Sec.43B as brought in by Finance Act, 2006 with retrospective effect from 01.04.1989 and 01.04.1997 respectively. Therefore, the same would not apply to the facts of the present case. The decision of Hon’ble High Court of Madras as relied upon by Ld. AO would apply. Therefore, the action of Ld. AO in making

the disallowance was upheld. The alternative submissions were also not accepted since the assessee did not provide the relevant facts and figures. Aggrieved, the assessee is in further appeal before us. 7.3 Having considered the orders of lower authorities, we find that the adjudication of Ld. CIT(A) is in accordance with the statutory provisions as well as binding decision of Hon’ble High Court of Madras. The amendment brought in by Finance Act 2006 was squarely applicable to the facts of the case. The newly inserted explanations (3C) and (3D) provide that mere conversion of interest into loan would not be deemed to be actual payment of interest. Therefore, the same has rightly been disallowed and confirmed by lower authorities considering the provisions of Sec.43B. The assessee is free to make the claim of the same whenever it is eligible to claim the deduction in accordance with law. The corresponding grounds stand disposed-off accordingly. 8. Addition of Contract receipts not recognized 8.1 The Ld. AO observed that contract receipts as covered in TDS certificates came to Rs.2641.75 Lacs. The assessee was directed to provide the reconciliation of the same vis-à-vis revenue recognized for Rs.11197.39 Lacs in the Profit & Loss account. The assessee explained that the nature of work carried out by the assessee involve supply of material and manpower. SMO (a division of assessee) was executing high voltage electrical transmission line contracts and electrification projects for government agencies and technical manpower supply to other clients. Execution of such contracts involve supply of material and manpower. SMO was supplying material to its clients separately by way of different invoices and the same was duly accounted for in the books as Contract income. SMO division was also

executing erection contract for the clients against separate invoices. As the invoices and other billing done in respect of various clients was voluminous, it was difficult to segregate the cost of material supplied and erection services rendered. The cost of material supplied to the clients would not be liable to TDS. However, in respect of composite contracts, the client has deducted TDS on gross value of bills. It was confirmed that the relevant income received by SMO was fully offered to tax in the return of income. 8.2 However, Ld. AO held that the companies / projects figuring in the list, from whom contracts receipts were received by the assessee, did not tally with the break-up of contractee as per TDS certificates. The assessee could not reconcile the two lists and therefore, it was to be concluded that the income contained in the TDS certificates was not recognized in the Profit & Loss Account. As per accounting policy for revenue recognition, the assessee was recognizing income from long- term contracts on percentage of completion method. However, up-to AY 2002-03, the income on long-term contracts was being recognized on completed contract method and the new method was being followed from AY 2003-04 onwards. It was clear that the projects mentioned in the TDS certificates were long standing contracts, which on all probability, would have attained a considerable percentage of completion which was clear from steep decline in receipt of progress payments. Therefore, the submissions of the assessee were to be rejected. Since the assessee claimed TDS credit in this year, the relevant income embedded therein should have been offered to tax in this year. When all the supply of material and other contract related expenses are debited to the Profit & Loss Account in full, the payments

received should likewise be credited to the Profit & Loss Account. There was no separate Profit & Loss Account in respect of assessee’s contract activity. Finally, entire amount of Rs.2641.75 Lacs as shown in TDS certificates was added to the total income with an observation that if the assessee furnishes evidences to show that any of the said amount was admitted as income in any other year, the addition as well as TDS credit would be modified suitably u/s 154. 8.3 During appellate proceedings, the assessee submitted that it admitted contract income of Rs.11197.39 Lacs out of which amount of Rs.5475.51 Lacs pertained to income from Kuwait operations which was not liable for TDS. The assessee claimed TDS credit of Rs.56.36 Lacs covered in 110 TDS certificates and the corresponding income covered in the relevant certificates was Rs.2641.75 Lacs. The assessee had furnished break up of party-wise TDS certificates received by it and demonstrated that the income of Rs.2641.75 Lacs was recognized in the income statement. 8.4 The Ld. CIT(A), upon perusal of reconciliation statement, held that the assessee furnished explanation for mismatch to the extent of Rs.2033.46 Lacs only but could not provide explanation for the remaining sum of Rs.608.29 Lacs. Therefore, the addition to the extent of Rs.608.29 Lacs was upheld. Regarding amount of Rs.2033.46 Lacs, Ld. AO was directed to verify the TDS certificates and financial statements and give due relief, if the claim was found in order. Aggrieved as aforesaid, the assessee is in further appeal before us. 8.5 From the facts, it emerges that the assessee is executing composite contracts of varied nature which would involve supply of material as well as services. The assessee is following definite

accounting policy to recognize the revenue in the books of accounts. No defect in the books has been pointed out by lower authorities. The revenue shown by the assessee is way above than the revenue shown in the TDS certificates. The assessee is a corporate entity and would receive contract payments through banking channels only. The assessee has already provided copies of bills, TDS certificates and relevant ledgers from books of accounts. No discrepancy is noted in the same. Therefore, the impugned addition is merely on suspicion and nothing more. By deleting the addition of Rs.608.29 Lacs, we allow the corresponding grounds raised by the assessee. 9. Disallowance of Electricity Tax under normal provisions and u/s 115JB 9.1 The assessee debited liability of Rs.298.67 Lacs which include amount of Rs.200 Lacs deposited as per directions of Hon’ble Court towards self-generation tax as disputed by the company. The remaining amount of Rs.98.67 Lacs was self-generation tax as per assessee’s own working. It transpired that the Tamil Nadu Electricity Board (TNEB) imposed electricity tax demand of Rs.10.51 Crores relating to consumption of captive power for the period form Jan, 1986 to March, 1994. The same was disputed by the assessee before Hon’ble High Court of Madras which was pending for adjudication. The Hon’ble Court, vide order dated 13.07.2004, stayed the recovery of the demand subject to payment of Rs.200 Lacs. The assessee paid the same and debited the same to the Profit & Loss account. Regarding the balance amount, the same was as calculated by the assessee as per Tamil Nadu Tax on Consumption / sale of Electricity Tax, 2003 which enabled the government to impose electricity tax on the supply of TNEB power

at the rate of 5% of power cost and 10 paisa per unit on captive power. The assessee worked out the tax at Rs.98.67 Lacs and debited the same to Profit & Loss Account. The Ld. AO held that the validity of levy of electricity tax was under dispute and the said demand pertained to earlier years. The Constitutional validity of the levy was also disputed by the assessee. Therefore, both the components were not actually paid by the assessee and these components were admittedly taxes levied under the statutes passed by State Government. Therefore, the same would be governed by the provisions of Sec.43B. Since these items were not actually paid and both the items were provision of unascertained liabilities, the prohibition of Sec. 43B would apply. Moreover, the amounts at this juncture were only liabilities of a contingent nature since the levy would depend on the court’s judgment to be delivered in future on its validity. Relying on the decision of Hon’ble Supreme Court in the case of Gemini Cashew Sales Corporation (65 ITR 543), Ld. AO disallowed the impugned amount of Rs.298.67 Lacs. 9.2 The Ld. CIT(A) upheld the stand of Ld. AO by observing that the deposit made by the assessee in the court was not definitive to be adjusted against the final determination of tax payable and the tax payable itself had to be determined by the outcome of the court proceedings. These items were nothing but merely in the nature of a contingent liability. Aggrieved, the assessee is in further appeal before us. 9.3 In assessment framed u/s 143(3) r.w.s. 263, pursuant to the directions of revisionary authority, Ld. AO added this item while

computing Book Profits u/s 115JB also. The Ld. CIT(A) upheld the same which form subject matter of ITA No.205/Chny/2023. 9.4 From the facts, it emerges that the constitutional validity of the state levy is sub-judice before Hon’ble High Court of Madras. The Hon’ble Court has stayed the recovery of demand subject to deposit of Rs.200 Lacs by the assessee. The same has been deposited by the assessee. The assessee has also computed additional liability of Rs.98.67 Lacs as per applicable computations. Both these items have been debited in the Profit & Loss Account. However, it remains a fact that this liability has not yet crystallized and the same is merely in the nature of contingent and an unascertained liability only which may or may not arise. Undoubtedly, the same is covered under the provisions of Sec.43B. Therefore, the same has to be disallowed in normal computations u/s 43B as well as while computing Book Profits u/s 115JB. Therefore, we confirm the stand of lower authorities and dismiss the grounds raised by the assessee in both the appeals. 10. Interest disallowance 10.1 The assessee claimed interest expenditure of Rs.15666.03 Lacs against loan liabilities of Rs.231081.72 Lacs. However, it was noted by Ld. AO that the assessee advanced various sums to group entities against which no interest was received during the year. The same has been tabulated on page no.15 of the assessment order as under: - No. Name of the Party Amount (In Lacs) 1. Deposits against Equity to SPIC 8260.14 Fertilizers & Chemicals Ltd. (SFCL) 2. Indo Jordan Chemicals Ltd. (IJCL) 1435.70 3. Ind-ITAL Chemicals Ltd. (TPL) 10.55 4. SPIC Technologies Ltd. 2200.66 5. SPIC Petrochemicals Ltd. (SPC) 82.39

contended that the funds given to this entity were for business purposes as held by Tribunal for AY 2000-01. (iv) Tuticorin Alkali Chemicals and Fertilizers Ltd. (TAC) The assessee held 43.93% of paid-up equity of TAC located at Tuticorin. It was submitted that the assessee was marketing the product of TAC all over the country. The assessee advanced funds to this entity against allotment of preference shares which were allotted in AY 2005- 06. (v) Inter-Corporate Deposits The assessee placed ICD of Rs.675 Lacs to 4 associated entities in the year 1999 which was still outstanding. The assessee submitted that it could not succeed in its effort to claim interest on ICDs from these companies and therefore, no interest was offered against these deposits. (vi) Other Advances to SPIC Fertilizers & Chemicals Ltd. (FXE), Dubai and M/s Indo Jordon Chemicals Ltd. (IJCL) The assessee advanced funds to SPIC fertilizers and Chemicals Ltd. (FXE) Dubai for Rs.8260.14 Lacs and M/s Indo Jordon Chemical Ltd. of Jordon for Rs.1435.70 Lacs. The assessee relied on the decision of Tribunal for AY 2000-01 holding that these investments were for expansion of business. The Ld. AO held that these two entities, though subsidiary of the assessee, were separate legal entities. The assessee even bagged contract from one of the subsidiaries and received progress payment of Rs.261.12 Lacs. It also received substantial income from services implying that all these entities were separate and distinct entities in the eyes of law. Therefore, interest disallowance was attracted.

10.2 Finally, rejecting the submissions of the assessee, Ld. AO held that the assessee resorted to issue of debentures from time to time and always employed interest bearing loan funds in its business. The internal cash accruals, as averred by the assessee, would be minimal in view of huge cash expenditure incurred by the assessee. As per accounting policy, interest bearing funds were diverted to make investments / advances to promoter companies and the interest cost has always been capitalized in the account. Therefore, proportionate interest expenditure was to be disallowed. The Ld. AO also tabulated that the assessee had mixed funds in the shape of shareholders’ funds for Rs.117764.99 Lacs and loan funds of Rs.231081.72 Lacs. All these funds were utilized to acquire fixed asset, creation of capital work-in- progress, making of advances / investments, creation of net current assets etc. Accordingly, Ld. AO worked out proportionate interest disallowance of Rs.5587.10 Lacs and disallowed the same u/s 37(1) on the ground that the expenditure was not for the purpose of business. 10.3 During appellate proceedings, the assessee reiterated that most of these entities had business nexus with the assessee’s business. The advances so made had direct business nexus. The assessee relied on the decision of Tribunal for AY 2001-02 ITA No.2252/Mds/2003 dated 20.10.2004 deleting the disallowance with respect of SFCL-FZE and IJCL. However, this issue was remitted back by Tribunal in AY 2003-04 in ITA No.1466/Chny/2009 dated 16.12.2019 considering the observation of Ld. AO that interest free funds were replaced by interest bearing funds. Similar issue was restored back by Tribunal in AY 2009-10 ITA No.1418/Mds/2014 & 1821/Mds/2014 dated 27.12.2016.

10.4 The Ld. CIT(A), in the aforesaid background, observed that the assessee did not have enough interest free funds to cover its advances. The Ld. CIT(A) also examined the relationship of the assessee with these parties. 10.5 As per submissions, SFCL, FZE was 100% subsidiary of SFCL Mauritius and the assessee owned 83.54% stack of SFCL, Mauritius, The SFCL, FZE was thus subsidiary of a sister concern and ever after years of establishment, the sister concern had no visible business operations. Regarding IJCL, it was observed that this entity was a joint venture entity of the assessee to manufacture phosphoric acid and the entire production was to be sold to the assessee. The assessee made 60% contribution in this entity. The venture was to supply of critical raw material for the assessee. However, as per ledger, there was no business transaction of this entity with the assessee from financial year 2000-01 onwards and the assessee received only dividend from this entity. Therefore, there was no nexus in respect of business operations of the assessee. 10.6 M/s TAC was joint venture entity of assessee and TIDCO for production of Soda Ash and fertilizer grade ammonia chloride. The assessee acquired entire stake of TIDCO and TAC became associated entity of the assessee. The assessee held 43.93% of ownership interest in TAC and TAC commenced production in 1983. The surplus chemicals of assessee were sold to TAC for producing Soda Ash and Ammonia Chloride, produced by TAC being fertilizer grade is marketed by assessee. The advance was given for expanding the soda ash and ammonia chloride capacity. There was business transaction of this entity such as supply of raw material and marketing and sale of product.

Accordingly considering the decision of Hon’ble Supreme Court in the case of Hero Cycles Ltd. (379 ITR 347), Ld. AO was directed not to make any interest disallowance. NAPCL was a joint venture of assessee to produce Benzene, orthoxylene, paraxylene and PTA. However, the project failed to commence production. The assessee merely submitted that the project got delayed due to regulatory consents but the same was not sufficient enough to establish business nexus. Therefore, the disallowance was hit by the provisions of Sec. 37(1). M/s SPIC Petrochemicals Ltd. was wholly owned subsidiary of the assessee. The advance was given for implementation of the project which was to be converted into loan once commercial production commenced. However, even after passage of more than 20 years, the project failed to commence production. Though Ld. AO allowed interest expenses in AYs 1997-98 to 1999-2000, however, considering the decision of the Tribunal for AY 2003-04, ITA No.1466/Chny/2009 dated 16.12.2009 due to change in nature of advances since 2000-01, the issue was remitted back to Ld. AO. The assessee failed to produce any evidence to corroborate its claim regarding business expenditure. The ledger extract did not provide evidence of any running business of the sister concern. Therefore, the disallowance was hit by the provisions of Sec. 37(1). Further, as per settled legal position, interest before commencement of business could be capitalized but could not be allowed as revenue expenditure. The advances were to be converted into equity investments and proviso to Sec. 36(1)(iii) would apply which provide that any interest paid in respect of capital borrowed for acquisition of an asset for any period beginning from the date on which the capital was borrowed for

acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. The equity shares being the final outcome of the interest free advance and the same being an asset, the said proviso would apply and interest on borrowed capital would not be allowable. For other entities, the interest disallowance was confirmed on the ground of absence of business nexus. The partial relief given by Ld. CIT(A) with respect to TAC reduced the impugned disallowance to Rs.5519.30 Lacs. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 11. From the facts, it emerges that impugned advances have been given by the assessee in the ordinary course of business to all these entities. The investments have been made in joint venture entities though the projects may not have fructified for the assessee. It could be seen that SFCL, FZE is 100% subsidiary of SFCL Mauritius in which the assessee owns stake of 83.54%. The investment made by the assessee was for expansion of assessee’s business. This business of this entity is stated to be having direct nexus with the assessee’s main business of manufacturing of Urea and fertilizers etc. The assessee has undertaken to buy back the entire production of Urea from this entity. The ministry of chemicals and fertilizers, vide its letter dated 03.12.1998, informed the assessee that import of urea by assessee from this entity will be given preference. The aforesaid facts substantiate the arguments that investments made by the assessee had direct business nexus and therefore, the test of commercial expediency, in our opinion, was duly satisfied by the assessee. It could be said that the investments were made in furtherance of business

interest and the ratio of decision of Hon’ble Supreme Court in the case of CIT V/s S.A. Builders (288 ITR 1) would favor the case of the assessee. In this decision, it was held by Hon’ble Court that once nexus was established between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, revenue could not disallow the claim assuming what was reasonable. In fact, Tribunal in ITA No.232/Chny/2022 order dated 23.09.2022 for AY 2017-18, in similar issue, quashed revisionary proceedings on the ground that the loss of investments so made by the assessee was a business loss and the same was one of the possible views. Considering the same, the view taken by Ld. AO in allowing the business loss was upheld. To allow the expenditure, it would not be necessary that the project should fructify. Considering all these facts, we would hold that impugned disallowance against this entity could not be sustained. Similarly, the investments made in IJCL were made as a joint venture investment. This entity was to manufacture phosphoric acid and the entire production was to be sold to the assessee. The assessee made 60% contribution in this entity. The venture was to ensure supply of critical raw material for the assessee. Simply because the project could not fructify would not disentitle the claim of the assessee that it had business connection with this entity. The investment made by the assessee has RBI approval vide letter dated 22.09.1994 which is placed on page nos.100 & 101 of paper-book-1. This being so, disallowance of interest either u/s 37(1) or u/s 36(1)(iii) could not be said to be justified. We order so.

The advances given to SPEL have been given by the assessee as a promoter entity to meet its debt obligations and capital expenditure. The advances were given by the assessee to this entity only up-to financial year 2000-01. During impugned year, the advances made by the assessee have been converted into equity shares. In earlier years, when the advances were given, the assessee is having sufficient own interest free funds to make these investments. The working of the same has been given on page nos. 7 & 8 of the paper-book-1. Similar findings have been rendered by us in assessee’s own case vide ITA No.170/Chny/2023 for AY 2003-04. Therefore, the assessee’s ground would succeed to that extent both on commercial expediency as well as on the ground of having sufficient own funds. M/s NAPCL is a joint venture entity of the assessee to produce Benzene, orthoxylene, paraxylene and PTA. However, the project has failed to commence production which has led to impugned disallowance. Nevertheless, there is direct business nexus of making the investment. The reason for delay in execution of the project is the fact that there was delay in getting regulatory approvals which is beyond the control of the assessee. The assessee has entered into MOU with Chennai Petroleum Corporation Limited to establish a large petrochemical plant near Chennai. The plant was to produce raw material for the assessee. The same has resulted into formation of this entity. As per the terms of MOU, the expenses of the joint venture are to be shared equally by the joint venture entities. Considering the same, the assessee has advances sum to this entity towards it share of the expenditure of the project. The investment would ultimately convert into equity shares. All these facts would establish the claim of the assessee

that the investment had direct business nexus and therefore, no disallowance could have been made for this investment. Regarding investment in SPC, upon perusal of page no. 182 of the paper-book, it could be noted that the assessee has, in fact, charged interest from this entity. The outstanding loan amount including interest has been converted into equity and bonds which is evident from assessee’s financial statements. Therefore, there is no question of disallowing interest against this investment. The Ld. AR has pointed out that there is no investment made by the assessee in SPIC Technologies Ltd. for Rs.2200.66 Lacs. In fact, the assessee has made investment of Rs.220.66 Lacs in another entity viz. M/s SPIC Bio technologies Ltd. The Ld. AR has stated that the assessee has surplus net owned funds in the year in which the advances were given. The position of net owned funds has been summarized on page nos. 34 to 37 of paper book-2 along with extract of Balance Sheet, Profit & Loss Account and status of reserves and Surplus. After going through the same, we concur with the submissions of Ld. AR that the assessee had surplus net funds and disallowance need not be made in terms of decision of Hon’ble Supreme Court in the case of CIT V/s Reliance Industries Ltd. (307 CTR 121) which held that it could be presumed that the investments were made out of interest free funds available with the assessee. The ratio of decision of Hon’ble Madras High Court in CIT V/s Hotel Savera (239 ITR 795) as well the decision of Hon’ble Bombay High Court in CIT V/s Reliance Utilities (313 ITR 340) also supports the case of the assessee. The interest disallowance on inter-corporate deposits of Rs.675 Lacs has been deleted by us in assessee’s own case vide ITA

No.170/Chny/2023 for AY 2003-04 on the ground that in the year when these deposits were placed, the assessee had sufficient own funds to make the investments. Taking consistent view, no disallowance is called for against these ICDs. Finally, considering the facts and circumstances of the case, the impugned disallowance of Rs.5519.30 Lacs as sustained in impugned order could not be sustained in law. We order so. 12. Assessment of interest income offered in earlier years. 12.1 In the computation of income, the assessee claimed deduction of Rs.10573.31 Lacs under the heading ‘interest income already offered to tax in AY 2003-04. The assessee drew attention to agreement dated 03.03.2004 as executed by the assessee with SPIC Petro Chemicals Ltd. (SPC). In terms of the said agreement, the interest accrued on deposits against equity extended by the assessee to SPC had already been offered to tax in relevant assessment years. The interest offered in Assessment Years 2001-02 and 2002-03 aggregated to Rs.10573.31 Lacs. Pursuant to the agreement, the amount of Rs.10573.31 Lacs was again accrued during financial year 2003-04. Since the interest was already offered to tax in earlier years, the same was deducted while computing the total income. 12.2 The Ld. AO, upon perusal of agreement dated 03.03.2004, noted that the shareholders of the assessee granted approval to subscribe or otherwise invest a sum not exceeding Rs.266 Crores in the equity capital of SPIC. Accordingly, the assessee made advances against equity and ICD which aggregated to Rs.248.54 Crores as on 31.03.2003. Since there was delay in allotment of equity shares, the assessee pressed the said company for compensation for the delay.

The interest accrued as on 31.03.2002 amounted to Rs.306.10 Crores which SPC agreed to pay in full and final settlement. The Ld. AO upon perusal of report of statutory auditor as well as directors report, held as under: - 9.3 I have examined the above contentions. As per the agreement dated 03-03-04 entered into between SPIC and SPIC Petro, the shareholders of SPIC had granted approval to subscribe or otherwise invest a sum not exceeding Rs.266 crores in the equity capital of SPIC Petro. Accordingly, SPIC has made both advances against equity and intercorporate deposit to SPIC Petro and as on 31-03-03, the total deposit and ICD to SPIC Petro aggregated to Rs. 248.54 crores. Since there was delay in allotment of equity shares by SPIC Petro, the assessee pressed the said company for compensation for the delay and the interest accrued as on 31-03-02 amounted to 306.10 crores. SPIC Petro agreed to pay the compensation of Rs. 306.10 crores in full and final settlement. The agreement states in Clause (v) that the assessee had accrued interest in its books of account during the years at prevalent bank rates till the financial year 2001-02 in respect of AAE and ICD. 9.4 The reports of the statutory auditors for the year ended 31.3.2004 states in this connection as follows: "Advance of Rs. 24800 lakhs given to SPIC Petro in the earlier years against equity has been converted during the year into investments in equity shares of that company. The company has also accrued the interest on advances till 31-03-02 amounting to Rs.30609.63 lakhs (including Rs. 10573.01 lakhs recognised during the year) against which the company has issued zero bonds". 9.5 In notes on accounts at Page 61 the Directors have stated as follows: "The company promoted SPIC Petro in 94-95 for the manufacture of polyester filament yarn and purified Terepthalic Acid. As per the agreement dated 03-03- 04 between SPIC & SPIC Petro, SPIC Petro has agreed to an interest claim of Rs.30609.63 lakhs on the advances against equity and intercorporate deposits made by the company. Out of Rs.30609.63 lakhs, Rs.20036.32 lakhs has been accrued in the earlier years and Rs.10573.31 lakhs during the current year." 9.6 In page-70 of the Annual Report, the Directors have given the details of transactions carried out with related parties. Against item No.9 interest accrued on loans/ICDs namely Rs.10573.31 due from a subsidiary has been shown as transaction of the year. This obviously refers to SPIC Petro. 9.7 From the above, it is clear that the total interest liabilities from SPIC Petro calculated unto 31-03-02 as mutually agreed upon is Rs.30609.03 lakhs. Out of the above interest income, the assessee company had accrued in the earlier years interest to the tune of Rs.20036.32 lakhs and during the current year i.e. A.Y 04-05 the balance interest of Rs.10573.31 lakhs. It follows that the accrual of interest to the tune of Rs.10573.31 lakhs under the heading "Interest on advance to companies" for this year is quite in order as per Schedule-14 certified by the Statutory Auditors and as reported by the Directors to the AGM. As a corollary, the deduction claimed by the assessee in the Return of Income amounting to Rs.10573.31 lakhs with the narration "Interest income already offered for tax" is indefensible. The accounts have been audited and certified by the Statutory Auditors and laid before the shareholders of the company in the AGM and passed by the shareholders. When the assessee's statement during

assesment proceedings are in conflict with the statutory auditor's remarks in the financial accounts, only the observations of the auditors have to be taken into account. Hence, the claim is not allowable on facts and the non-controvertible evidence provided by the audit reports. This would be further clear from the discussion given below: 9.8.1 One of the main contentions of the assessee regarding its claim for reducing Rs.10573.31 lakhs in the statement of total income is that this interest has already been offered to tax for the asst. years 2001-02 (5726.45 lakhs) and 2002-03(4846.86 lakhs). Let us examine this claim with reference to the printed accounts (For the sake of a fuller appreciation of facts, it is necessary to extensively quote from the above) for the relevant assessment years. 9.8.2 The auditors' report for the year ended 31.3.01(clause f at page 21) states as follows: "The company has been following the accounting policy of capitalising borrowing costs on advances given to a company promoted. by it which is to be adjusted eventually against equity to be issued by that company. Consequent to the AS No.16 -borrowing costs which has been made mandatory w.e.f. 1.4.2000 such borrowing costs cannot be capitalised. During the year interest of Rs.5726.45 lakhs has been capitalised as part of the carrying amount of such advances. Had the accounting standard been followed and if such interests not been capitalised but charged to the P&L account, the interest and financial charges for the year would have been higher and profit for the year before tax, loans and advances and reserves and surplus would have been lower to that extent." The Notes on Accounts (Schedule 15 at page 39) also states as follows: "During the year interest of Rs.5726.45 lakhs has been capitalised as part of the carrying amount of advances made to promoted companies in accordance with the policy consistently followed in the past. If such interest had not been capitalised, but charged to the P&L account in accordance with AS No.16 borrowing costs which is mandatory from 01.04.2000, the interest and financial charges for the year would have been higher and the profit. for the year would have been lower to that extent. The company has been consistently following the policy of capitalising the borrowing costs incurred on funds used for investment in /advances made to companies promoted by it for the reasons stated in Note i(iii). This accounting treatment is in accordance with US GAPP. The borrowing costs capitalised upto 31.3.2001 amounts to Rs.22203.21 lakhs. Note 1(iii) states as follows: "Borrowing costs incurred on specific borrowings for funds used for investments in/advances made to companies are capitalised as part of the carrying amount of the advance/investments. The company follows this policy in respect of those companies promoted by it and where it has an effective control over the operations of the investee company. As the company capitalises borrowing costs on funds utilised for investments on Its own fixed assets/projects the same principle is also followed in respect of funds invested in the investee company." The following significant observations have been made by the Board in Directors Responsibility Statement at P.16 of the Annual Report: "The Directors consider that the treatment of Borrowing Costs mentioned in the Notes on Accounts is in accordance with the policy being consistently followed by the Company over the years in respect of companies in which the company

has invested substantially, as confirmed in Notes 1(iii) and 6 of the Notes on Accounts in Schedule 15." 9.8.3 From the above, it is quite clear that the assessee has not been following accounting standard No.16 but has been following only US GAPP. This would also mean that the assessee has capitalised in its books of account interest liability attributable to funds specifically borrowed for the purpose of investments in/advances to the companies that are promoted by it. The usage of the expression "charged to the P&L account" in the above Notes is significant. In other words, the amount of Rs.5726.45 lakhs reduced form the total interest and financial charges in Schedule 14 for the year ended 31.3.2001 represents only such capitalisation of a portion of interest liability of the assessee and does not represent any income accrued in the accounts as interest receivable from those promotee companies. Had there not been interest bearing borrowals for the purpose of investment in SPIC Petro, there would not have arisen any necessity to capitalise a portion of the interest charges. Thus the interest and financial charges incurred by the assessee have not been netted against the interest receivable from the promoted companies (as the assessee would have it), but only the interest charges have been reduced to the extent of interest capitalised in the accounts relatable to the borrowed amounts advanced to its associate companies. It is also clear that, in spite of the remarks of the auditors, the company has taken a conscious decision to follow the accounting policy of capitalisation of interest, even if this meant contravention of the mandatory AS No.16. 9.8.4 Identical notes have also been appended to the printed financial statements for the year ended 31.3.2002 in relation to the amount of Rs.4846.86 lakhs capitalised similarly for that year and the conclusion is also the same as in para 9.8.3 above. 9.8.5 Capitalisation in the books of a portion of interest liability is quite different from admitting as income the interest receivable, though both are deducted/netted off from the interest charges account in the financial statements. This position is further made clear from the accounting policies followed by the assessee in this regard for the subsequent assessment year 2003-04. 9.8.6 On a perusal of Schedule 14 for the year ended 31.3.2003, it is seen that there is no deduction from the interest charges as "interest on advances to companies" as seen in the earlier years. Since admittedly the capitalisation of the interest relatable to the advance to promoted companies i.e. SPIC Petro in this case made in the earlier years was not in accordance with AS No.16, for the assessment year 2003-04, the assessee reversed the above entry of capitalization in its books 9.8.7 Thus the mistake in not following As No.16 in the earlier two years was rectified in the accounting year relevant to the assessment year 2003-04.The Directors have reported in the Notes on Accounts for the year ended 31.3.2003 (page 62/item 17) in this regard as follows: "Interest capitalised as part of the carrying amount of advance against equity to SPIC Petro for the period from 1.4.2000 to 31.3.2002 amounting to Rs.10573.31 lakhs have been charged to the P&L account of the current year, as this was not in accordance with AS 1.6 borrowing costs which is mandatory from 1.4.2000” Note 1(iii) at page 58 also says in part as follows: "This policy of capitalising such borrowing costs has been discontinued from the current year and interest capitalised for the period 1.4.2000 to 31.3.2002 has been charged to the P& L account"

Further, in the directors Report at page 13, it is mentioned as follows: "The interest charged to SPIC Petro ..... on the advance against equity, from the period 1.4.2000 to 31.3.2002, amounting to Rs.105.73 crores has been written off, during the financial year 2002-03. No interest has also been capitalised for the year 2002-03. Thus the mistake in not following AS No.16 in the earlier two years (capitalising the borrowing cost) was set right during the year ending 31.3.2003 by passing necessary accounting entry to be in line with AS 16. This had the effect of charging off to the P&L account for the year ending 31.3.2003 an excess interest of RS.105.73 crores It follows that, as a consequence, the loss returned for the AY 2003-04 in the original return of income for the year had become greater by the corresponding amount of Rs.105. 73 crores. Now, the excess charge of Rs.105. 73 cores happened to be a liability that did not accrue or arise during the relevant accounting year ended 31.3.2003. And the excess liability that related to the earlier years would not be an admissible deduction for the AY 2003-04 in view of the decisions in Kedarnath Jute Manufacturing Co. Ltd., Vs CIT(82 ITR 363)(SC), CIT Vs Kalinga Tubes Ltd.,(218 ITR 164)(SC) and Madras Fertilisers ltd., Vs CIT (209 ITR 174, 194)(Madras). Therefore, what the assessee did was to file a revised return of income for the year 2003-04, reversing the write off of interest of Rs.105.73 crores referred to earlier, which the assessee mistakenly called "offering of interest income on advance to SPIC Petro" 9.8.8 Coming to the present year ended 31.3.2004, the assessee has actually offered the said interest of Rs.10573.31 lakhs which is netted off against the interest and financial charges in schedule 14. Significantly, there is no mention in the Notes on accounts about the capitalisation of interest as in earlier years, since actually no such capitalisation of interest had been resorted to in the year ended 31.3.2004. This recognition of interest income is made amply clear from the Notes on Accounts for the year ended 31.3.2004 referred to in para 9.5 above. Thus the total interest compensation agreed upon by SPIC and SPIC Petro on AAE and ICD has, according to the audited financial statements, been recognised as follows: In the earlier years (AY 99-00 and earlier : 20036.32 lakhs In the year 2003-04(AY 2004-05) : 10573.31 lakhs Total : 30609.63 lakhs Consequently, the reduction for Rs.10573.31 lakhs claimed in the statement of income for the year on the incorrect ground that it had been already offered to tax for the AY 2003-04 is not borne out by facts and is not admissible. 9.9. Before parting with this subject, it would not be out of place to point out certain distinguishing features between capitalisation of interest liability on the one hand and recognition of interest income on the other. Of course, both are shown as deductions from interest charges account in the P&L account. But the distinction between them is one of kind and not of degree. Capitalisation of interest is always shown as deduction from the gross interest liability and it (capitalisation) can never be shown in the credit side of the P&L account. Whereas, recognition of interest income can be either shown as a deduction from interest liability (as per netting off principle) or as an item of income in tile credit side of the P&L account. The ledger account concerned for passing

journal entry for capitalisation of interest liability are quite different from those in the case of recognition of interest income. It is also crystal clear from the facts narrated above that whatever tax that accrued to the Revenue u/s 115JB for the AY 2001-02 resulted because of the assessee's mistake in not following the mandatory AS NO.16 and not otherwise. The mistake has to be rectified only for the asst. years concerned (i.e. 2001-02 and 2002-03) and not for any other asst. year. Further, it is significant to note that, when the assessee was called upon to furnish the actual accounting entries passed in its books in this regard right from the AY 2001-02 to 2004-05 and to furnish copies of Board's resolutions by this office letter dt.14.11.2006, the assessee avoided a direct answer merely saying that when advance was paid to SPIC Petro, loans and advances account was debited and bank account credited. No Board's resolutions were furnished. 9.10 The assessee filed a further letter dated 18.12.2006 reiterating its earlier contentions. The crux of the assessee’s contention in this letter is as follows: "During the AY 2003-04, the interest of Rs.10573.31 lakhs was written off in the books of accounts which was not claimed as deduction in the IT return for the relevant asst. year. However, the aforesaid interest of Rs.10573.31 lakhs was again accrued in the books during the AY 2004-05. As the corresponding write off was not claimed as deduction in the immediately preceding year in the return, the interest will not constitute income during the asst. year 2004-05 9.10.2 The assessee's contention as above would reflect the correct position if and only if the interest of Rs.1053.71 lakhs had been recognized as interest income during the earlier asst. years 2001-02 and 2002-03, but this is not the case as explained elaborately in the preceding paras. What was done in the asst. years 2001-02 and 2002-03 was merely capitalisation of a portion of the assessee's interest liability relatable to the borrowed funds invested by it in SPIC Petro, unmindful of the fact that such capitalisation though consistently followed, violated the mandatory accounting standard No.16 which had come into effect in the meanwhile. This is made clear again and again by the printed financial statements for the two years. Hence, the assessee's present contention has no force in it. 9.11 For the reasons stated above, I am of the considered opinion that the assessee’s claim made in the statement of total income annexed to the return of income for this year (04-05), i.e. for reducing the interest of Rs.10573.31 lakhs is untenable and deserves to be and is hereby disallowed.”

12.3 The Ld. AO thus held that the total interest from SPIC Petro calculated unto 31-03-02 was Rs.30609.03 lakhs out of which, the assessee accrued interest of Rs.20036.32 Lacs and for current year, the balance interest was Rs.10573.31 Lacs. The same was in order as supported by Schedule-14 of financial statements certified by the Statutory Auditors and as reported by

the Directors to the shareholders. The reduction of interest as sought by the assessee was not in accordance with the notes to the accounts as well as directors’ statement. The assessee was not following Accounting Standard-16 but it was following US GAAP. The assessee had capitalized the interest liability attributable to funds specifically borrowed for the purpose of investments / making advances to the companies that are promoted by it. The impugned amount of Rs.5726.45 Lacs as reduced from the total interest and financial charges in Schedule-14 for the year ended 31.3.2001 represents only such capitalisation of a portion of interest liability of the assessee and does not represent any income accrued in the accounts as interest receivable from those promotee companies. Had there not been interest bearing borrowals for the purpose of investment in SPIC Petro, there would not have arisen any necessity to capitalize a portion of the interest charges. Thus, the interest and financial charges incurred by the assessee have not been netted against the interest receivable from the promoted companies (as the assessee would have it), but only the interest charges have been reduced to the extent of interest capitalised in the accounts relatable to the borrowed amounts advanced to its associate companies. It is also clear that, in spite of the remarks of the auditors, the company has taken a conscious decision to follow the accounting policy of capitalisation of interest, even if this meant contravention of the mandatory AS-16. The Capitalisation in the books of a portion of interest liability is quite different from admitting as income the interest receivable, though both are deducted / netted off from the interest account in the financial statements. On

perusal of Schedule-14 for the year ended 31.3.2003, it was to be seen that there was no deduction from the interest charges as "interest on advances to companies" as seen in the earlier years. Since admittedly the capitalisation of the interest relatable to the advance to promoted companies i.e., SPIC Petro in this case, made in the earlier years was not in accordance with AS-16, for the assessment year 2003-04, the assessee reversed the above entry of capitalization in its books. The mistake in not following As-16 in the earlier two years was rectified in the accounting year relevant to the assessment year 2003-04. In this year, the assessee has actually offered the said interest of Rs.10573.31 Lacs which is netted off against the interest and financial charges in schedule-14. Therefore, the aforesaid reduction of Rs.10573.31 Lacs as claimed in the statement of income was incorrect. What was done in AYs 2001-02 and 2002-03 was mere capitalisation of portion of the assessee's interest liability relatable to the borrowed funds invested by it in SPIC Petro, unmindful of the fact that such capitalisation though consistently followed, violated the mandatory AS-16 which had come into effect in the meanwhile. Finally, the claim made by the assessee was disallowed which was agitated by the assessee before Ld. CIT(A). 12.4 During appellate proceedings, the assessee reiterated that during AY 2003-04, the assessee had written-off interest receivable for Rs.10573.31 Lacs in the books of accounts being interest receivable from SPC Petrochemicals Ld. For AYs 2001-02 and 2002-03 and the write-off of the same was not claimed as deduction by the assessee in the return of income for AY 2003-04.

The same was accrued as income during AY 2004-05 in the books of accounts based on agreement dated 03.03.2004. Therefore, the same was not offered as income during this year since the same was not claimed as deduction in AY 2003-04. However, Ld. CIT(A) concurred with the observations of Ld. AO that the interest was to be recognized for this assessment year. Aggrieved, the assessee is in further appeal before us. 13. The submissions of Ld. AR are that during AY 2003-04, the assessee provided for interest receivable for Rs.20036.32 Lacs and Rs.10573.31 Lacs from SPIC petro in the earlier years but did not claim the deduction of the same in the return of income. The same was settled in AY 2004-05. Hence, the provisions made in the earlier (but not allowed in those years) was reversed and credited to Profit & Loss Account. The same is, therefore, reduced from the income since it is only a reversal provisions disallowed in earlier years. We are of the considered opinion that the income, if already taxed, could not be taxed twice. The Ld. AO is directed to verify the aforesaid facts as stated by Ld. AR and re-adjudicate this issue keeping in mind the fact that there would be no double taxation of the same income notwithstanding the accounting methodology being followed by the assessee. The corresponding grounds stand allowed for statistical purposes. 14. The appeal stands partly allowed in terms of our above order. ITA No.205/Chny/2023 15. The assessment so framed by Ld. AO u/s 143(3) was subjected to revision u/s 263 by revisionary authority vide order dated 17.10.2008. Consequently, another assessment was framed u/s 143(3) r.w.s. 263

on 23.12.2009 making some more additions / disallowances which are subject matter of ITA No.205/Chny/2023. The issue of disallowance of electricity tax u/s 115JB has already been adjudicated by us at appropriate places in earlier paragraphs. The revisionary authority while passing an order u/s 263, flagged two more issues viz. Adjustment of provision of bad and doubtful debts u/s 115JB and disallowance of Bad Debts. These issues are adjudicated as under: - 16. Adjustment of provision of bad and doubtful debts u/s 115JB 16.1 The revisionary authority directed Ld. AO to disallow the provision for bad and doubtful debts for Rs.1690.09 Lacs while computing the Book Profits u/s 115JB on the ground that the same was unascertained liability. The assessee contended that it was an ascertained liability. Reliance was placed on the decision of Hon’ble Supreme Court in the case of HCL Comnet Systems and Services Ltd. (305 ITR 409). During revisionary proceedings, it was stated by the assessee that stated provision includes provision of Rs.1603.61 Lacs which was made against advances made to Sical Ships (India) Ltd. (SSIL). The advance made by the assessee to that entity aggregated to Rs.2760.45 Lacs. That entity was engaged to transport imported raw material from other countries for manufacture of chemical fertilizers. However, SSIL faced financial difficulties and winding up petition was filed before Hon’ble High Court of Madras. Considering this fact, the advances were considered as doubtful and provision thereof was made in the bools of account. The Hon’ble High Court of Madras, vide order dated 04.09.2003, ordered for winding up of SSIL. Therefore, the provision of Rs.1603.61 Lacs made in accounts relating to AY 2004-05 was fully reversed and credited to the Profit & Loss Account during AY

2005-06. After the above reversal, entire amount of Rs.2760.45 Lacs was written-off in the books of accounts during AY 2005-06. Regarding balance provision of Rs.86.48 Lacs, party wise break up was furnished by the assessee. The aforesaid provision of Rs.1690.09 Lacs was fully added back while computing income under normal provisions. In the above background, the assessee contended that it was provision for ascertained liability. The assessee also submitted that as per Explanation (1) to the second proviso to Sec.115JB(2), the amount set aside for provision made for meeting liability other than ascertained liability ought to be added back while computing book profits u/s 115JB. Further, the second proviso to Sec.115JB was brought in only by the Finance act No.2 of 2009 and therefore, said adjustment would not be justified. Another issue raised in revisionary proceedings was issue of bad debts written off for Rs.84.09 Lacs. The same was claimed under the head misc. expenditure. However, the assessee again claimed the same in the computation of income. The same resulted into double deduction to the assessee. 16.2 However, rejecting assessee’s submissions, the revisionary authority held that the aforesaid provision for doubtful debts was unascertained liability which needed to be adjusted u/s 115JB. The balance amount of Rs.86.48 Lacs was due mostly from Government departments which could not be considered as bad and doubtful debts. On the issue of bad debts claim of Rs.84.09 Lacs, revisionary authority held that the said claim was merely a double claim. Pursuant to revisionary directions, Ld. AO framed an assessment u/s 143(3) r.w.s. 263 wherein Book Profits were adjusted accordingly.

16.3 During appellate proceedings, the assessee reiterated the submissions made during revisionary proceedings. However, Ld. CIT(A), considering the amendment made by Finance Act 2009, with effect from 01.04.2001 to Explanation 1 to Sec.115JB wherein clause (i) was introduced by which any provision made towards diminution in value of an asset has to be added back with the book profits, confirmed the adjustment made by Ld. AO. Further, the assessee, in first appeal for AY 2008-09, claimed deduction thereof i.e., in the assessment year in which such provisions are reversed and credited to Profit & Loss account. In this year, the assessee was claiming contrary. The amendment made by Finance Act 2009 was applicable to the facts of the case. The deduction could be allowed only in the relevant AY in which such provisions are reversed and credited to the Profit & Loss account. Therefore, the action of Ld. AO was upheld against which the assessee is in further appeal before us. 16.4 From the fact itself, it is very clear that the provision made by the assessee towards bad and doubtful debt was towards unascertained liability only. The same is also evident from the fact that provision made against SSIL was reversed in subsequent years and full amount due against that entity was claimed as deduction. The amendment brought in by Finance Act, 2009 with retrospective effect was clearly applicable to the facts of the case. The remaining provisions were against marketing debts which were mostly due from government departments. As rightly held, the dues from government departments could not be considered to be doubtful. The aforesaid provision could also not be considered as any diminution in value of assets since these are mere provisions which may or may not crystallize for the assessee

in future and therefore, these are nothing but mere provisions for unascertained liabilities. The Bad Debts claimed by the assessee is clearly a double claim. Therefore, on both the issues, the impugned order does not require any interference on our part. This appeal stands dismissed. Conclusion 17. ITA No.204/Chny/2023 stand partly allowed whereas ITA No.205/Chny/2023 stand dismissed. Order pronounced on 10th January, 2024

Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा45 / VICE PRESIDENT लेखा सद7 / ACCOUNTANT MEMBER चे9ई Chennai; िदनांक Dated :10-01-2024 DS आदेशकीBितिलिपअ%ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. � थ�/Respondent 3. आयकरआयुA/CIT 4. भागीय�ितिनिध/DR 5. गाडFफाईल/GF